2024 Supreme(Online)(KER) 12

HIGH COURT OF KERALA
A. K. Jayasankaran Nambiar, SYAM KUMAR V.M., JJ
M/S. DLF HOME DEVELOPERS LTD – Appellant
Versus
STATE OF KERALA – Respondent
OT.Rev 3/2020

The value of the undivided share in the land is not contemplated for inclusion in the definition of 'turnover' of the works contract under the Kerala Value Added Tax Act and Rules, and the absence of a machinery provision to exclude such land value does not render the taxable turnover computation mechanism unworkable.

Headnote:

Works Contract - Kerala Value Added Tax Act - Taxable Turnover - Deduction for Land Value

Fact of the Case:

The petitioner companies were engaged in the activity of developing residential projects and selling fully constructed flats. They entered into Apartment Buyer's Agreements with customers, which included a component representing the value of the undivided share in the land and building. The petitioners engaged independent contractors/sub-contractors for the construction activities and deducted the applicable tax under the Kerala Value Added Tax Act (KVAT Act) from the payments made to them. The petitioners did not charge any VAT on the advances received from their customers and filed nil returns with the Assessing Authorities. Show cause notices were issued to the petitioners proposing to treat the transactions as works contracts and levy VAT accordingly. The Assessing Authority confirmed the demand of tax as applicable to works contracts on the petitioners. The petitioners appealed against the assessment orders, but did not get any relief, leading them to file the revision petitions before the court.

Finding of the Court:

The court found that the statutory provisions relating to the levy of tax on works contract and the computation of taxable turnover under the KVAT Act and Rules do not contemplate the inclusion of the value of the undivided share in the land in the value of the works contract. The court held that the absence of a machinery provision to exclude the land value from the total turnover does not render the taxable turnover computation mechanism unworkable. The court also found that the Assessing Authority had arbitrarily adopted a figure of 5% towards the deduction for land value in some cases, which was not justified, and remanded those cases to the Appellate Tribunal for a fresh determination of the taxable turnover.

Issues: 1. Whether the absence of a machinery provision in the KVAT Rules to exclude the value of land from the total turnover renders the levy of tax on the sale of flats unenforceable. 2. Whether the mode of valuation of 'works contract' under Rule 10 of the KVAT Rules, insofar as applicable to construction contracts, needs to be read in the manner that meets the criteria laid down by the Supreme Court. 3. Whether the Appellate Tribunal was justified in upholding the deduction towards land cost at only 5% of the contract receipt, which is contrary to the material available on record and the deductions allowed by the department for earlier years.

Ratio Decidendi: 1. The statutory provisions relating to the levy of tax on works contract and the computation of taxable turnover under the KVAT Act and Rules do not contemplate the inclusion of the value of the undivided share in the land in the value of the works contract. The absence of a machinery provision to exclude the land value from the total turnover does not render the taxable turnover computation mechanism unworkable. 2. The petitioner companies were required to declare the total turnover (contract receipts) pertaining solely to the works undertaken by them, without including the component representing the value of the undivided share in the land. 3. The Assessing Authority's arbitrary adoption of a 5% deduction towards land value in some cases was not justified, and those cases were remanded to the Appellate Tribunal for a fresh determination of the taxable turnover.

Final Decision: The court upheld the impugned orders of the Appellate Tribunal, except for the limited purpose of determining the taxable turnover in O.T.Rev.Nos.105, 106 and 107 of 2019, which were remanded to the Appellate Tribunal for a fresh determination based on the observations in the judgment.