VAT PPT by Mr Puneet Agrawal Athena

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Analysis post CHD Developers Judgment –
Punjab & Haryana High Court
By:- Puneet Agrawal
Athena Law Associates
Issues for discussion
• Summary of the Judgment of the Hon’ble High Court
of Punjab & Haryana in CHD Developers v. State of
Haryana & Ors.
• Step forward and action points in view of the
• Issues open till date and requiring attention.
Premise of the judgment and facts involved
Background - Issues Involved
• Post the judgment in the case of K. Raheja Development Corporation
[2005] 141 STC 298 (SC) the HVAT Department issued three Circulars
directing the Assessing Officers to conduct assessments of Developers in
the State of Haryana.
• In the meantime larger bench of Supreme Court in the case of Larsen &
Toubro [(2013) 65 VST 1 SC-LB], considered the correctness of the
division bench judgment in K. Raheja case (supra), and upheld it.
• The Departmental machinery acted upon the Circulars so issued. The
developers were served with Notices for Assessment, Re-assessment and
• Assessments were being made by adopting deductive method of calculation
and thus including various amounts in consideration which in no manner
were relatable to sale of goods.
Background - Issues Involved
• The value of land was also subjected to levy of VAT and in case deductions
were given on account of land, the same were on the basis of circle rates or
on some other presumptive premise. Thus complete exclusion to the value
of land was not being provided.
• Various other expenses not relatable to sale of goods such as fee for
various approvals, EDC/IDC charges, legal expenses, etc. also remained
within the Taxable Turnover so calculated and thus VAT was proposed to
be imposed on such amounts, raising the liability manifold. VAT was
proposed to be imposed on values in addition to that of goods incorporated
in the execution of works contract.
• Effectively, as per revenue’s calculation in the Assessment Orders there
were margins ranging to even than 500% on sale of goods which is
impossible in real terms. Thus, VAT was being imposed on various other
values than that of goods, which is completely beyond the competence of
State legislation.
Example of Assessment conducted by
adopting Deductive Method of assessment
Gross Receipts [7000]
Less:(-) Cost of land at Circle Rate
Less:(-) Deduction for labour and services as per
books or @ 25% of the receipts:
VAT at (say) 10%:
Our View – accepted by High Court
• Total Material purchased by Developer – Rs. 500
(per sq. ft.)
• Add: Value addition (say 10%):
Rs. 50
• Tax at (say 10%):
Rs. 550
----------Rs. 55
Background - Issues Involved
• Effect of the Assessments
– The VAT demands raised by such method were unconstitutional,
absolutely irrational, exorbitant and cryptic.
– The Developers preferred a writ petition before the Hon’ble
High Court of Punjab & Haryana. A number of petitions were
preferred, where CHD Developers was the lead case.
– The Hon’ble High Court was pleased to grant stay in operation
of the Notices and Assessment Orders issued by the Department.
The matter was argued at length before the Hon’ble High Court
and judgment was passed in the case on 22.04.2015.
Liability of VAT on Works Contracts
The judgment dated 22.04.2015
• Material ONLY to be taxed after the date of agreement.
• Fresh rules to be framed by the government for incorporation
of the guidelines laid down in the judgment.
• Fresh Assessments to be framed in line with the judgment.
• Joint and several liability of both developer and sub-contractor
for payment of VAT.
• Composition scheme upheld and thus remains unaltered.
Pre-Conditions and Subject for Levy of
VAT on Works Contract
Three pre-conditions must be fulfilled for imposition
of VAT liability:
a. there must be a works contract;
b. the goods should have been involved in the execution
of a works contract; and
c. the property in those goods must be transferred to a
third party either as goods or in some other form.
In the referred Works Contract, only material,
incorporated after the date of agreement to be charged
to VAT.
Value for payment of VAT
• No VAT chargeable on goods incorporated before entering into
an Agreement with the buyer.
• Clarified that there shall be no deeming of sale in case of
absence of a buyer. Fact that the building is being made for
sale, is irrelevant for determination of VAT liability.
• Value of goods to be the value at the time of incorporation into
the property.
• This value shall include the following:
– Cost of goods which are transferred;
– Overheads attributable to the above said goods;
– Profit attributable to the above said goods.
ONLY ‘Goods’ to be charged to VAT
• The Court clarified that ONLY the value of goods is to be
charged to VAT and anything in addition to that shall not be
exposed to VAT liability as the State does not have the
requisite constitutional mandate for doing the same.
• The judgment further clarifies that any legislature imposing
VAT on anything in addition to that of ‘value of goods
incorporated in the execution of works contract’ shall be ultra
vires the Constitution of India.
Joint and Several Liability of
developer and sub-contractor
• The judgment has upheld the validity of Section 42 of the
Act and has clarified that the developer and the subcontractor have joint and several liability for payment of
VAT. However, no VAT shall be payable on the goods on
which VAT liability has been already borne by the subcontractor.
• Only in case of failure on part of sub-contractor the
liability shall shift towards the developer.
• Thus, on considering Section 42 of the Act the developers
are required to maintain records of completion of
assessment of sub-contractors in order to safeguard their
own interest.
Composition scheme upheld
• The Hon’ble High Court has upheld the Composition
Scheme under the HVAT Act and Rules and thus the
same remains unaltered.
• There is no provision for deduction of value of land
from the Gross Receipt for determination of taxable
turnover and the same shall be calculated on the
complete receipts of the Developer.
Fresh Assessments to be framed
• The State Government has been directed for framing
of fresh assessments after incorporating the rules of
law provided in the judgment.
• Here, jurisdiction of the Assessing Authorities need to
be analyzed for conducting Reassessment, Revision,
– Extension of Limitation by two years in view of the case
before High Court. (Section 18)
Assessment of VAT for the activity of Works Contracts
Points to be considered
The way forward and the major points to be considered and
acted upon are summed up as follows:
• Proper records to be maintained by the developer precisely depicting
the goods incorporated in the execution of works contract after the
date of agreement. The records should be so maintained that the
Assessing Authorities cannot reject the same.
• To be prepared with relevant data before initiation of the fresh
Assessment proceedings by the Department. In absence of relevant
data, the department may tend to use presumptive/ as available data
for determination of liability.
• Records of Assessment of the sub-contractors to be maintained for
safeguard against Section 42 of the HVAT Act.
Quantification of Value of Goods
• Here, the pertinent question arises as to how the value of
goods is to be determined for calculation of taxable turnover.
• The judgment clearly states that the books and accounts
maintained by the Developer shall be taken into consideration
for determination of the value of goods incorporated in the
execution of works contract.
• The books and accounts shall not be taken into consideration if
only the same are rejected by the Assessing Authority for
reasons of non-credibility, etc.
• Thus, it becomes necessary that the developers maintain
proper books and accounts for determination of value of goods
for the purpose of VAT determination.
Quantification of Value of Goods
• The value of goods referred here shall not only be the cost
of the goods but shall also include:
– Overheads attributable to the said goods; and
– Profit attributable to the said goods.
• The date of agreement here shall be the date on which
the developer finds a buyer and is bound in a contract
with the buyer for sale of the property to the said buyer.
For instance the date on which the developers receives an
installment, etc.
• The High Court has also directed for reframing of Rule 25 for
computation of taxable turnover for the purpose of VAT in
view of other various aspects of the judgment as also stated
Example showing Quantification
• Total units: 100
• Saleable area: 80,000 sq.ft.
• Lets take one item, namely cement for the purpose of determination
of VAT liability on a test basis. The progress of the project may be
depicted below and sale of goods is also determined for the purpose
of VAT.
• Month 1
100 bags of cement used
No units sold
No sales tax – since no customer
Cement used in month 1 will never be charged to sales tax
Example showing Quantification
• Month 2
5 units sold (4000 sq. ft.)
200 bags of cement used in Month 2
Relatable sale of goods: (4000/80000)*200 = 10 bags
Thus sales tax chargeable on 10 bags
• Month 3
15 more units sold (12000 sq. ft.)
Cumulative units sold – 20 (16000 sq. ft.)
400 bags of cement used in Month 2
Relatable sale of goods: (16000/80000)*400 = 80 bags
Thus sales tax chargeable on 80 bags
• Applicable Rate shall be the rate of tax for individual goods
chargeable to VAT as per relevant schedule.
Purchase Strategy
As also stated in earlier discussions that in order to manage
the VAT liability, the developers may strategize their
purchasing methods as below:
• Local purchases:
– In local procurements, the developers may claim Input Tax
Credit on tax paid goods;
• Interstate purchases:
– Purchases may be made on the strength of ‘C Forms’. Even in
case the goods so purchased on the strength of ‘C Forms’ are
incorporated before the date of agreement, i.e., remain unsold,
there can be no liability of penalty in our view. [Section 8; Rule
12 of CST Act]
Issues open till date
• Date of transfer in property: that transfer of property takes
place only after the sale deed is registered.
• Issues pertaining to jurisdiction of assessments:
– Jurisdiction to conduct Re-assessments and Revisions.
– Limitation Periods: That the statutory limitation periods for
Assessment/ Re-assessment/ Revision have come to an end.
• Assessment: before expiry of 3 Years from the close of a year.
[Section 15]
• Reassessment: before expiry of 3 Years from the end of a period.
[Section 16]
• Revision: 3 Years from the date of supply of copy of order to the
assessee. [Section 34]
Contact us:
Puneet Agrawal
Athena Law Associates
[email protected]

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