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M/S. LARSEN & TOUBRO LIMITED V. STATE OF KARNATAKA

M/S. LARSEN & TOUBRO LIMITED V. STATE OF KARNATAKA 

(2014) 1 SCC 708

FACTS

  • The ECC division of Larsen and Toubro is involved in property development along with the owners of vacant sites. On 19th October 1995, L&T entered into a development agreement with Dinesh Ranka, who was the owner of the land. The owner was required to contribute his land and L&T was required to construct the apartment complex. Post the development, 25% of total space was to be;long to the owner and 75% to L&T.
  • There was the execution of a power of attorney by the owner of the land in favour of L&T to enable it for the negotiation and booking of orders from the prospective purchasers for allotment of the built up area.
  • Accordingly L&T entered into agreements of sale with intended purchasers which stated that upon the completion of the construction, the apartment would be handed over to the purchasers, who shall get an undivided interest in the land as well. Sale deeds, thus,  were executed in favour of the intended purchasers by L&T and the owner.
  • On 12.07.2005, the business premises of L&T were inspected by the Deputy Commissioner of commercial taxes and a detailed statement of finance manager was recorded 
  • On 21st December 2005 the deputy commissioner called upon L&T to furnish the details of the development project.
  • On 4 October 2005, the deputy commissioner issued a show cause notice on L&T stating that it was liable to tax  according to the decision of the court in Raheja development 
  • L&T responded to the show case notice and submitted preliminary objections on 10.10.2005. By a further communication dated 10.11.2005, L&T objected to the assessment of tax for the development of projects by it.
  • The L&T inter alia submitted that the development agreement was not a work contract per se on account of the reason –

         – agreement was to develop and market flats to customers 

         –  the intent and purpose of the agreement word to develop the property by the petitioners on the one hand and the land owner on the other

         – the construction and development of the said land involved no monetary consideration 

         – The only consideration  was that upon the completion of entire project ,L&T would be in title to 75% of the same

  • Again on 04.01.2006 the inspection was carried out in the business premises of L&T and certain documents like agreement copies and other documents relating to the transaction of sale of flats were seized for the purpose of further investigation and verification 
  • On 2nd February 2006, the deputy commissioner served upon L&T a further notice proposing to tax the sale of material used in the construction of flats on the ground that it was entitled to 75% of the share of the project 
  • On 03.07.2006, deputy commissioner issued a provisional assessment order under section 28(6) of Karnataka sales tax act, 1957. Along with the provisional orders the deputy commissioner also issued demand notices raising a total demand of Rs. 39928936.
  • Initially a writ petition was preferred by L&T before this court challenging the above demands, but the same was withdrawn and a writ petition under article 226 of constitution of India was filed before the Karnataka high court

ISSUE

  • Whether the judgment of the Division bench in the Raheja Development Corporation case is correct?
  • Whether the State Government was entitled to levy VAT on the sale of flats?

JUDGEMENT

  • The apex court held that any agreement for selling immovable property entered into before the construction would fall within the purview of the team ‘works contract’, allowing state government power to impose value added tax on such contracts.

LEGAL ANALYSIS

  • When an agreement is entered into between the promoter and the flat purchaser for constructing a flat and eventually selling the flat, the said activity is considered a works contract and the conditions of such a contract are satisfied in this case.
  • Goods in some other form imply that the goods have ceased to be chattels or movables and become attached to earth. Therefore goods which have by incorporation become part of immovable property are deemed as goods.
  • Building contracts are species of works contracts, and the dominant nature test is not applicable.
  • A tripartite agreement between the owner of the land, the developer and the flat purchaser is a composite contract compromising both a works contract and sale of immovable property.
  • If the builder has undertaken the task to build for the prospective buyer and then to that extent, it is a works contract.
  • The activity of construction undertaken by the developer will be works contract only from the stage the developer enters into a contract with the flat purchaser.