The Kerala High Court has held that the methodology in determining total turnover prescribed under Kerala Value Added Tax ( KVAT )Rules cannot be followed in absence of documents showing actual land value.
The petitioner/assessee, DLF Home Developers is in the business of developing residential projects and selling fully constructed flats. In the apartment buyer’s agreement that they entered into with various customers, they stipulated a price for the work undertaken by them, which included a component representing the value of the undivided share in the land and building. In undertaking the construction activities for the customers, the petitioners engaged the services of independent contractors and subcontractors.
These contractors in turn procured goods and materials on their own and duly discharged the applicable VAT on the payments received by them from the petitioners for the work undertaken by them. The petitioners in turn deducted the applicable tax under the KVAT Act from the payments made to their contractors.
The petitioners used to supply major components such as steel, cement, etc. to the contractors on a free-of-cost basis and the petitioner believed that they were merely engaged in the sale of finished apartments and had not entered into any agreement for construction with the prospective customers, and therefore, they would not be liable to pay any tax on work contracts under the KVAT Act. They did not charge any VAT on the advances received by them from their customers and also filed nil returns with their respective assessing authorities under the KVAT Act.
A show cause notice was issued to the petitioners proposing to reject their returns, determine their taxable turnover on the best judgment basis, and levy VAT at the applicable rates on the consideration received by the petitioners from their customers by treating the transactions as works contracts. The assessing authority confirmed the demand for tax as applicable to the work contract for the petitioners.
In the appeals preferred by the petitioners, the Tribunal ruled against the petitioners. The petitioners have filed revision petitions, challenging the order of the Appellate Tribunal that confirmed the demand for VAT against them.
The assessee contended that in the absence of a machinery provision in the KVAT Rules that provides for the exclusion of the value of land from the total turnover, to determine the taxable turnover, the levy of tax on the sale of apartments, by treating the same as a works contract, cannot be enforced.
It was also contended that at any rate, the deduction granted by the Assessing Authority towards the value of the land included in the amounts collected from the customers of the apartments could not be restricted to an amount equivalent to 5% of the contract receipt as was done by the Assessing Authority, especially when, for the assessment year 2007–08, the Assessing Authority had allowed a deduction of 22.5% of the contract receipt as a deduction towards the value of land by adopting an entirely different methodology.
The department contended that orders of the Appellate Tribunal do not require any modification. It was solely since the petitioners and assessees had not produced documents to separately show the value of the undivided share of land in the properties that had been transferred to the purchaser of the apartments that the assessing authority was constrained to determine the value of the land on a best judgment basis and grant a deduction of the said value while computing the taxable turnover of the works contract.
The value of the undivided share in the land is not contemplated for inclusion in the definition of ‘turnover’ of the works contract; the rules providing for deduction for the purposes of computation of taxable turnover do not need to specifically deal with the value of the undivided share in the land.
It was observed that the scheme for determining the taxable turnover under the KVAT Rules is, to begin with the total amount received or receivable by the dealer for the execution of the work contract and then deduct from the amounts expressly mentioned in Rule 10(2)(a) of the KVAT Rules.
The division bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V. M. has observed that in the absence of any document produced by the petitioner to show the actual land value included in the contract receipts, the methodology can be adopted by the Appellate Tribunal to determine the taxable turnover of the petitioner assessees for the assessment years 2008–09 and 2009–10, respectively.
While upholding the orders of the Tribunal, the court directed the Appellate Tribunal to complete the exercise of determining the taxable turnover afresh within a period of six months.
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