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L&T judgment of the Supreme Court
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Contents
Real Estate Industry – Varying Tax and Contracting PracticesA l i f th L&T J d tAnalysis of the L&T JudgmentImplicationsL&T - Previous ruling of the SCQ & AQ & A
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Real Estate Industry – Varying TaxReal Estate Industry Varying Tax and Contracting Practices
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Real Estate – Varying Practices
Taxation of Residential Real Estate Sector – Still Nascent and Evolving
Developers / Builders yet to get a grip on the optimum tax efficient / li t d l b it th t t JDA tcompliant models – be it on the customer agreements, JDAs, etc
VAT / Service Tax positions were driven by State level practices – No consistency across India
Same Developer may have had different VAT / service tax position for different projects across India
Differing contracting models – adds to the inconsistencies in tax positions
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In case of dual agreement model - Supreme Court ruling in K Raheja case applies - where applicability of VAT is upheld
In case of a single agreement model – Industry was eagerly awaiting the
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inIn case of a single agreement model Industry was eagerly awaiting the Supreme Court larger bench ruling in the case of L&T
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Real Estate – Contracting ModelsSingle Agreement model Dual Agreement Model
• A single agreement to sell the flat along with undivided interest in land executed with the
• Two agreements are entered into – one for sell of undivided share in land and another
intending purchasers• Arguments taken in most cases for no VAT, as
- The arrangement is not for undertaking construction for and on behalf of the prospective customer
agreement to build/construct• Agreement to build is essentially for
construction of the flats for and on behalf of the prospective customer
• The ownership in the constructed propertyprospective customer- Absolute ownership over the constructed
flat continues to remain with the builder -Ownership of property gets transferred to customer only after completion of
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The ownership in the constructed property passes to the customer by ‘accretion’ during construction (ie, as and when the property is being developed)
• After construction, mere possession of the t t d t i h d d
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construction- In case of termination of the agreement,
the customer does not enjoy any right in the flat or in the land - The builder would only be liable to refund the advance
constructed property is handed over• No separate sale deed is executed
between the Developer and the purchaser• Stamp duty is typically paid only on the
value of the land value or in some States
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ydeposit received
- Conveyance is executed by builder only after building is complete and possession is handed over - Conveyance is in respect of land as well as the flat constructed
on the guidance value of the flat, if higher
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of land as well as the flat constructed • Stamp duty typically paid on entire sale price
Different States – Different Practices
State Predominant Contracting Model
VAT Service Tax
Karnataka Dual Agreement Model Yes Yes – under worksKarnataka Dual Agreement Model Yes Yes – under works contract services
Tamil Nadu Dual Agreement Model Yes Yes – under works contract services
G D l A t M d l Y Y dGurgaon Dual Agreement Model Yes Yes – under Construction of complex services
Delhi Single Agreement Model Yes Yes – under Construction of complex
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Construction of complex services
Mumbai Single Agreement Model Yes - Mainly under composition option
Yes – under Construction of complex services
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West Bengal Single Agreement Model No Yes – under Construction of complex services
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Analysis of the L&TAnalysis of the L&T Judgment
Facts of the Case – L&T HC matter
Facts from L&T case
L&T had entered into development agreements with land owners (to develop and share constructed flats)and share constructed flats)
L&T had entered into agreements of sale with purchasers, wherein on completion of construction, the flats would be handed over to purchasers who will also get undivided interest in landwill also get undivided interest in land
Karnataka HC upheld the demand of sales tax on amounts collected by L&T from purchasers of flats treating it to be works contract turnover - L&T had appealed to SC against this ruling
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tiveThe two member bench of SC, referring the Raheja Development case to the
Chief Justice for re-consideration, observed as follows:
If ratio of Raheja Development is accepted, there would be no difference between
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inworks contract and contract for sale as chattel
An agreement to sell entered between Developer and prospective purchaser could be for future sale of flat (and not for undertaking construction on behalf of purchaser)
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Facts of the Case – Maharashtra Chambers of Housing
Facts from Maharashtra Chambers of Housing Industry case
Assessee had appealed to the Bombay HC on the constitutional validity of levy of VAT on agreement to sell flats to buyersof VAT on agreement to sell flats to buyers
Bombay HC, upholding the constitutional validity, held that
Works contracts have numerous variations
Not possible to accept the contention that contract for works in the course of which title is transferred to the flat purchaser would cease to be works contract
This ruling of the HC was contended before the SC
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tiveConstitutional validity of the expanded Section 2(24) of the MVAT Act as well as
Rule 58(1), Rule 58 (1A) of the MVAT Rules was challenged
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Judgment
View taken in Raheja Development on the definition of “works contract” is justified
Argument that agreement between Developer and flat purchaser is for sale ofArgument that, agreement between Developer and flat purchaser is for sale of flat and not to appoint Developer as contractor of flat purchaser, is devoid of merit
Incorrect to say that work is undertaken by Developer for himself and the owner y yand construction is not carried for and on behalf of purchaser
Levy of VAT only on value of material involved in execution of works contract, even though it is composite contract for works contract and transfer of immo able propert
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immovable property
Validity of MVAT Provisions
Amendment in explanation b(ii) to Section 2(24) brought because of judgment of
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inSC in Raheja Development – hence valid
Mode of valuation of goods provided in Rule 58(1A) has to be read to include value of goods only at the time of incorporation - even though property in goods passes later Rule 58(1A) accordingly to be read down to this limited extent
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passes later - Rule 58(1A) accordingly to be read down to this limited extent
Key Principles from the Judgment
Immovable Property Sale vs Works Contract
A contract comprising both works contract and transfer of immovable property, does not denude it of its character as works contractdoes not denude it of its character as works contract
Term “works contract” in Article 366 (29-A)(b) takes within its fold all genre of works contract and is not restricted to one species of contract to provide for labour and services alonelabour and services alone
Building contracts are species of works contract
Three conditions to be fulfilled to tax deemed sale of goods in works contract:
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there must be a works contract
goods should have been involved in execution of works contract
property in those goods must be transferred to third party either as goods
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inproperty in those goods must be transferred to third party either as goods or in some other form
Single indivisible contract for sale of flat is on par with contract containing two separate agreements
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Key Principles from the Judgment
Immovable Property Sale vs Works Contract (cont.)
Value of goods for levy of tax has to be value of goods at time of incorporation of goods in works - even though property passes as between Developer and flatgoods in works even though property passes as between Developer and flat purchaser after incorporation of goods
Works contract applicable only from the stage the Developer enters into contract with flat purchaser - Value addition made to goods transferred after agreement is entered into with flat purchaser can only be made chargeable to tax by States
No tax payable if no contract entered until completion of construction
The fact that building is intended for sale ultimately after construction does not
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g ymake any difference
Dominant Intention Test
The dominant nature test has no application in any contract that has element of
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inThe dominant nature test has no application in any contract that has element of works contract specified
Traditional decisions which have held that substance of contract must be seen, have lost their significance after amendment in the Constitution in 1982
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IMPLICATIONS
Impact in States where VAT is being paid…
Even Developers who are already paying VAT – to face valuation issues and credit reversals
SC h h ld th t VAT li bl l f t t d tSC has held that VAT applicable only from contract date VAT to be paid only on goods incorporated after agreement with the intended buyers
E h t t h diff t VAT t T ki h i f hEach agreement to have different VAT amounts – Tracking mechanism for each customer would be a challenge to the Developers
Input credit availment/ sub contractor deduction and reversals to be a challenge
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Many States do not have facilitating provisions
Even otherwise, availing credits/ sub contractor deduction on a pro-rata basis suo-moto will also be contentious
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inReversal of credits would impact overall costing and hence imposes challenges of recovery of lost credit/ sub contractor taxes from the customer
Industry will have to adapt to these changes
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Impact in States where VAT is being paid
Possibility of claiming refund of excess VAT paid (depending on the stage of booking) by Developers / purchasersAnalysis of composition scheme vs regular / abatement methods for payment of VAT – assumes more significance
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Impact in States where no VAT is paid…
State Governments would now aggressively pursue Developers
Many States may not even be required to make retrospective amendments to levy VAT
Definition of “works contract” in State Legislations typically include any agreement for carrying out for cash, deferred payment or other valuable consideration, the building / construction of any immovable propertybuilding / construction of any immovable property
Completed Projects Developers may not be able to recover VAT from purchasers
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Ability to avail past VAT credits/ sub-contractor deductions should be examined and may be a challenge
Implications where assessments complete and legal ability for the authority to
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inreassess, to be examined – as the ruling is an “interpretation of the law” as it always existed and not a “change in law”
Implications not confined to transaction with end customers – implications on J i t D l t A t (“JDA”) t b i d
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Impact in States where no VAT is paid
States could introduce a voluntary compliance scheme for payment of arrears (without penalty and possibly interest) as a facilitation measure
Recently some states, even prior to ruling, have taken an interpretation that “under construction contracts” would be exigible to VAT
Delhi has recently made detailed amendments to the rules – to cover residential transactions
Haryana has recently issued a circular covering JDA
Industry representation to States is an option that should be explored
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Industry representation to States is an option that should be explored
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Joint Development / Collaboration Agreements…
Joint Development / Collaboration Agreements also get covered
Typical arrangement involves landowner providing developmental rights to Developer to construct buildings on the land provided by landowner, in exchange for share in revenue from sale of flats or share in constructed flats
Landowners’ share of building constructed by the Developer, would be covered as works contract liable to VATworks contract – liable to VAT
Argument of barter may not hold good
Developer does not take title to land – but receives money for the proportionate l d d b th l d di tl t th D l ’ h
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land conveyed by the landowner directly to the Developer’s purchaser
Some State VAT laws have already clarified taxability of such transactions
Haryana and Karnataka have issued specific circulars wrt JDA
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Delhi has recently made detailed amendments to the rules
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Joint Development / Collaboration Agreements
Practical issues wrt discharge of tax on JDA transactions
Varied practice on valuation - No uniformity wrt valuation of construction services deemed to be carried out by the Developer for the landowner in lieu of land
No clarity on the time for payment of taxes
Recovery of tax from Landowners - JDA should provide for this to avoid disputesy p p
No clarity on liability of Landowner on pre-sales of his share of units
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Karnataka Circular No KSA CR 121/09-10 dated December 7, 2009
Valuation of consideration payable by the LO to the developer for construction of his share of building
Where Developer collects amounts separately from his customers towards theWhere Developer collects amounts separately from his customers towards the share of undivided interest in the land
Aggregate of all such amounts collected would be considered as consideration payable by the LO to the developer for construction of his share of building for levy of VAT
If no separate amount is collected by the developer from the customers towards the undivided interest in land
Aggregate of amounts declared by the developer to be the value of undivided share of l d t f d t t hil i t i ith l t th iti h ll b
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land transferred to customers while registering with relevant authorities shall be considered as the value for payment of VAT by the developer
If value of the undivided share of land transferred is not declared separately at the time of registration
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Aggregate of amounts fixed under the relevant law for payment of duty of registration of transfer of such land shall be the value for payment of VAT by the developer
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Haryana Circular Memo No. 152 /ST-1 dated May 7, 2013
Valuation of consideration payable by the LO to the developer for construction of his share of building
Where Developer/builder collects amounts separately from his customers towardsWhere Developer/builder collects amounts separately from his customers towards the share of undivided interest in the land
Aggregate of all amounts collected would be considered as consideration payable by the LO to the developer for construction of his share of building - liable to works contract tax
If no separate amount is collected by the developer from the customers towards the undivided interest in land
Aggregate of amounts declared by builder/developer to be the value of undivided share f l d t f d t t t th ti f i t ti h ll b id d th
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of land transferred to customers at the time of registration shall be considered as the value for payment of VAT by the builder/developer
If value of the undivided share of land transferred is not declared separately at the time of registration
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Aggregate of amounts fixed under the relevant law as the value of undivided share shall be considered as the value for payment of VAT by the developer
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Delhi Rule Amendment
Collaboration agreements or joint development agreements or similar other agreements/arrangements liable to VAT under DVAT
Valuation of consideration payable by the LO to the developer for constructionValuation of consideration payable by the LO to the developer for construction of his share of building shall be highest of the following amounts:
Actual value of construction including the profit, transferred by the builder to the LO; orLO; or
Where separate conveyance/sale deed is executed - Value in the sale deed for the purpose of payment of stamp duty less any such amounts paid by the builder to the LO; or
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builder as notified under Delhi (Prevention of Undervaluation of Instruments) Rules, 2007 prevailing at the time of execution of the works contract
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Where separate circle rates for land and construction is not notified in a specified area, then the prevailing circle rates in that locality
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Service Tax – Classification Issues…
Declared services, under the new service tax regime under Section 66E, include
construction of a complex building civil structure or a part thereof including aconstruction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority - Section 66E(b)
service portion in the execution of a works contract - Section 66E(h)
As both construction of complex services and works contract services are
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declared services
Debate on classification primarily due to difference in rates under the new service tax regime
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3.09%/3.71% on entire sale value vs 4.95% on construction agreement
Contracts which are treated as works contract for the purpose of levy of VAT / sales tax should also be treated as works contract for the purpose of levy of
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service tax
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Service Tax – Classification Issues…
Since VAT is to be paid on all construction agreements – natural classification would be works contract – is construction services entry obsolete?
Implications where booking is done for an already under construction propertyImplications where booking is done for an already under construction property – consideration post booking to be treated as “works contract services” and prior to be treated as “construction of complex services”?
Classification merits representation before CBECClassification merits representation before CBEC
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Supreme CourtSupreme Court –Earlier L&T Case
Developers – No VAT position…
Possibility of taking a no VAT position by Developers – when entire construction activity is outsourced
Preferably with one main contractor
Developer should not procure any goods directly
Place reliance on L&T Case [2008-TIOL-158-SC-VAT] of the Supreme CourtIn case of a sub-contract, the property in goods is directly transferred to the contractee - hence, the main contractor ceases to execute the works contract
There can only be one deemed sale
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Mere privity of contract between main contractor and the contractee would not alter the position
No works contract
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Contractee Main Contractor Sub-contractor
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Single direct deemed sale
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Developers – No VAT position
Principles also upheld by the latest L&T case by the SC
Value of goods for levy of tax has to be value of goods at time of incorporation ofValue of goods for levy of tax has to be value of goods at time of incorporation of goods in works
Even though property passes as between Developer and flat purchaser after incorporation of goods
Developer margins would be free from VAT
VAT charged by the contractors would be a cost
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No VAT position could impact the classification under service tax
Suggested to adopt this position only after obtaining an advance ruling
Will be litigious otherwise
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inWill be litigious otherwise
Documentation is the key – customer agreements, main contract, etc to be structured / drafted appropriately
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Q&A
2013
MR
Adv
isor
s
Amitabh Khemka
Cop
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ht ©
201
3 B
M
+91 98212 98432C +91 98212 98432
Disclaimer
This presentation has been prepared for the clients and Firm personnel only. The presentation is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this p g g g ypresentation will be accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This presentation does not substitute the need to refer to the original pronouncements
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C h a l l e n g e U s
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