IN THE HIGH COURT OF KERALA AT ERNAKULAM
P.R. Ramachandra Menon, J. W.P.(C) No. 35048 of 2007 Dated this the 21st day of May, 2012 Head Note:- Kerala Value Added Tax Act, 2003 - Section 8(a)(iii) - Finance Act, 2007 - There is no irregularity or illegality demanding higher rate of tax in respect of the work contracts entered into between Contractors and the prospective purchasers (Awarders) based on any agreement executed on or after 01-04-2005. Kerala Value Added Tax Act, 2003 - Section 8(a)(iii) - Finance Act, 2007 - Since it is a substantive provision and not a procedural one, it cannot have any retrospective application and the intention of the law makers cannot be widened by any "reading into" exercise, at the instance of this Court to suit the convenience of the petitioners. For Petitioner:-
For Respondents:-
J U D G M E N T 1. Constitutional validity of the newly introduced provisos to Sec. 8(a) (iiii) of the Kerala Value Added Tax Act, 2003 (hereinafter referred to as 'Act') by the Finance Act 2007 (Act 15/2007) published in the official gazette of the State of Kerala dated 28-07-2007, taking away the benefit of the lesser rate of compounding, being availed by the petitioners with retrospective effect from 01-04-2005, is the main challenge in both the writ petitions. 2. The petitioner in W.P. (C) No. 35048 of 2007 is a company registered under the relevant provisions of the Indian Companies Act, 1958, while the petitioner in the other case, i.e. W.P. (C) 860 of 2008 is a partnership firm registered under the relevant provisions of the Indian Partnership Act. Both the petitioners are construction contractors engaged in the business of construction of multi-storeyed residential complex and are assessees on the rolls of the second respondent, registered under the KGST Act, who got transposed as registered assessees on the advent of KVAT Act w.e.f 01-04-2005 and their transactions, being 'work contract', is exigible to tax under both the enactments. 3. With regard to the tax liability, the petitioners had been paying compounded rate of tax under Sec. 7(7) of the KGST Act, filing returns under Sec. 7(11) of the said enactment, on the basis of the receipts of the cost of construction from their clients. Even after the advent of KVAT Act 2003 w.e.f. 01-04-2005, the petitioner had been effecting the same compounded rate of tax in terms of Sec. 8(a)(iii) of the KVAT Act, which stipulates that any contractor who had opted for payment of tax in accordance with the provisions of sub sec. (7) or sub-sec. (7A) of Sec. 7 of the KGST Act, 1963 (15 of 1963) could continue to pay tax in respect of the transfer of goods involved in the unexecuted portion of such contracts at the rate specified in sub-sec. (7) or (7A) of Sec. 7 of the KG ST Act in respect of any works contract entered prior to the date of coming into force of the VAT Act. The project of the petitioner in W.P.(C)No.35048 of 2007 named as 'Dover Court' started in October, 2004, while the petitioner in W.P. (C) No. 860 of 2008 is concerned with 4 different projects namely 'Ivory Heights', 'MaisonD'or' 'Silver Lawns' and 'Green Hills', which were also started prior, to 01-04-2005. The dispute is with regard to receipt obtained by the petitioners from their clients during the period 2005-06 to 2006-07 in respect of the ongoing works , the particulars of which have been given in Ext. P1 statement in the former case and as Exts.P1, P1(a), P1(b) and P1(c) in the latter case. While so, there was an amendment to KVAT Act, 2003 as per the Kerala Finance Act, 2007(Act 15 of 2007- whereby two new provisos were added to Sec.8(a)(iii) which read as follows: Provided further that this sub-clause shall not be applicable to any works taken up after 31st March, 2005 as a subsequent part or phase of the original work for which option had been filed under sub-sec. (7) or (7A) of sec. 7 of Kerala General Sales Tax Act, 1963 (15 of 1963)". "Provided also that the rate under this sub-clause shall be applicable only for the payments received up to 31st March, 2007 in respects of all works other than works awarded by the Government" 4. The purport of the new provisos, according to the petitioners is to take away the benefit of lesser compounded rate of tax, which was being enjoyed by them hitherto, calling upon to pay the tax at a higher compounded rate of 4% in respect of the 'receipt' between 31-03-2005 to 01-04-2007. On receipt of the notice issued to produce the Books of Accounts in respect of the said period for verification, a detailed statement of objection was submitted, as borne by Exts. P3 and P4 respectively in W.P. (C) No. 35048 of 2007. However, without any regard to the same, and the relevant provisions of law applicable to the case, Exts.P5 and P5(a) notices have been issued to the petitioner in W.P. (C) No. 35048 of 2007 under Sec.24(1) of the KVAT Act, 2003 in respect of the assessment years 2005-06 and 2006-07 respectively. Similar notices issued to the petitioner in the other case have been produced as Exts. P3 and P4. The petitioners are challenging the course and proceedings, attributing the same as a direct result of the amendment brought in by virtue of the Finance Act, 2007 and are questioning the constitutional validity of the relevant provisions. 5. The first respondent has filed a detailed counter affidavit in W.P.(C) 35048 of 2007 seeking to sustain the impugned proceedings, rebutting the plea of discrimination and such other circumstances mentioned in the writ petition. It has been stated that, though the project of the petitioner was started prior to 01-04-2005, there were several agreements with new clients executed after 01-04-2005 for the construction of residential flats and that the petitioner has obtained various amounts during the said period from 01-04-2005 to 31-03-2007 which are liable to be taxed at the new rate, as the benefit of lesser rate of tax payable as per the then existing provisos under the KG ST Act with regard to the compounded rate of tax under sub-sec. (7) or (7A) of Sec. 7 are not applicable to the case of the petitioner. The learned Government Pleader submits that there is nodispute with regard to the factual points; more so in view of the admitted facts discernible from the materials on record and that the respondents would like to adopt the stand taken in the counter affidavit in W.P. (C) No. 35048 of 2007, to be made applicable in the other case as well. 6. Adv. Mr.V.V. Asokan, the learned Counsel for the petitioners submits that there is absolutely no rationale for having introduced the new provisos as per the Finance Act, 2007 to Sec. 8(a)(iii), which has taken away the benefit of lesser tax being enjoyed by the petitioners till then, by virtue of the existing provisions. It is stated that the above provisos are beyond the legislative competence; that they are inequitable and have also given rise to discrimination between different contractors, inspite of the fact that all the projects of the petitioners were started prior to 01-04-2005, with regard to which there is no dispute. The learned Counsel also submits that; from 2008-09 there are only two segments of contractors; the first lot falling under Sec. 8 (a)(ii), i.e contractors without CST-registration with tax liability at the rate of 3%, while leaving the others under Sec. 8(a)(ii), whose tax liability, which was fixed @ 8% in the year 2008-09, was subsequently brought down by the Government itself in 2009-10 providing for a commodity rate at the first sale, with the balance to be paid at the rate of 3%, as a result of the amendment brought about pursuant to the grievance projected by various Builders' Associations. It is also brought to the notice of this Court that the newly introduced provisos, as per the Finance Act, 2007 have been substituted as per the Kerala Finance Act 2009 (Act 13 of 2009) w.e.f. 01-04-2009, which read as follows: Sec. 8(a): "(ii)- any works contractor not falling under clause (i) above may, at his option, instead of paying tax in accordance with the provisions of the said section tax at three per cent of the contract deducting the purchase value of goods including freight and gross profit element consigned into the State on stock transfer or purchased from outside the State and for the purchase value of goods so deducted shall pay tax at the scheduled rate applicable to such goods. xx xx xx xx Provided also that notwithstanding anything contained in this Act, in cases of works which commenced prior to 1st April, 2008 and which remains partly unexecuted as on 1st April, 2008, the contractor shall pay tax at the rates as it existed prior to 1st April, 2008 till the completion of work or upto 31st March, 2009, whichever is earlier. Provided also that notwithstanding anything contained in this Act, contractors who have opted for payment of tax under sub-clause (ii) of clause (a) of sec. 8 during the previous years shall continue to pay tax on that portion of the works remaining unexecuted as on 1stApril, 2009, at the rates applicable as on 1st April, 2009." By virtue of the substituted provisos as above, the contractors need to pay tax in respect of the works which commenced prior to 01-04-2008 and which remain partly unexecuted as on 01-04-2008, only at the rate as it existed prior to 01-04-2008, till completion of the work or upto 31-03-2009, whichever is earlier. The latter proviso contains a 'non-obstante clause', which stipulates that the contractors who have opted for payment of tax under Sec. 8(a)(ii) of the Act during the previous years shall continue to pay tax on that portion of the works remaining unexecuted as on 01-04-2009, at the rates applicable as on 01-04-2009. Referring to the scope of the above proviso, the learned Counsel submits that the works undertaken by the petitioners having commenced prior to 01-04-2008 and since they were continuing to pay tax at the KGST rates after 01-04-2008 by virtue of the then existing proviso under Sec. 8(a)(iii), there is no basis for the notice issued under Sec. 24 (1) of the KVAT Act, 2003 demanding a higher rate. 7. The learned Sr. Government Pleader Mr. S. Sudhish Kumar appearing for the respondents submits that the idea and understanding of the petitioners is quite wrong and misconceived. The liability to satisfy the tax is admittedly by virtue of Sec. 8(a)(iii), which enabled the petitioners to continue to pay the tax at the lesser rate, in respect of the works contract started prior to 01-04-2005, confining to the unexecuted portion, even after 01-04-2005. In the instant case, several new contracts were executed by the petitioners with their clients after 01-04-2005, which cannot be said as any 'work contract' 'having commenced prior to 01-04-2005 ' and as such, the petitioners are not entitled to the benefit of lesser tax even under Sec. 8(a)(iii). It is also stated that the newly added provisos, as per the Finance Act, 2007 are only supplementary to give effect to the scheme of the statute and that by itself has not given any cause of action to the petitioners to be aggrieved of. The learned Government Pleader submits that, but for the vague averment/allegation as to the challenge against the constitutional validity of the relevant provisos, no tenable ground has been raised and that such a contention was taken only to sustain the writ petition before this Court at the notice stage, even without getting the proceedings completed before the statutory authorities and to avoid further course of challenge, if aggrieved, under the statute. 8. Considering the challenge against the statutory provisions, it is relevant to go through the grounds raised in the writ petitions, which read as follows: " 1. The newly introduced provisos to Sec.8(a)(iii) of the Kerala Value Added Tax Act, 2003 by the Finance Act, 2007 (Act 15 of 2007) published in the official Government Gazette dated 28-07-2007 is unconstitutional and arbitrary. 2. The purpose and effect of the new proviso is to take away the compounded rate ( of course a lesser rate) being availed by the petitioner with retrospective effect ie.. from 31.3.2005,. The petitioner from 1.4.2005 until the date of the Finance Act, 2007 have been collecting and remitting the compounded rate of tax at 2.3% on the basis of Sec. 8 (a) of the KVAT Act. The abrupt manner in which that facility has been taken away that too with retrospective effect casting additional burden as has been done by the impugned amendment is clearly arbitrary and unjust. 3. In view of the prevailing statutory provisions during the period 01-04-2005 to 01-04-2007, the petitioner could collect only 2% of tax by way of works contract tax from their clients and any collection over and above such rate would have attracted penal action against them. That being the position, there is no justification to cast an additional impost of tax with retrospective effect rather there is any justification to upset the compounded rate at which the petitioner has been paying the works contract tax. 4. The newly introduced two provisos are inconsistent with each other and create discrimination between the contractors who have undertaken works before 31-03-2005 and after 31-03-2005. There is no rationale in that classification. On this ground of discrimination also the impugned amendment is unsustainable and liable to be annulled." When the petitioners contend that the newly introduced provisos as per the Finance Act, 2007 are beyond the legislative competence, in what way,does it become incompetent is never mentioned in the writ petitions or argued before this Court. There is no challenge with regard to the source of power to bring about the enactments, with reference to the relevant entry in the State List under the 7th Schedule of the Constitution of India. Similarly, why the provisos become inequitable is also not substantiated. When the very benefit provided under Sec. 8(a)(iii) enabling the petitioners to satisfy the tax liability at a lesser rate, as it existed earlier under the KGST Act, is only by way of 'concession'. This Court finds that none of the grounds raised by the petitioners as mentioned above does support the challenge against the constitutional validity of the newly introduced provisos. This being the position, the challenge raised in this regard, cannot but be answered against the petitioners . 9. With regard to the scope of the newly added provisos, as per the Finance Act, 2007, this Court finds that the amendment stands on a different footing, to meet a different situation and that the liability to satisfy higher tax in respect of the agreements executed between the petitioners and their clients during the period from 01-04-2005 to 31-03-2007, is not a direct result of the said amendment . This is discernible from Sec. 8(a)(iii) as it existed prior to the amendment/addition of the proviso in the year 2007. Sec. 8(a)(iii), as it originally stood reads as follows: ...."(iii) any contractor who had opted for payment of tax in accordance with the provisions of sub sec. (7) or sub sec. (7A) of Sec. 7 of the Kerala General Sales Tax Act, 1963 in respect of any works contract prior to the date of coming into force of this Act, part of which remains to be executed on such date, such contractor may continue to pay tax in respect of the transfer of goods involved in the unexecuted portion of such contracts, at the rate specified in sub sec. (7) or sub sec. (7A) of the said Act." 10. A mere reading of sub-clause (iii) of Sec. 8(a) shows that the benefit of lesser rate of compounded tax, as was being paid by the assessee in tune with the option exercised for payment of tax in accordance with the provisions of sub-sec. (7) or (7A) of the KGST Act, is only in respect of the work contracts prior to the date of coming into force of the Act, part of which remains unexecuted on such date. To put it more clear, to have the benefit thereunder, the work contract had to be live and incomplete, as on the date of coming into force of the KVAT Act, 2003, i.e. 01-04-2005. In other words, if there was a work contract, as on 31-03-2005 and the assessee opted to pay compounded rate of tax under sec. 7(7) or 7(7A) of the KGST Act, such assessee is entitled to continue to pay at the same rate of tax in respect of the unexecuted portion of said work contract. It is corollary to note that, if the work contract is on or after 01-04-2005. it was not a work contract prior to the date of coming into force of the KVAT Actand in such case, the benefit of lesser tax under Sec. 8(a)(iii) is not available. 11. Coming to the case of the petitioners, it has been rather admitted by them vide. Exts.P1/P1 series statements, that several bookings/agreements have been executed between them and their clients on or after 01-04-2005, for construction of the residential flats, accepting various amounts in this regard between 01-04-2005 and 31-03-2007. True, the project, as named, was started prior to 01-04-2005. But the question is whether starting of the project is enough to avail the benefit of lesser tax or is it not necessary to have the work contract to be in existence prior to 01-04-2005 for availing the benefit. A 'Project', irrespective of the total cost involved, may consist of a single work contract and the contract will come into existence on accepting the proposal supported by valid consideration between the Contractor and the Awarder. The 'Project' may also consist of several independent works contract as in the instant case, involving construction of various residential buildings, where the Awarder of the work contract happens to be different persons, who provide funds of their own to effect the construction. In the case of construction of a multi-storeyed 'flat complex', construction is effected in a common undivided land, either utilizing the funds provided by the Builder himself, later transferring the individual apartments with undivided interest in the land to the prospective purchasers; or by way of construction effected by the Builder making use of the funds separately provided by the prospective purchasers (Awarders), where the role of the Builder is that of a Contractor, ( unlike in the former case, where it is a 'Vendor' and not a Contractor). In the instant case, there is no dispute that the undivided interest in the land has been caused to be conveyed by the land owner to the prospective purchasers and that the construction has been effected by the petitioners (Builders), making use of the funds provided by the prospective purchasers (Awarders of the Contract) on the strength of the agreements executed between them. In other words, the proposal and acceptance to effect construction of the residential building becomes a complete contract, only by virtue of the agreement executed in between,, supported by valid consideration. The construction contractors like the petitioners have obtained the 'work contract' to effect the construction, only based on such agreements. In the case of such agreements executed on or after 01-04-2005, the very right to effect construction came to the hands of the petitioners only after commencement of the new Act, i.e., KVAT Act, 2003, w.e.f. 01-04-2005. In other words, there was no work contract prior to coming into force of the said Act, in respect of any agreement executed on or after 01-04-2005. This being the position, it cannot be said that the petitioners had commenced the construction of the buildings prior to 01-04-2005, pursuant to any agreement executed on or after 01-04-2005, for claiming lesser compounded rate of tax as given in Sec. 8(a)(iii), [dehors the newly added provisos as per the Finance Act, 2007]. This being the position, the stand taken by the respondents to have the assessments finalised, issuing notice under Sec. 24 (1) of the KVAT Act,2003, in respect of the agreements executed between the petitioners (Contractors) and the prospective purchasers (Awarders) on or after 01-04-2005 and in respect of the payments effected between that date and 31-03-2007, is not assailable under any circumstance. 12. Coming to the scope of the newly added provisos as per the Finance Act, 2007, it is to be noted that the words " as a subsequent part or phase of the original work" for which option had been filed under sub sec. (7) or (7A) of Sec. 7 of the Kerala General Sales Tax Act, are very relevant . There may be cases, as mentioned herein before, that the Project as such may consists of a single work contract depending upon the nature of the result intended to be achieved. There may also be cases where it is to be completed by way of different phases or at different stages, based on the terms of the contract, though such Project was started prior to 01-04-2005. It may be to deny the benefit of lesser rate of tax in respect of any subsequent part or phase of the original work/project (for which, an option had already been filed under the KGST Act), that the new provisos were introduced to limit or clarify the position, as per the Finance Act, 2007; which by themselves do not become ipso facto applicable to the petitioners. By virtue of the very nature of contract being undertaken by the petitioners, whereby 'independent' residential flats are intended to be constructed on behalf of the different prospective purchasers (Awarders) based on different agreements to be executed in between, accepting consideration from such different persons, it gives rise to several independent work contracts and is taken care of by Sec. 8(a) (iii) itself. This being the position, the petitioners cannot be heard to say that they became aggrieved only by introduction of the newly added provisos as per the Finance Act, 2007. 13. With reference to the substitution of the newly added proviso as per the Kerala Finance Act, 2009, it is contended that, this will take care of the whole situation, as the benefit is intended to be given in respect of the works which commenced prior to 01-04-2008 and remains partly unexecuted as on 01-04-2008, to be mulcted with tax liability as it existed prior to 01-04-2008 till the completion of the work or upto 31-03-2009. The scope of the amendment is also sought to be highlighted with reference to the latter proviso, where there is a non- obstante clause and right of the contractor/s, who have opted for payment of tax during the previous years, has been protected to be continued in respect of the remaining unexecuted work/portion as on 01-04-2009 at the rates applicable as on 01-04-2009. This Court finds it difficult to accept the said proposition, primarily for the reason that the writ petitions filed in the year 2007 and 2008 do not call upon this Court to examine the scope of the above proviso or the benefit flowing therefrom. Secondly, both the above provisos were brought into force by the Kerala Finance Act, 2009 as per the Gazette Notification dated 28-07-2009, only w.e.f. 01-04-2009. Since it is a substantive provision and not a procedural one, it cannot have any retrospective application and the intention of the law makers cannot be widened by any "reading into" exercise, at the instance of this Court to suit the convenience of the petitioners. This Court finds that the reliance sought to be placed on the said provisions is quite out of context. 14. In the above facts and circumstances, it is held that the challenge raised against the constitutional validity of the provisos impugned in the writ petitions is devoid of any merit. There is no irregularity or illegality on the part of the respondents for having issued the impugned notices demanding higher rate of tax in respect of the work contracts entered into between the petitioners (Contractors) and the prospective purchasers (Awarders) based on any agreement executed on or after 01-04-2005. Both the writ petitions fail and they are dismissed accordingly. |
 | |
W.P. (C) No. 35048 of 2007 - Mather and Company Pvt. Ltd. Vs. State of Kerala, 2012 (3) KLT SN 41 (C.No. 43)posted Jul 26, 2012 6:10 AM by Law Kerala [ updated Jul 26, 2012 6:10 AM ] |
|
(DISCLAIMER : Though all efforts have been made to reproduce the order / judgments / contents / statues etc. correctly but the access and circulation is subject to the condition that keralaw.com is not responsible / liable for any loss or damage caused to anyone due to any mistake / error / omissions.)
Sign in|Report Abuse|Print Page|Remove Access|Powered By Google Sites