The Maharashtra Sales Tax Tribunal (MSTT/Tribunal), vide its land mark judgment dated 3 May 2016, in the matter of M/s Sumer Corporation v The State of Maharashtra,1 has decided the issue of taxability of Transferable Development Rights (TDR) and Development Right Certificates (DRC) that are acquired from Slum Rehabilitation Authority (SRA) and subsequently transferred. The Tribunal held that such transfer would be taxable under the provisions of Maharashtra Value Added Tax Act, 2002 (MVAT Act). The Tribunal analysed clauses of the contract along with provisions of the MVAT Act and legal precedents to conclude that acquisition of TDRs was taxable under the provisions of the MVAT Act as the same was acquired as consideration not only for land but also for undertaking construction activities. In the absence of contract value, the Tribunal directed the authorities to follow the mechanism prescribed under Rule 58 of MVAT Rules to compute the consideration attributable to TDR and determine its value.
Facts of the Case
The Appellant in the present case was engaged in the business of construction of buildings and tenements for the SRA. The Appellant had constructed buildings for the SRA, for which it did not receive any monetary consideration. Further, no monetary contract value was fixed for undertaking the said activity. As per the terms of the agreement, the Appellant received TDRs, which were subsequently sold for cash consideration. The Value Added Tax (VAT) authorities initiated assessment proceedings for the period 2006-2007 and levied VAT on the value of the TDRs by treating them as consideration towards activity of works contract undertaken for the SRA. The assessing authority computed the value of TDRs based on the subsequent sales consideration. The Appellant contended that the transaction was actually a 'barter' and could not be taxed under the MVAT Act. Reliance was placed on the decision of Devi Dass Gopal Krishnan and Others2 and Radhas Printers v State of Kerala3 by the Appellant to support its contention. The counsel appearing on behalf of the State of Maharashtra submitted that subsequent to the amendment in clause 29A of Article 366 of the Constitution of India, the definition of 'sale' included deemed sale and that the taxable event was the transfer of property in goods whether as goods in the same or any other form.
The Tribunal, after hearing both the learned Counsels at length went on to decide the ensuing questions:
1. Whether the transaction is works contract?
The Tribunal referred to the following agreements admitted by both sides:
- Agreement between the Appellant and the SRA
- Agreement entered between the owner of the land and the Appellant for development of property in relation to rehabilitation of slum dwellers; and
- Agreement between the land owner, the Appellant and the SRA.
From the agreements itself, it was very evident that the Appellant had entered into a contract for construction of tenements for the land taken for development. The Appellants were to carry on construction under Slum Land Redevelopment, in pursuance of which, the Appellant was to receive TDRs as consideration. It was further evident that both parties had agreed that the SRA would be giving developers the TDRs. Referring to the case of Larsen & Toubro Ltd v State of Karnataka Civil Appeal No 8672 of 2013 dated 26 September 20134, the Tribunal held that building contracts were species of works contract and hence, the said arrangement was a works contract.
2. Was the transaction free of cost?
The judgement in the case of Devi Dass Gopal Krishnan and Others was referred wherein it was stated that "the expression 'valuable consideration' takes colour from the preceding expression 'cash or deferred payment'". Also in the case of Radhas Printers, the High Court of Kerala had held that the term "'other valuable consideration' means consideration in money terms only and not any other consideration." The Tribunal, however, accepted the submission of the Counsel for State that the judgments referred by the Appellant pertains to the period prior to constitutional amendment and hence, the same would not be applicable to the changed circumstances. Accordingly, since TDRs could be converted into money, it would be construed as valuable consideration. Hence, the argument that transaction was barter or free of cost or without consideration, could not be accepted.
3. Whether in this transaction there was transfer of property in goods (whether as goods in the same form or another)?
Tribunal referred to the observations made by the Supreme Court of India (SC) in the case of Larsen and Toubro, wherein it was held that a transfer of property in goods under clause 29A(b) of Article 366 was deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. Further, it observed that a single and indivisible contract had been brought on par with a contract containing two separate agreements and States had the power to levy sales tax on the value of the material in the execution of works contract by virtue of the forty sixth amendment to the Constitution. The Tribunal further observed that in the case of Chheda Housing Development v Bibijan Shaikh Farid5, TDRs were granted as compensation for land and hence, were held to be immovable property, whereas, in the present case, TDRs had been received not only for land, but also for the construction of tenements. Hence, TDRs received could not be said to be consideration purely for immovable property but also for the works contract undertaken.
4. Whether levying tax on amount received on sale of TDRs was proper?
The Tribunal upheld the contention of the Appellant that the value of TDR could not be taken as a basis for computing VAT liability as that was the value the TDRs would have fetched subsequently in the open market. In order to determine the VAT, one had to first establish value of entire contract. In this connection, the Tribunal observed that the value of the contract could be computed on the basis of the sale price that would have been fetched on the date of the agreement of the tenements of that particular area. Based on the above observation, the Tribunal directed the assessing authority to obtain the value of the entire contract on the basis of the value of the tenements that would have been fetched as on the date of the agreement in that locality and thereafter apply Rule 58 of MVAT Rules for determining the value of the goods involved in the execution of the works contract in that year.
5. What is taxable in the given circumstance?
The Tribunal declined to rely on the observations of SC questioning existence of taxing machinery as in the case of Commissioner of Excise and Customs v Larsen and Toubro (supra) and commented that the ruling cited would not be applicable in view of changed circumstances. Further, the Tribunal referred to the observations made by the SC in the case of Larsen and Toubro v State of Karnataka (supra) in relation to Rule 58(1) of the MVAT Rules, and observed that necessary amendments had been made by the State Government. Thus, from the amended Rule 58 of MVAT Rules, it could be seen that the rule provided for measurement of value and hence, the contention of Appellant could not be accepted.
With an objective to curtail the inordinate delays in implementation of a Slum Rehabilitation Scheme and to ensure time bound redevelopment of slums, the Government of Maharashtra has come up with a proposal to auction the Slum Rehabilitation Schemes. The Government seeks to take the public auction route for redevelopment of the slums. This will not only save time taken in the appointment of a developer but will also give the Government a chance to evaluate, at the initial stage itself, the financial potential and ability of the developer to take the Slum Rehabilitation Scheme through. This judgement to an extent will hamper developers' intentions to engage themselves into such redevelopment as there would be a long lasting tax effect on such transactions. The developers/promoters/builders will have to re-strategize/re-calibrate their business models, on a going forward basis, so as to gain a competitive edge.
2. [22 STC 430 SC]
3. [(90 STC 201) Kerala]
4. (65 VST 1)
5. [2007 3 MhLJ 402]
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