SUPREME COURT
JUDGMENT IN THE CASE
OF L&T LIMITED
10th October, 2014
Copyright 2013, Lakshmikumaran & Sridharan
COVERAGE & SCOPE
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Coverage
 BRIEF BACKGROUND:
 K. Raheja Development Corporation
 Environment prevailing after K. Raheja-industry
reaction
 Subsequent developments
 L&T LIMITED VS. STATE OF KARNATAKA
 IMPACT ON THE DEVELOPERS
 WAY FORWARD
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BRIEF BACKGROUND
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K. Raheja Development Corporation
vs.
State of Karnataka
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K. Raheja
Developer
Agreement to develop flats
Land Owner
Intending
Purchaser
Society formed
under KOFA
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K. Raheja
Works Contract
Definition
Includes “any agreement” for
building construction, for
consideration
Wide and Inclusive
Agreement with purchaser prior
to completion of construction
Agreement with purchaser after
Works Contract
Not a Works Contract
completion of construction
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Environment prevailing after
K. Raheja-industry reaction
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Assotech Realty Pvt. Ltd
 Petitioner constructing house on land purchased and
developed by it, for selling them to interested purchasers
 Allottees not getting any right in house till sale deed is
executed
 Allahabad High Court:
 Construction not undertaken for and on behalf of prospective allottees
 On facts, transaction not works contract
 Supreme Court set aside the decision on technical grounds
- no comments on the merits
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Magus Construction Pvt. Ltd.
 Developer enters into ‘flat purchase agreements’ – during the construction
 Registered agreement for sale- before accepting the advance payment
 Issue before Gauhati High Court: Whether developer providing
“Commercial or industrial construction service/ construction of
complex service”
 HELD:
 Title in flat/apartments passes to customer only on execution of sale
deed and registration thereof
 Payment made by prospective purchaser is against consideration of
sale
 Construction not on behalf of prospective purchaser
 Therefore, no taxable service
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Industry View
 Peculiar factual matrix in K. Raheja
 Judgment inapplicable where:
 Construction for self
 Sale deed/conveyance deed after
construction
 Sale of immovable property
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Subsequent developments
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Amendment to Maharashtra
VAT
 Explanation to Section 2(24) amended:
“…including an agreement for carrying out
for cash,
payment or other
valuable
consideration,
the
construction…of any movable or immovable property.”
deferred
building,
 Rule 58(1A) inserted:
In case of a construction contract where immovable property, land
or an interest in the land is transferred to
the purchaser along
with
property in goods involved in
the execution
of
the
construction
contract, then such a transfer will be chargeable
to VAT excluding cost of land.
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Amendment to Maharashtra
VAT…contd.
 Notification dated 10th July, 2010:
Composition scheme for dealer who undertakes the
construction of flats, dwellings or buildings or premises
and transfers them in pursuance of an agreement alongwith land or interest underlying the land.
.
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Maharashtra Chamber of Housing
Industry
 Constitutional Validity challenged before the
Bombay High Court:
 Amendment to the definition of Sale
 Insertion of Rule 58 (1A)
 Notification dated 10th July, 2010
 Validity of the amendment upheld:
 Amendment only clarificatory
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Service Tax-Amendments
 Explanation inserted w.e.f. 1.7.2010 by the
Finance Act, 2010
Construction of residential complex; and
construction of commercial/industrial building
intended for sale, wholly or partly, by a builder or any
person authorized by builder before, during of after
construction
deemed to be service provided by builder to the buyer if
any sum is received before grant of completion
certificate
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L&T LIMITED
VS.
STATE OF KARNATAKA
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L&T Limited
Larsen and
Toubro
Joint Development
Agreement
Land Owner
Sale deed in favour of purchaser by L&T and Land Owner
Intending
Purchaser
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L&T Limited
KARNATAKA HIGH COURT-SINGLE JUDGE
KARNATAKA HIGH COURT – DIVISION BENCH
•Controversy covered by the Supreme
Court decision in the case of K.
Raheja (Para 16 and 19)
•Controversy covered by the Supreme
Court decision in the case of K. Raheja
SUPREME COURT-DIVISION BENCH
•The correctness of view taken in Raheja Development doubted:
•If Raheja is relied upon, no difference between sale simplicitor and WCT
•Is the developer a contractor for prospective flat purchaser?
•If the development agreement is not a works contract could the department
rely upon the tripartite agreement and interpret it to be works contract?
•Referred for consideration by Copyright
Larger2013,
Bench
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L&T Limited: Supreme
Court-Larger Bench
ARGUMENTS PUT FORTH BEFORE THE LARGER BENCH
APPELLANTS (L&T AND ORS.)
STATE OF MAHARASHTRA AND KARNATAKA
• For levy of sales tax there must be works contract i.e. contract
•Phrase in “some other form” for construction, fabrication and the like, goods deemed to have
takes colour from “transfer of been sold should be involved in the works contract, and property
property in goods” (Para 25)
in goods should be transferred to third party (Para 40)
•Construction by developer not •Dominant intention not applicable and accretion not decisive
at the behest of flat purchaser (Para 46)
(Para 26)
•Raheja wrong to the extent it says agreement for sale entered
•Stamp duty (Para 30)
post completion of construction is not works contract (Para 42)
•Accretion is sine qua non for •“In some other form” means goods may cease to be goods i.e.
works contract (Para 31)
they may merge into immovable property(Para 44-47)
•Works contract may be coupled with sale of immovable
property (Para 45)
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L&T Limited: Supreme CourtLarger Bench
Consideration of correctness
of K. Raheja decision as
referred by division bench
Appeals from Maharashtra
against the M.C.H.I. judgment
UPHELD K.RAHEJA
UPHELD M.C.H.I.
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IMPACT ON THE DEVELOPERS
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Judgment’s
Developers
impact
on
“Where a contract comprises of both a works contract and a transfer
of immovable property, such contract does not denude of its character
as works contract.”
“It cannot be said to be an absolute proposition of law that the
ownership of the goods must pass by way of accretion.”
“Dominant nature test has no application and the traditional decisions
which have held that the substance of the contract must be seen have
lost their significance.”
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Contd…
Issues:
 Works Contract-widest coverage
 Relevance of definition of ‘works contract’ in
States: ‘means’ and ‘includes’
 Retrospective or prospective applicability?
 Exposure for the past period
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Contd...
“So long as the agreement is entered into before the construction is
complete it would be works contract.”
“Activity undertaken by the developer would be works contract only
from the stage the developer enters into a contract with the flat
purchaser.”
ISSUES
•What is meant by completion of construction? Completion Certificate?
•Construction of a three storied building being undertaken
• Agreement to sell first floor entered into while second floor is being
constructed
WHETHER SALE OF FIRST FLOOR WORKS CONTRACT OR NOT?
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Contd…
“The value of the goods which can constitute the measure for the levy
of the tax has to be the value of the goods at the time of incorporation.”
ISSUES
•What is “value of goods at the time of incorporation”?
•Method to determine the value of goods and land?
•What will be the value of the goods in cases of back to back sub-contracting?
•Deduction
•Applicability of decision in the case of State of A.P. vs. L&T [2008 (SC)]
•Input Tax Credit
•Concession Forms
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Judgment’s
Service Tax
impact
on
Taxability of deemed construction service prior to deeming it as service ?
Levy of service tax on agreement to sell flats under
construction prior to 1.7.2010
No SCN till date
SCN already issued
Limitation
Applicability of the judgment?
No suppression
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WAY FORWARD
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Way Forward
 Specific scheme based on the value of
goods at the time of incorporation
 Composition scheme for developers
 Deduction of sub-contractor’s turnover
wherever available
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NEW DELHI
5 Link Road, Jangpura Extension, opp. Jangpura
Metro Station, New Delhi 110014
MUMBAI
401 - 404, Kakad Chambers
132, Dr. Annie Besant Road, Worli
Mumbai - 400 018
Phone: +91 (22) 2491 4382/84/86
CHENNAI
2, Wallace Garden 2nd Street
Chennai - 600 006
Phone: +91 (44) 4396 1600
BANGALORE
‘World Trade Centre,
26/1. Dr.Rajkumar Road,
Bangalore - 560005
Phone: +91 (80) 4933 1800
AHMEDABAD
HYDERABAD
‘Hastigiri’, 5-9-163, Chapel Road,
Opp. Methodist Church, Nampally,
Hyderabad - 500001
Phone: +91 (40) 4129 9811
PUNE
AHMEDABAD
HYDERABAD
B-334 (3rd floor), SAKAR-VII, Nehru Bridge
Corner, Ashram Road, Ahmedabad-380 009
Phone: +91 (79) 4001 4500
PUNE
607-609, Nucleus, 1 Church Road, Camp,
Pune – 411 001
Phone: 020-66801900
Maharashtra
E-mail : lspune@lakshmisri.com
CHENNAI
BENGALURU
KOLKATA
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41, Chowringhee Road,
Kolkata – 700 071.
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