States can bifurcate contracts

Oct 03 2013, 03:01 IST
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SummaryUpholding its earlier decision in the case of Raheja Development Corporation vs State of Karnataka...

SC settles law on works contract

Upholding its earlier decision in the case of Raheja Development Corporation vs State of Karnataka, a larger bench of the Supreme Court has held that a real estate developer who constructs flats for consideration in cash or deferred payment would qualify as an agreement for “works contract” and, therefore, is liable to pay turnover tax to the states on the transfer of goods involved in such a contract. However, it said that the activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. From the time of the construction and until completion, there is no contract for construction of the building with the flat purchaser and the raw material used in the construction cannot be deemed to have been sold by the builder since at that time there is no purchaser.

A two-judge bench in August 2008 had referred to a larger bench, construction major Larsen & Toubro’s petition challenging levy of turnover tax on transfer of property jointly developed by a developer and the owner. While deciding a batch of 26 appeals led by Larsen & Toubro Ltd vs State of Karnataka against the judgments of the high courts of Bombay and Karnataka, it said that in a composite contract which comprises both a contract of work and labour and a contract for sale, the distinction between both types of contracts is “virtually diminished.” The larger bench held that the development agreement between the owner of the land and the developer cannot be seen in isolation to the terms therein and the tripartite agreement. Effectively and de facto, it is the developer who constructs the building for the flat purchaser, it said. The judgment further stressed that the 46th Amendment to Article 366 of the Constitution clarifies that the states have the power to bifurcate the contract and levy sales tax on the value of the materials used.

Labour dispute

Quashing the Jharkand High Court’s order in a labour dispute involving Tata Steel, Lafarge India Ltd and around 75 employees, the Supreme Court has asked the state government to make a fresh reference with correct terms “which is reflective of the real/exact nature of dispute” to the labour court. In this case, M/s Tata Iron & Steel Co vs State Of Jharkhand, Tisco (now Tata Steel

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