States can bifurcate contracts

Written by Indu Bhan | Indu Bhan | Updated: Oct 3 2013, 08:31am hrs
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 & Toubros 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 Courts 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 Ltd) sold its cement division to Lafarge India in March 1999. The agreement provided that Lafarge would take over the company personnel in terms of Section 25 FF of the Industrial Disputes Act, 1947 and without any interruption in service and with terms not less favourable than before. Lafarge had issued fresh letters of appointment to the workmen.

Unsatisfied with the working conditions in Lafarge, workers complained to the labour commissioner. They submitted that they were directed to work with Lafarge without taking their consent. Since conciliation talks failed, the Jharkhand government referred the disputes to the labour court. Even Tata moved the HC, which ruled that it was an industrial dispute and it should be adjudicated as such. Tisco argued that the workmen were no longer its employees and the workmen could raise the labour dispute only against Lafarge. However, workmen asserted that they continue to be the employees of Tisco. On appeal, the Supreme Court stated that the state government's terms of reference was wrongly worded, as it assumed that the employees were of Tisco.

Cheque bounce case

The Supreme Court has held that a complaint in a cheque bounce case can be filed in any of the jurisdictions where transactions took place, including the place of issue and the place of dishonour. Citing its earlier judgment, the top court stated that the complainant can choose any one of the five places to file a complaint under Section 138 of the Negotiable Instruments Act - drawing of the cheque; presentation of the cheque to the bank; returning the cheque unpaid by the drawee bank; giving notice in writing to the drawer of the cheque demanding payment of the cheque amount; and failure of the drawer to make payment within 15 days of the receipt of the notice. In the case of Escorts Ltd vs Rama Mukherjee, the apex court said that offence under Section 138 would not be completed with the dishonour of the cheque. It attains completion only with the failure of the drawer of the cheque to pay the cheque amount within the expiry of 15 days. It is normally difficult to fix up a particular locality as the place of failure to pay the amount covered by the cheque. A place, for that purpose, would depend upon a variety of factors.