IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY MONDAY, THE 7TH FEBRUARY 2011 / 18TH MAGHA 1932 OT.Appeal.No. 6 of 2010() ------------------------- (ORDER NO.C3/48825/09/CT OF THE AUTHORITY FOR CLARI- FICATION U/S.94 OF THE KVAT ACT.) APPELLANT/APPLICANT: ----------------------------- M/S.ALLIANCE HABITAT & REAL ESTATE PVT.LTD., KOCHI. BY ADV. SRI.C.A.SADASIVAN SRI.JOY P.JOSE SRI.SOJAN MATHEW SRI.K.N.KRISHNAN NAMBOOTHIRI SRI.EMILY ANDREWS SRI.C.V.SASI SRI.K.JAYAMOHANAN PILLAI SRI.K.I.MAYANKUTTY MATHER RESPONDENTS: --------------- 1. GOVT. OF KERALA REPRESENTED BY CHIEF SECRETARY, SECRETARIAT, THIRUVANANTHAPURAM. 2. COMMISSIONER OF COMMERCIAL TAXES, THIRUVANANTHAPURAM. 3. ASST. COMMISSIONER (WC & LT), COMMERCIAL TAXES, ERNAKULAM. 4. TAHSILDAR (RR), KANAYANNOOR TALUK, ERNAKULAM. BY SPL. G.P. SRI.VINOD CHANDRAN THIS OTHER TAX APPEAL HAVING BEEN FINALLY HEARD ON 07/02/2011, ALONG WITH OTAP NO.7 OF 2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ. .................................................................... O.T. Appeal Nos.6 & 7 of 2010 .................................................................... Dated this the 7th day of February, 2011. JUDGMENT Ramachandran Nair, J. These appeals are filed by builders-cum-developers challenging the clarification issued by the Prescribed Authority under Section 94 of the Kerala Value Added Tax Act, 2003 (hereinafter called "the Act"). We have heard counsel appearing for the appellants and Special Government Pleader appearing for the respondents. 2. Both the appellants are property developers who under an agreement with land owners agreed to develop the land, earmark the same into plots, construct villas or multi-story apartments for sale to various customers. After entering into agreement with the land owners, the appellants contracted with various customers for construction and sale of the flats. The appellants have been paying sales tax on works contract under Section 6(1)(e) and (f) of the Act which provides for tax on transfer of goods involved in the execution of works contract. O.T.A. 6&7 of 2010 2 However, during the year 2007 amenments were introduced to the Kerala Stamp Act which provided among other things for payment of stamp duty in respect of property development agreements at the rate applicable to conveyance. Conveyance as defined under the Act, so far as construction and sale of flats or villas with right in land is concerned, include the value of the building constructed under contract also. Prior to the amendment, builders were paying stamp duty only on the value of the undivided right in land and not on the value of the building constructed under agreement with the purchasers. In order to get over this and to levy full stamp duty on the value of the land and building, the amendment was introduced. In fact, the amendment provides for payment of stamp duty on the agreement itself whereunder construction of the flat or villa is agreed upon between the parties. However, when sale deed is executed, the parties are granted rebate of stamp duty paid on the agreement. In other words, the construction of flat or villa and transfer under agreement ultimately involves payment of full stamp duty on the value of the land or undivided right in land as the case may be and on the value of the building together. Government issued notification SRO No.676/2007 under Section 9(1)(a) of the O.T.A. 6&7 of 2010 3 Kerala Stamp Act, providing for rebate of value added tax paid under the Act while paying stamp duty to the extent of maximum 4%. In other words, rebate on stamp duty admissible will be the actual VAT paid subject to a limit of 4% of the value of the land and building sold. The validity of the amendment to the Stamp Act was challenged in this court by several parties and this court vide judgment dated 23.8.2009 in W.P.(C) No.17794/2007 and connected cases dismissed the challenge. 3. So far as appellants are concerned, they have been paying VAT on the construction made by them which is admittedly in the form of works contract. However, based on the judgment of this court rendered in the stamp duty cases, the appellants filed application for clarification before the Prescribed Authority constituted under the Act for clarifying that they are not liable to pay VAT because of their liability to pay full stamp duty. However, under the impugned orders, the Prescribed Authority rejected their contention holding that appellants' transaction is construction and delivery of villas or flats to the purchasers which amounts to works contract on which tax is payable under Section 6(1) (e) and (f) of the Act. It is against these orders which are identical in nature the appellants have come up with these appeals under Section 62 O.T.A. 6&7 of 2010 4 (1) of the Act. 4. Since the issue cropped up because of the judgment of the Division Bench of this court in the stamp duty case above referred, we have gone through the said judgment. Special Government Pleader appearing for the State and Tax authorities contended that in fact a Review was filed only to clarify the position regarding tax liability under the KVAT Act and the same was closed because the matter was already pending in the Supreme Court. Both the counsel appearing for the appellants took us to the observations of this court with regard to liability of works contractors to pay stamp duty. According to the appellants, these observations are such that they are exonerated from payment of tax under the KVAT Act. However, after going through the judgment, we do not find the High Court having considered any of the provisions of the KVAT Act or the liability of builders or contractors to pay tax under the Act. The court has only considered the validity of the amended provisions of the Stamp Act which only deals with liability of the parties to pay stamp duty on various transactions. The purpose of the amendment to the Stamp Act is to levy stamp duty on the value of the land or the undivided right in land together with O.T.A. 6&7 of 2010 5 cost of the building. Even though full stamp duty is payable at the time of entering into agreement itself, the rigor of this provision is got over by providing rebate of stamp duty paid on agreement while paying stamp duty on conveyance i.e. when final sale deed is executed. The appellants mainly relied on SRO 676/2007 and the observations of this court in support of their contention that tax under KVAT Act is not payable when full stamp duty is payable for the transaction. For considering this, we have to necessarily refer to the scope of the notification which is extracted hereunder: "SRO No.676/2007:- In exercise of the powers conferred by clause (a) of sub-section (1) of Section 9 of the Kerala Stamp Act, 1959 (17 of 1959), the Government of Kerala having considered it necessary in the public interest so to do, hereby reduce the duties with which all instruments of conveyance relating to flats/apartments are chargeable under the said Act to the extent of four rupees for every rupees 100 or part thereof, of the amount of value of the consideration for such conveyance or the Value Added Tax paid in respect of the works contract entered into between a promoter or developer, by whatsoever name called for construction, development or sale or transfer (in any manner whatsoever) of any immovable property and the purchases whichever is less provided such payment of Value Added Tax payment is described in the instrument of conveyance on the basis of certificate issued by competent authority under the Kerala Value Added Tax Act, 2003 (30 of 2004). Explanatory Note (This does not form part of the notification, but is intended O.T.A. 6&7 of 2010 6 to indicate its general purport.) Government have decided to reduce the stamp duty on instruments of conveyance relating to flats/apartments to give set off of the Value Added Tax paid in respect of works contracts executed between a promoter or developer, by whatsoever name called for construction, development or sale or transfer (in any manner whatsoever) of any immovable property and the beneficiaries of the flats/apartments. This order is intended to achieve the above object. [G.O. (Ms.) No.176/2007/TD dt.04/08/2007 in K.G. Ext. No.1461 dt.04/08/2007.]" Special Government Pleader submitted that the above Notification has no relevance under the KVAT Act because it is issued under Section 9 (1)(a) of the Stamp Act, by which Government is authorised to reduce or exempt stamp duty. Counsel for the appellants raised a contention that by virtue of the above notification if full stamp duty is payable for the value of the land or the value of the undivided right in land and the building, then there is no need to pay any sales tax at all. The appellants have also raised a contention that under the sequence of events, first the agreement is executed on which full stamp duty is payable including the value of the building whether constructed or not and when such stamp duty is paid, the appellants and other builders cannot get rebate of tax from the stamp duty because tax becomes O.T.A. 6&7 of 2010 7 payable later and the subsequent payment of tax will not entitle the appellants and other builders for getting rebate of stamp duty already paid. In other words, the situation covered by the Notification is unworkable. Special Government Pleader submitted that whatever be the practical difficulty in implementing the above Notification, so far as appellants are concerned, both of them have not paid full stamp duty on the agreements executed and admittedly as of now they have not executed any sale deed as well. So much so, according to him, the appellants are bound to pay sales tax payable under the KVAT Act on works contract executed by them and grievance if any for them will be only when they are called upon to pay stamp duty at the time of execution of sale deeds to the purchasers which is on the entire value of the land or undivided right in land together with the value of the building. 5. After hearing both sides, we feel there is a practical difficulty in the implementation of SRO 676/2007 issued under the Stamp Act, if stamp duty is paid on the agreement executed by the builders prior to construction. However, in all cases where the agreements were executed as in the case of appellants prior to amendment of Stamp Act, O.T.A. 6&7 of 2010 8 there is no practical difficulty and it is for the the builders and the appellants to pay sales tax regularly under the VAT Act in terms of the provisions of the statute and then to claim so much of the tax paid as a rebate on stamp duty at the time of execution of sale deed. In other words, the purchasers will be liable to pay stamp duty after excluding the sales tax recovered from them and remitted by the builders like the appellants. So far as agreements executed after the amendment to the Stamp Act came into force, whereunder parties have paid full stamp duty on agreements including the value of the land or undivided right in land and also the building cost, certainly there is a difficulty for them under the Notification which provides rebate of sales tax paid under the VAT Act only when stamp duty is paid. Since construction starts subsequent to execution of agreement, liability for stamp duty is already discharged and, therefore, the scheme of rebate of sales tax under the VAT Act from stamp duty is not possible. Therefore, it is for the Government to issue appropriate orders authorising Sales Tax Officers under the VAT Act to determine the tax liability in respect of the works contract executed by builders under the VAT Act, verify whether full stamp duty is paid on agreement and if so, to grant waiver O.T.A. 6&7 of 2010 9 to the extent of tax admissible under SRO 676/2007 and recover only balance sales tax payable under the VAT Act. The appeals are accordingly disposed of with direction to the Government to issue appropriate Notification as stated above so that those who pay the stamp duty in advance on agreement, also get the benefit of rebate under SRO 676/2007 while remitting sales tax under the VAT Act. The contention of the Special Government Pleader that liability for tax under the VAT Act and liability for stamp duty under the Stamp Act are entirely different is perfectly correct. However, we have moulded the above relief only to avoid discrimination against those who pay stamp duty on agreements in advance and remit sales tax later as against those who remit tax first and avail rebate of the same while executing sale deed later. In other words, but for SRO 676/2007 issued under Section 9(1)(a) of the Act, the State was perfectly justified in collecting both sales tax and stamp duty separately under both statutes. We uphold the validity of the clarification subject to the above direction to the Government. In view of the above direction, it is for the appellants to remit the tax with interest on the entire amount collected under the building agreement in terms of the KVAT Act O.T.A. 6&7 of 2010 10 provisions within a period of three weeks from date of receipt of copy of this judgment. There will be direction to the Assessing Officer to withhold penalty proceedings for two months from now and thereafter consider penalty by taking into account payment of tax and interest as above. Even though counsel for the appellants stated that they are not directly executing contracts and they are engaging sub-contractors who are registered and remitting tax, we are not dealing with tax liability of the appellants in relation to sub-contractors which is a matter to be considered in the course of making assessment by making appropriate claims of exclusions, rebates or set off applicable in respect of sub- contracts. Sd/- C.N.RAMACHANDRAN NAIR Judge Sd/- BHABANI PRASAD RAY Judge pms True copy P.S. to Judge