Delhi HC Quashes 2005-06 VAT Demand Against Builder Over Lack Of Taxable Turnover Rules
The Delhi High Court has quashed a Value Added Tax (VAT) demand raised against a builder for the assessment year 2005-06, holding that the levy could not be enforced in the absence of machinery provisions prescribing the manner of determining taxable turnover for works contracts.
The Division Bench of Justices Avneesh Jhingan and Shail Jain allowed the petition filed by a builder, challenging demand and notice of default assessment.
The Court noted that two issues arose for consideration: whether the activities of the builder fell within the definition of a “works contract” under the Delhi Value Added Tax Act, 2004 (DVAT Act), and whether VAT could be levied in the absence of machinery provisions for determining the taxable turnover.
On the first issue, the Court relied upon the Supreme Court's decision in Larsen & Toubro Limited v. State of Karnataka (2014), holding that the activities of the Petitioner were covered within the definition of “works contract” under Section 2(1)(zo) of the DVAT Act and were, in principle, exigible to VAT.
The Supreme Court in Larsen & Toubro had held that where a developer enters into an agreement to sell with a flat purchaser during construction, the construction undertaken thereafter is on behalf of the purchaser and constitutes a works contract. However, construction undertaken before any such agreement is entered into does not constitute a works contract merely because the completed building is subsequently sold.
The High Court thereafter considered whether the VAT demand for 2005-06 could nevertheless be sustained.
It noted that the mechanism for determining taxable turnover in respect of works contracts under the DVAT Rules was introduced only with effect from September 7, 2006, when Rule 3 was substituted.
The Court also relied upon the Supreme Court's decision in Commissioner, Central Excise & Customs, Kerala v. Larsen & Toubro Ltd. (2016), which had held that in the absence of machinery provisions for assessment, the taxing authority could not arbitrarily determine the tax payable on a composite works contract.
It also referred to the Punjab and Haryana High Court's decision in Dhingra Jardine Infrastructure Pvt. Ltd. v. State of Haryana, which had considered the issue of whether tax on builders could be sustained in the absence of machinery provisions.
In that case, it was held that although the levy itself could not be disputed, it was unenforceable for the period during which there were no rules prescribing the manner of determining taxable turnover.
Applying this principle to the case at hand, the High Court observed that under the DVAT Act, prior to the substitution of Rule 3 with effect from September 7, 2006, there was no provision stipulating the manner of calculating taxable turnover in respect of works contracts involving builders.
“Consequently, the demand for the assessment year 2005-06 is unsustainable due to the non-existence of machinery provisions for determination of taxable turnover and is liable to be quashed,” it held.
As such, the Court allowed the writ petition and set aside the demand.
For Petitioner: Advocates Puneet Agrawal, Mansi Khurana, Viplav Tiwari, Chetan Kumar Shukla
For Respondents: Advocates Urvi Mohan, Roshni Agarwal, Sumit Kumar