Sri Jose Thomas (Proprietor, Choice Constructions) v. State of Kerala (O.T.Rev. No. 87 of 2018 & O.T.Rev. No. 93 of 2018)

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE DR.JUSTICE A.K.JAYASANKARAN NAMBIAR** ## **&** **THE HONOURABLE DR.JUSTICE KAUSER EDAPPAGATH** **FRIDAY, THE 29[TH] DAY OF SEPTEMBER 2023/7TH ASWINA, 1945** **O.T.REV.NO.87 OF 2018** **AGAINST THE ORDER DATED 12.04.2018 IN T.A(VAT).NO.524/2014 OF KERALA VALUE ADDED TAX APPELLATE TRIBUNAL, ERNAKULAM** ## **REVISION PETITIONER/PETITIONER:** **SRI.JOSE THOMAS AGED 65 YEARS PROPRIETOR,CHOICE CONSTRUCTIONS, IV/432A, P.V.SREEDHARAN ROAD, KUMBALAM, KOCHI-682506** **BY ADV.SRI.JOSE JACOB** ## **RESPONDENT/RESPONDENT:** **STATE OF KERALA REPRESENTED BY THE SECRETARY, TAXES(A) DEPARTMENT, GOVERNMENT OF KERALA, SECRETARIAT,TRIVANDRUM -695001** **BY DR.THUSHARA JAMES, SR. GOVERNMENT PLEADER** **THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 25.09.2023 ALONG WITH O.T.REV.NO.93/2018, THE COURT ON 29.09.2023 DELIVERED THE FOLLOWING:** **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 2 ::** ## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE DR.JUSTICE A.K.JAYASANKARAN NAMBIAR** ## **&** **THE HONOURABLE DR.JUSTICE KAUSER EDAPPAGATH** **FRIDAY, THE 29[TH] DAY OF SEPTEMBER 2023/7TH ASWINA, 1945** ## **O.T.REV.NO.93 OF 2018** **AGAINST THE ORDER DATED 12.04.2018 IN TA(VAT) NO.551/2014 OF KERALA VALUE ADDED TAX APPELLATE TRIBUNAL, ERNAKULAM** ## **REVISION PETITIONER/PETITIONER:** **SRI.JOSE THOMAS AGED 65 YEARS PROPRIETOR, CHOICE CONSTRUCTIONS, IV/432A, P.V.SREEDHARAN ROAD, KUMBALAM, KOCHI 682 506.** **BY ADV.SRI.JOSE JACOB** ## **RESPONDENT/RESPONDENT:** **STATE OF KERALA** **REPRESENTED BY THE SECRETARY, TAXES (A) DEPARTMENT, GOVT OF KERALA, SECRETARIAT, TRIVANDRUM 695 001** **BY DR.THUSHARA JAMES, SR. GOVERNMENT PLEADER** **THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 25.09.2023, ALONG WITH O.T.REV.NO.87/2018, THE COURT ON 29.09.2023 DELIVERED THE FOLLOWING:** **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 3 ::** ## **O R D E R** ## **Dr. A.K. Jayasankaran Nambiar, J.** As both these O.T. Revisions are preferred by the same petitioner, albeit pertaining to different assessment years viz. 2008-09 and 2010-11 respectively, they are taken up together for consideration and disposed by this common order. The brief facts necessary for disposal of these O.T. Revisions are as follows: 2. The petitioner is a property developer who constructs residential apartments for sale to prospective customers. During the assessment years 2008-09 and 2010-11, the petitioner had opted for payment of tax at compounded rates under Section 8 of the Kerala Value Added Tax Act [hereinafter referred to as the “KVAT Act”]. While discharging his liability in accordance with the formula prescribed under the said Section, the petitioner deducted certain amounts from the gross contract value received by him from the customers and applied the rate of tax prescribed under Section 8 to the said reduced contract value. This was objected to by the Assessing Authority, who sought to levy the tax at the prescribed rates on the entire amount collected by the petitioner **O.T.Rev.No.87/2018 & :: 4 :: O.T.Rev.No.93/2018** from his customers. The order of the Assessing Authority, although impugned by the petitioner before the First Appellate Authority and thereafter before the Tribunal, was upheld by both the Appellate authorities below save for minor modifications in favour of the petitioner. It is being aggrieved by the common order of the Appellate Tribunal for the assessment years 2008-09 and 2010-11 that the petitioner is now before us through these O.T. Revisions. 3. The questions of law raised in the O.T. Revisions are as follows: ## **Questions of law raised in O.T. Revision No.87/2018:** - 1) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in confirming the differential VAT demand for the AY 2008-09 without considering the ratio laid down by the Supreme Court in the case of **M/s. Larsen & Turbo Limited & Anr v. State of Karnataka & Anr** with respect to contractors paying tax at compounded rates? - 2) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in holding that service tax included in the contract receipts is not deductible from the taxable turnover since the Petitioner had opted for payment of tax under Section 8(a) of the KVAT Act? - 3) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in holding that land value as per the sale agreement is not deductible and only land value as per registered sale deed is deductible? - 4) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in holding that the deduction claimed by the Revision Petitioner for the AY 2008-09 should be limited to Rs.11,00,88,027/- where the Revision Petitioner had produced Form 20H amounting to Rs.11,45,21,298/-? **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 5 ::** ## **Questions of law raised in O.T. Revision No.93/2018:** - 1) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in confirming the differential VAT demand for the AY 2010-11 without considering the ratio laid down by the Supreme Court in the case of **M/s. Larsen & Turbo Limited & Anr v. State of Karnataka & Anr** with respect to contractors paying tax at compounded rates? - 2) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in holding that service tax included in the contract receipts is not deductible from the taxable turnover since the Petitioner had opted for payment of tax under Section 8(a) of the KVAT Act? - 3) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in holding that land value as per the sale agreement is not deductible and only land value as per registered sale deed is deductible? - 4) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in holding that the online building tax collected from the customers should not be deducted from the taxable turnover since the Petitioner had opted for payment of tax under Section 8(a) of the KVAT Act? - 5) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in holding that maintenance fund and sinking fund collected from the customers on behalf of the owners' association should not be deducted from the taxable turnover since the Petitioner had opted for payment of tax under Section 8(a) of the KVAT Act? - 6) Whether under the facts and circumstances of the case, the Hon'ble Tribunal was correct in giving tax credit of only Rs.22,70,735/- as against Rs.36,08,465/- for AY 2010-11? 4. The common issue raised in both the O.T. Revisions is whether KVAT at compounded rate is payable on: - (i). service tax amount collected by the builders from the customers. - (ii). value of goods incorporated in the building till the date of entering into agreement or whether it is payable only on the value of the goods incorporated into the building after **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 6 ::** the date of entering into the construction agreement? - (iii). land value mentioned in the sale agreement entered into between the builder and customer or as per the value mentioned in the registered sale deed. It may be mentioned in the outset that the petitioner chose not to press issue No.(iii) before us at the time of hearing of the O.T. Revisions, and hence, the questions of law raised in the O.T. Revisions on this issue are not answered. 5. The additional issue that arises for consideration in O.T. Revision No.87/2018 pertaining to assessment year 2008-09 is - Whether benefit of sub-contractor deduction evidenced by consolidated Forms 20H issued for multiple years can be disallowed on the ground that it is not specific to one year when payments made for each year is provided by the petitioner? Similarly the additional issue that arises for consideration in O.T. Revision No.93/2018 pertaining to assessment year 2010-11 is- Whether KVAT at compounded rate is payable on: - (i) one time building tax collected and paid by the builder on behalf of the customer; - (ii) maintenance fund and sinking fund collected by the builder on behalf of owners' association to be formed and shown in its accounts under current liabilities? and - (iii) Whether the Hon'ble Tribunal was correct in giving tax credit of only Rs.22,70,735/- as against Rs.36,08,465/- for assessment year 2010-11? **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 7 ::** 6. We have heard Sri.Jose Jacob, the learned counsel for the petitioner in both these O.T. Revisions and Dr. Thushara James, the learned senior Government Pleader for the respondent/State. 7. On a consideration of the facts and circumstances of the case, we find that on the issue of whether KVAT at the compounded rate is payable on service tax amounts and one time building tax amounts collected and paid by the petitioner on behalf of his customers and on the maintenance fund and sinking fund amounts collected by the petitioner from customers on behalf of the owners' association to be subsequently formed and shown in its accounts under current liabilities, we are of the view that although the provision for payment of tax on compounded basis for works contractors provides that the contractor has an option of paying tax at 3% of the whole contract amount instead of paying tax in accordance with the provisions of Section 6 of the KVAT Act, the expression “whole contract amount” for the purposes of the Section is clarified as not including the amount paid to sub contractors for execution of a portion of works contract if the sub contractor is a registered dealer liable to pay tax under sub section (1) or sub section (1A) of Section 6, and the contractor claiming deduction in respect of such amount furnishes certificates in such form as may be prescribed. The definition of “whole contract amount” is couched in exclusive phraseology and does not clarify what is included within the ambit of the phrase. The learned Government Pleader Dr. Thushara James would **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 8 ::** contend that in the absence of any specific exclusion from the definition of “whole contract amount”, all receipts under the contract would come within the ambit of the phrase and this would include service tax amounts, one time building tax amounts as also maintenance fund and sinking fund amounts collected by the petitioner from his customers, although subsequently paid to different statutory authorities and the owners' association. The learned counsel for the petitioner Sri. Jose Jacob would however point out that reading the definition of “whole contract amount” solely in terms of the explanation would violate the scheme of taxation under the KVAT Act and bring to tax amounts that have no nexus with the subject sought to be taxed. In particular, he submits that amounts collected by the petitioner as a “pure agent” of the customer and paid over to the respective statutory authorities, such as authorities entrusted with the administration of service tax and building tax, and the owners' association in respect of maintenance charges and charges towards sinking fund, cannot, by any stretch of imagination, be included within the phrase “whole contract amount” for the purposes of Section 8 of the KVAT Act. 8. On a consideration of the rival submissions, we find force in the contention of the learned counsel for the petitioner for, we must remind ourselves that the provisions of a taxing statute have to be read in the backdrop of Article 265 of the Constitution of India, which clearly mandates that there shall be no levy and collection of tax except by the **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 9 ::** authority of law. Read in the backdrop of the constitutional provision, therefore, Section 8 of the KVAT Act cannot be taken as authorising the levy of tax on any amount that does not bear nexus with the construction activity involved in a works contract in the instant case. Statutory levies and amounts paid by the petitioner as pure agent of the customer, who is legally obliged to bear the burden of those levies and expenses, cannot be included in the contractual receipts of the petitioner for computing the “whole contract amount” for the purposes of Section 8 of the KVAT Act. The assessment of the petitioner under Section 8 of the Act has to be re-done after excluding such amounts from the computation of whole contract amount. Thus, we remand the said issues to the Assessing Authority for the purposes of excluding those amounts, in the nature of taxes and re-imbursable expenses, which the petitioner can prove to the satisfaction of the said authority to be expenses incurred by the petitioner as a pure agent for his customers. Accordingly, the Assessing Authority shall exclude those amounts from the computation of “whole contract amount”, in respect of which there is documentary proof produced by the petitioner to show that the exact amount collected from the customer has been paid to another authority such as the service tax/building tax authority or the owners' association of the building in question. 9. Similarly, we also find that in relation to the claim of the petitioner for deduction from the contract value of amounts covered by **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 10 ::** Form 20H issued by the sub contractor, the Appellate Tribunal has rejected the claim solely for the reason that the Form 20H produced by the petitioner before it covered different assessment years and not only the assessment year 2008-09. The learned counsel for the petitioner took us to Annexure A11 attached to O.T. Revision No.87/2018 which gives details of payments made by sub contractors in ongoing contracts. A perusal of the said document shows that the Form 20H certificates produced before the Tribunal comprised of the amounts paid by sub contractors over three years namely, 2008-09, 2009-10 and 2010-11, and it was under those circumstances that the Form 20H certificates contained figures in excess of what was claimed for the assessment year 2008-09 by the petitioner. The document produced before us clearly indicates that for the year 2008-09, the Form 20H certificates covered amounts of Rs.11,44,52,778/- + Rs.68,505/- and hence, it is clear that the petitioner ought to have been granted the benefit of deduction in respect of an amount of Rs.11,45,21,283.00 in lieu of the amount of Rs.11,00,88,027 that was granted to him by the authorities below. Since the Assessing Authority and the Appellate authorities did not have the benefit of the detailed statement produced as Annexure A11 before us, we deem it appropriate to remand this issue also to the Assessing Authority for verification of the details referred above and grant the deduction if the details are found to be correct and otherwise in order. 10. As regards the claim of the petitioner that he had paid a total **O.T.Rev.No.87/2018 & :: 11 :: O.T.Rev.No.93/2018** tax of Rs.36,08,465/- during the assessment year 2010-11 but credit was given only for Rs.22,70,735/-, we find that although the petitioner had produced Annexure A11 challans for the year 2010-11 and raised an argument before the Tribunal, the Tribunal has not considered the same in the impugned order. We therefore feel that this is also a matter that can be remanded to the Assessing Authority for a factual verification, and if it is found that the payment of tax to the extent of Rs.36,08,465/- is proved through the challans furnished by the petitioner, then the Assessing Authority shall give due credit for the said payment for the assessment year 2010-11. 11. Lastly, on the issue of whether KVAT at compounded rate is payable on the value of goods incorporated in the building till the date of entering into of the agreement between the petitioner and his customers or whether it is payable only on the value of the goods incorporated into the building after the date of entering into the agreement, the learned counsel for the petitioner relies on the decision of the Supreme Court in **Larsen Toubro Ltd. v. State of Karnataka - [2014 (303) ELT 3 (SC)]** at paragraph 115 of which, the Court observes as follows: > “115. It may, however, be clarified that 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. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 12 ::** ## only be made chargeable to tax by the State Government.” It is the contention of Sri.Jose Jacob that the term “whole contract amount” should be interpreted in line with the above observations of the Supreme Court, and in situations where the agreement with the customers is entered into after 50% of the construction is completed, then only the remaining 50% of the amount charged should be subjected to KVAT and not the entire amount paid for the construction. This is because 50% of the value paid by the customer to the petitioner would be towards the price of immovable property, that had already come into existence in the form of a partially constructed building, at the time of entering into the agreement. While the said argument of the learned counsel seems persuasive at first blush, we are afraid, we cannot accept the same. It is no doubt true that if there was a separate agreement for the sale of the incomplete structure, the consideration shown under such agreement would have been for the purchase of an item of immovable property and no KVAT would have been levied on the said consideration amount. In the instant case, however, we are faced with a situation where in the single agreement that was entered into between the petitioner and his customer, the consideration for the construction activities undertaken by the petitioner for the unfinished portion of the building, at the time of entering into the agreement with the **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 13 ::** customer, includes not only the amount towards construction of the unfinished portion but also an amount towards the completed portion of the building up to the date of the agreement. It becomes clear from the terms of the agreement, therefore, that it was not a case where there was a separate consideration flowing from the customer to the petitioner for an item of immovable property which was distinct and separate from the consideration paid for the works contract undertaken by the petitioner. A holistic reading of the agreement would indicate that the consideration payable for the works contract undertaken by the petitioner for the customer was enhanced by an amount equal to the cost incurred by the petitioner for the constructions effected till then, and it was towards the construction cost of the whole building that the petitioner was being remunerated by the customer. Since there was only a single indivisible agreement, for which consideration flowed from the customer to the petitioner, the petitioner cannot be heard to contend that the “whole contract value” in respect of the works contract undertaken for the customer would not include the consideration attributable to the portion of the building that was already constructed at the time of entering into the agreement. We are of the view that through the imposition of tax on the whole contract value, the State cannot be seen as imposing tax on the sale of immovable property; on the contrary, it has to be seen as levying tax on the **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 14 ::** works contract undertaken by the petitioner, albeit on a value that stood enhanced by the cost incurred for the completed construction. We therefore find against the assessee on this issue. As a result of the aforesaid discussion, these O.T. Revisions are disposed in the following manner- 1. by answering Question No.(1) in both the O.T. Revisions against the assessee and in favour of the Revenue. 2. by remanding the issues in Questions Nos. (2) and (4) in O.T. Revision No.87/2018 and Questions Nos. (2), (4), (5) and (6) in O.T. Revision No.93/2018, to the Assessing Authority for verifying the factual aspects directed to be examined in this order. 3. Question No. (3) in O.T. Revision No.87/2018 and Question No. (3) in O.T. Revision No.93/2018 are not answered in view of the petitioner not choosing to press the said issue before us at the time of hearing of the O.T. Revisions. **Sd/-** **DR. A.K.JAYASANKARAN NAMBIAR JUDGE** **Sd/-** **DR. KAUSER EDAPPAGATH JUDGE** **prp/** **O.T.Rev.No.87/2018 & :: 15 :: O.T.Rev.No.93/2018** ## **APPENDIX OF O.T.REV.NO.87/2018** ## **PETITIONER'S ANNEXURES:** **ANNEXURE P1 TRUE COPY OF THE NOTICE DATED 18.06.2012 FOR AY 2008-09.** **ANNEXURE P2 TRUE COPY OF THE REPLY DATED 13.07.2012 FOR AY 2008-09.** - **ANNEXURE P3 TRUE COPY OF THE ORDER DATED 27.07.2012 FOR AY 2008-09.** - **ANNEXURE P4 TRUE COPY OF THE APPEAL NO. KVATA 2763/12 DTED 27.08.2012.** - **ANNEXURE P5 TRUE COPY OF THE STAY ORDER NO. KVATA 2763/12 DATED 10.09.2012.** - **ANNEXURE P6 TRUE COPY OF THE DEMAND DRAFT NO. 450988 DATED 03.10.2012 FOR AND AMOUNT OF RS. 5,96,953/-** - **ANNEXURE P7 TRUE COPY OF THE ORDER DATED 10.07.2014.** **ANNEXURE P8 TRUE COPY OF THE APPEAL DATED 07.11.2014. ANNEXURE P9 CERTIFIED COPY OF THE ORDER DATED 12.04.2018 PASSED BY THE KVAT APPELLATE TRIBUNAL. ANNEXURE P10 SAMPLE COPIES OF THE AGREEMENTS ENTERED WITH THE CUSTOMERS.** **O.T.Rev.No.87/2018 & :: 16 :: O.T.Rev.No.93/2018** **ANNEXURE P11 TRUE COPY OF THE YEAR WISE BREAK OF THE AMOUNT CLAIMED AS EXEMPTION ALONG WITH THE COPY OF FORM 20H.** **ANNEXURE P12 TRUE COPY OF THE SERVICE TAX PAYMENT CHALLANS FOR THE YEAR 2008-09.** ## **RESPONDENTS ANNEXURES: NIL.** ## **//TRUE COPY//** **P.S TO JUDGE** **O.T.Rev.No.87/2018 & :: 17 :: O.T.Rev.No.93/2018** ## **APPENDIX OF O.T.REV.NO.93/2018** ## **PETITIONER'S ANNEXURES:** **ANNEXURE A1 TRUE COPY OF THE NOTICE DATED 18.6.2012 FOR AY 2010-11.** - **ANNEXURE A2 TRUE COPY OF THE REPLY DATED 13.7.2012 FOR AY 2010-11.** - **ANNEXURE A3 TRUE COPY OF THE ORDER DATED 27.7.2012 FOR THE AY 2010-11.** - **ANNEXURE A4 TRUE COPY OF THE APPEAL NO.KVATA 2765/12 DATED 27.8.2012.** - **ANNEXURE A5 TRUE COPY OF THE STAY ORDER NO.KVATA 2765/12 DATED 10.9.2012.** - **ANNEXURE A6 TRUE COPY OF THE DEMAND DRAFT NO.450988 DATED 3.10.2012 FOR AN AMOUNT OF RS.5,96,965/-** - **ANNEXURE A7 TRUE COPY OF THE ADDITIONAL SUBMISSIONS.** **ANNEXURE A8 TRUE COPY OF THE ORDER DATED 15.7.2014. ANNEXURE A9 TRUE COPY OF THE APPEAL DATED 5.12.2014. ANNEXURE A10 TRUE COPY OF THE ORDER DATED 12.4.2018 PASSED BY THE KVAT APPELLATE TRIBUNAL.** **O.T.Rev.No.87/2018 & O.T.Rev.No.93/2018** **:: 18 ::** - **ANNEXURE A11 TRUE COPY OF THE CHALLANS FOR THE YEAR 2010-11.** - **ANNEXURE A12 SAMPLE COPIES OF THE AGREEMENTS ENTERED WITH THE CUSTOMERS.** - **ANNEXURE A13 TRUE COPY OF THE DETAILS OF LAND VALUE RELATING TO THE YEAR 2008-09 AND 2010-11, MENTIONED AS PER THE AGREEMENT.** - **ANNEXURE A14 TRUE COPY OF THE SERVICE TAX PAYMENT CHALLANS FOR THE YEAR 2008-06 AND 2010-11.** - **ANNEXURE A15 TRUE COPY OF THE DOCUMENTS EVIDENCING PAYMENT OF ONE TIME BUILDING TAX.** - **ANNEXURE A16 TRUE COPY OF THE AUDITED BALANCE SHEET FOR THE AY 2010-11.** - **ANNEXURE A17 TRUE COPY OF THE REGISTRATION CERTIFICATE OF THE OWNERS ASSOCIATION.** ## **RESPONDENTS ANNEXURES: NIL** ## **//TRUE COPY//** **P.S TO JUDGE**