Absence of specific machinery in VAT rules to exclude land value from taxable turnover affects enforceability of tax on composite works contracts.

Headnote:(A) Kerala Value Added Tax Act - Issues of taxable turnover and exclusion of land value in works contracts were discussed. The petitioners were involved in developing residential projects and had deducted VAT but faced challenges from State authorities. (Paras 1-4)

(B) Legal precedent - Absence of machinery provisions in KVAT Rules makes tax unenforceable. Reference to decisions such as CCE vs. Larsen and Toubro and others reiterated. (Paras 5-8)

(C) Deduction methodology - The court found the Assessing Authority’s use of 5% for land value arbitrary and remanded for fresh determination of taxable turnover with equitable appreciation. (Paras 14) Findings: The tribunal's reliance on deductions and methodology was upheld, albeit the case was remanded for proper valuation of land in taxable turnover. Issues Include: Validity of tax imposition on works contracts where land value is involved; adequacy of KVAT provisions, computation of taxable turnover; necessity for substantiation through documentation.

Result: O.T. Revisions partially upheld and remanded for further determination.

ORDER

D r. A.K. Jayasankaran Nambiar, J.

As all these revisions involve a common issue, they are taken up for consideration together and disposed by this common judgment. O.T.Rev.No.105 of 2019 pertains to M/s. DLF Home Developers Limited for the assessment year 2009-10 under the Kerala Value Added Tax Act [hereinafter referred to as the 'KVAT Act']. O.T.Rev.Nos.106 of 2019 and 107 of 2019 pertain to M/s. DLF Southern Towns (P) Limited for the assessment year 2008-09 and 2009-10 respectively under the KVAT Act. The aforesaid three O.T.Revisions have been preferred against a common order of the Kerala Value Added Tax Appellate Tribunal dated 10.07.2019. O.T.Rev.No.3 of 2020 pertains the M/s. DLF Home Developers Limited for the assessment year 2007-08 and impugns the order dated 25.09.2019 of the KVAT Appellate Tribunal.

2. The brief facts necessary for disposal of the O.T. Revisions are as follows:

The petitioners are Limited Companies engaged in the activity of developing residential projects and selling fully constructed flats. In the Apartment Buyer's Agreement that they entered into with various customers, they stipulated a price for the work undertaken by them which included a component representing the value of the undivided share in the land and building. For undertaking the construction activities for the customers, the petitioners engaged the services of independent contractors/sub-contractors. These contractors in turn procured goods/materials on their own and duly discharged the applicable VAT on the payments received by them from the petitioners for the work undertaken by them. The petitioners in turn deducted the applicable tax under the KVAT Act from the payments made to their contractors.

3. To maintain the quality of construction, the petitioners used to supply major components such as steel, cement etc. to the contractors on free of cost basis. The petitioners were therefore under the belief that they were merely engaged in the sale of finished apartments and had not entered into any agreement for construction with the prospective customers, and that therefore, they would not be liable to pay any tax on works contract under the KVAT Act. They therefore did not charge any VAT on the advances received by them from their customers and also filed nil returns with their respective Assessing Authorities under the KVAT Act.

4. Show cause notices were therefore issued to the petitioners proposing to reject their returns and to determine their taxable turnover on best judgment basis and to levy VAT at the applicable rates on the consideration received by the petitioners from their customers by treating the transactions as works contracts. After considering the replies preferred by the petitioners against the proposals in the show cause notice, the Assessing Authority confirmed the demand of tax as applicable to works contract on the petitioners. In the appeals preferred by the petitioners against the said assessment orders, the petitioners did not get any relief, and hence, it is that the petitioners are before this Court through these Revision Petitions, impugning the order of the Appellate Tribunal that confirmed the demand of VAT against them.

5. In the Revision Petitions before us, the petitioners raise the following questions of law:

(A) Whether the Hon'ble Tribunal was right in disregarding the contention of the petitioner, that in absence of machinery to exclude value of land from the 'taxable turnover' under the K-VAT Rules, the levy of tax on the sale of flats remain unenforceable, on the ground that lacunae in the provision or inadequacy of provision has to be redressed by appropriate legal forum ?

(B) Whether the Hon'ble Tribunal was right in disregarding the decision of the Hon'ble Supreme Court in the case of CCE vs. Larsen and Toubro , 2015 (39) STR 913 (SC) and the decision of High Court in case of Suresh Kumar Bansal vs Uol, 2016 (43) STR 3 (Del) which categorically held that in absence of statutory mechanism

Click Here to Read the rest of this document