# M/S. LARSEN & TOUBRO LIMITED & ANR v. STATE OF KARNATAKA & ANR

- **Citation:** [2013] 17 S.C.R. 678
- **Court:** Supreme Court of India
- **Decided:** 2013
- **Case number:** Civil Appeal No. 8672 of 2013
- **Bench:** R.M. Lodha, J. Chelameswar, Madan B. Lokur
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-larsen-toubro-limited-anr-v-state-of-karnataka-anr-28812
- **Pages:** 81

## Headnote

Worl<s contract - Concept and meaning of - Held: The
C term "works contract" in Art.366 (29-A)(b) takes within its fold
all genre of worl<s contract and is not restricted to one specie
of contract to provide for labour and services alone - Nothing
in Art.366(29-A)(b) limits the term "worl<s contract" - Where a
contract comprises of both a worl<s contract and a transfer of
D immovable property, such contract does not denude it of its
character as worl<s contract - Constitution of India, 1950 - Art.
366(29-A)(b).
Worl<s contract - Levy of tax on goods deemed to have
E been sold in execution of a works contract - Three conditions
to be fulfilled - Held: The conditions are: 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 a building contract or any contract to
F do construction, the above three things are fully met.
Works contract - Building contract - Held: Building
contracts are species of the works contract -
In the
performance of a contract for construction of building, the
G goods (chattels) like cement, concrete, steel, bricks etc. are
intended to be incorporated in the structure and even though
they lost their identity as goods but this factor does not prevent
them from being goods - The value of the goods which can
constitute the measure for the levy of the tax has to be the
H
678
M/S. LARSEN & TOUBRO LIMITED v. STATE OF
679
KARNATAKA
value of the goods at the time of incorporation of the goods Ain works even though property passes as between the
developer and the flat purchaser after incorporation of goods
- If the developer has undertaken to build for the prospective
purchaser for cash or deferred payment or a valuable
consideration pursuant to a. contract then to that extent, the
B
contract is works contract and there is deemed S<J/e ofmaterial
(goods) used in the construction of building and merely
because the builder has a right of lien in the event due
monies are not paid does not alter the character of contract
being works contract -However, activity of construction cundertaken 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 only be made chargeable to tax by the State
9
Government- Constitution of India, 1950 - Art. 366(29-A)(b).
Works contract - Composite contract - Held: A contract
may involve both a contract of work and labour and a contract
for sale - In such composite contract, the distinction between
contract for sale of goods and contract for work (or service) is
E
virtually diminished -
The dominant nature test has ncJ
application) - Even if the dominant intention of the contract
is not to transfer the property in goods and rather it is '
rendering of service or the ultimate transaction is transfer of
· immovable property, then also it is open to the States to levy
F
sales tax on the materials used in such contract if such
contract otherwise has elements of works contract - The
enforceability test is a/so not determinative.
Constitution of India, 1950- Art.366(29-A)(b) rlw Entry 54 G
List II of Seventh Schedule -
Taxing the sale of goods.
element in a works contract - When permissible - Held: It is
permissible even after incorporation of goods provided tax is
directed to the value of goods and does not purport to tax the
transfer of immovable property - Works contract.
H
680
SUPREME COURT REPORTS
(2013] 17 S.C.R.
A
Constitution of India, 1950 - Art. 366(29-A)(b) rlw Entry 54
List II of Seventh Schedule - Expression "tax on the sale or
purchase of goods" - Meaning of - Held: It includes a tax on
the transfer of property in goods whether as goods or in the
form other than goods involved in the execution of works
B
contract - Works contract.
Constitu

## Text

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[2013) 17 S.C.R. 678
A
M/S. LARSEN & TOUBRO LIMITED & ANR.
B
v.
STATE OF KARNATAKA & ANR.
(Civn Appeal No.8672 of 2013)
SEP,TEMBER 26, 2013
[R.M. LODHA, J. CHELAMESWAR AND
MADAN B. LOKUR, JJ.]
Worl<s contract - Concept and meaning of - Held: The
C term "works contract" in Art.366 (29-A)(b) takes within its fold
all genre of worl<s contract and is not restricted to one specie
of contract to provide for labour and services alone - Nothing
in Art.366(29-A)(b) limits the term "worl<s contract" - Where a
contract comprises of both a worl<s contract and a transfer of
D immovable property, such contract does not denude it of its
character as worl<s contract - Constitution of India, 1950 - Art.
366(29-A)(b).
Worl<s contract - Levy of tax on goods deemed to have
E been sold in execution of a works contract - Three conditions
to be fulfilled - Held: The conditions are: 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 a building contract or any contract to
F do construction, the above three things are fully met.
Works contract - Building contract - Held: Building
contracts are species of the works contract -
In the
performance of a contract for construction of building, the
G goods (chattels) like cement, concrete, steel, bricks etc. are
intended to be incorporated in the structure and even though
they lost their identity as goods but this factor does not prevent
them from being goods - The value of the goods which can
constitute the measure for the levy of the tax has to be the
H
678
M/S. LARSEN & TOUBRO LIMITED v. STATE OF
679
KARNATAKA
value of the goods at the time of incorporation of the goods Ain works even though property passes as between the
developer and the flat purchaser after incorporation of goods
- If the developer has undertaken to build for the prospective
purchaser for cash or deferred payment or a valuable
consideration pursuant to a. contract then to that extent, the
B
contract is works contract and there is deemed S<J/e ofmaterial
(goods) used in the construction of building and merely
because the builder has a right of lien in the event due
monies are not paid does not alter the character of contract
being works contract -However, activity of construction cundertaken 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 only be made chargeable to tax by the State
9
Government- Constitution of India, 1950 - Art. 366(29-A)(b).
Works contract - Composite contract - Held: A contract
may involve both a contract of work and labour and a contract
for sale - In such composite contract, the distinction between
contract for sale of goods and contract for work (or service) is
E
virtually diminished -
The dominant nature test has ncJ
application) - Even if the dominant intention of the contract
is not to transfer the property in goods and rather it is '
rendering of service or the ultimate transaction is transfer of
· immovable property, then also it is open to the States to levy
F
sales tax on the materials used in such contract if such
contract otherwise has elements of works contract - The
enforceability test is a/so not determinative.
Constitution of India, 1950- Art.366(29-A)(b) rlw Entry 54 G
List II of Seventh Schedule -
Taxing the sale of goods.
element in a works contract - When permissible - Held: It is
permissible even after incorporation of goods provided tax is
directed to the value of goods and does not purport to tax the
transfer of immovable property - Works contract.
H
680
SUPREME COURT REPORTS
(2013] 17 S.C.R.
A
Constitution of India, 1950 - Art. 366(29-A)(b) rlw Entry 54
List II of Seventh Schedule - Expression "tax on the sale or
purchase of goods" - Meaning of - Held: It includes a tax on
the transfer of property in goods whether as goods or in the
form other than goods involved in the execution of works
B
contract - Works contract.
Constitution of India, 1950 - Art. 366(29~A)(b) - Object
of - Held: Is. to bring transactions where essential ingredients
of 'sale' defined in the Sale '6f Goods Act, 1930 are absent
C
within the ambit of sale or purchase for the purposes of levy
of sales tax - Transfer of movable property in a works contract
is deemed to be sale even. though it may not be sale within
the meaning of the Sale of Goods Act - Sale of Goods Act,
1930 - Works contract.
D
Constitution of India, 1950- Art. 366(29-A)(b) - Transfer
of property - Legal fiction - Held: Transfer of property in
goods u/clause 29-A(b) of Art.366 is deemed to be a sale of
the goods involved in the execution of a works contract by the
p~rson making the transfer and the purchase of those goods
E , by the person to whom such transfer is made - Even in a
single and indivisible works contract, by virtue of the legal
fiction introduced by Art.366(29-A)(b), there is a deemed sale
of goods which are involved in the execution of the works
contract - Such a deemed sale has all the incidents of the
F
sale of goqds involved in the execution of a works contract
where the r;ontract is divisible into one for the sale of goods
and the other for supply ·Of labour and services - Works
contract.
Maharashtra Value Added Tax Act, 2002 - s.2(24),
G
explanation (b)(ii) - Expression "sale" in - Amended
definition of - Held: Is constitutionally valid.
H
Maharashtra Value Added Tax Rules, 2005 - r.58(1A) -
Valuation of goods - Mode of - State Government to bring
M/S. LARSEN & TOUBRO LIMITED v. STATE OF
681
KAR NAT AKA
clarity in r.58(1-A) - Subject to this, validity of r.58(1-A)
A
sustained.
The instant two sets of appeals - one from Karnataka
and the other ;from- Maharashtra, related to the concept
,
of works contract and distinction between it and a
contract of sale.
B
In regard to the appeals from Karnataka, the leading
case related to Larsen & Toubro (L& T). L& T was
engaged in property development alongwith owners of
vacant land sites in Bangalore for construction of a multiC
storeyed apartment complex. Accordingly, it entered into
agreements of sale with intende~ purchasers, which
provided that on the completion of construction, the
apartments would be handed over to the purchasers who
will also get an undivided Interest in the land. The revenue
D
authorities concerned issued provisional assessment
orders under the Karnataka Sales Tax Act, 1957 and
alongwith it also issued demand notices against L & T ·
on the g'round that it was li~ble to pay tax for
development of. projects by it.
E
F
L & T filed writ petition before the Karnataka High
Court opposing the demand .on ground that the·
development agreement was not a works contract. The
Single -Judge of the High Court noted that the
·controversy raise«i-by, the L&T was covered by the
· decision of the Supreme Court in Raheja Development
Corporation case, and, accordingly, dismissed the writ
petition holding that as L & T' had entered into an
agreement to carry out construction activity on behalf of
someone else for cash or .for·deferred pay.ment or for. any
G
· o~her valuable construction, it was carrying out works
contract.and therefore became liable to pay turnover tax
on the transfer of goods involyed in such work.contracts.
The Division Bench of the High Court concurred with the
Single Judge and dismissed the writ ·appeal.
· ·
H
682 SUPREME COURT REPORTS
[2013] 17 S.C.R.
A
In order to consider the question whether the view
taken in Raheja Development case with reference to
definition of "works contract" in Karnataka Sales Tax· Act,
1957 was legally justified, the matter was referred for
consideration by the present Larger Bench. The question
B for consideration before this Court was whether taxing
sale of goods in an agreement for sale of flat which is to
be constructed by the developer/ promoter is permissible
under the Constitution.
C
In the other set of appeals arising from the judgment
of the Bombay High Court, challenge was laid to the
constitutional validity of Section 2(24) of the Maharashtra
Value Added Tax Act, 2002 ("MVAT Act") as amended
initially by Maharashtra
1 Act XXXll of 2006 and thereafter
by Maharashtra Act XXV of 2007 and Rule 58(1A) of the
D Maharashtra Value Added Tax Rules, 2005 ("MVAT
Rules").
E
Answering the Reference and sending the matters
back to the Regular Bench for final disposal, the Court
HELD:1.1. When the agreement between the
promoter/developer and the flat purchaser is to construct
a flat and eventually sell the flat with the fraction of land,
such transaction involves the activity of construction
inasmuch as it is only when the flat is constructed then
F it can be conveyed. Therefore, there is no reason why
such activity of construction is not covered by the term
"works contract". After all, the term "works contract" is
nothing but a contract in which one of the parties is
obliged to undertake or to execute works. Such activity
G of construction has all the characteristics or elements of
works contract. The ultimate transaction between the
parties may be sale of flat but it cannot be said that the
characteristics of works contract are not involved in that
transaction. When the transaction involves the activity of
H construction, the factors such as, the flat purchaser has
MIS. LARSEN & TOUBRO LIMITED v. STATE OF
683
KARNATAKA
no control over the type and standard of the material to
A
be used in the construction of building or he does not
get any right to monitor or supervise the construction
activity or he has no say in the designing or lay-out of
the building, are not of much significance and in any case
these factors do not detract the contract being works
B
contract insofar as construction part is concerned. [Para
93] [7 40-D-G]
1.2. For sustaining the levy of tax on the goods
deemed to have been sold in execution of a works
contract, three conditions must be fulfilled: (i) there must C
be a works contract, (ii) the goods should have been
involved in the execution of a works contract, and (iii) the
property in those goods must be transferred to a third
party either as goods or in some other form. In a building
contract or any contract to do construction, the above
D
three things are fully met. In a contract to build a flat there
will necessarily be a sale of goods element. Works
contracts also include building contracts. and therefore
without any fear of contradiction it can be stated that
building contracts are species of the works contract.
E
[Para 94] [740-H; 741-A-B]
1.3. Ordinarily in the case of a works contract the
property in the goods used in the construction of the
building passes to the owner of the land on which the
F
building is constructed when the goods and materials
used are incorporated in the building. But there may be
contract to the contrary or a statute may provide
otherwise. Therefore, it cannot be said to be an absolute
proposition in law that the ownership of the goods must G
pass by way of accretion or exertion to the owner of the
immovable property to which they are affixed or upon
which the building is built. [Para 95] [741-C-E]
1.4. Value addition as a concept after Forty-sixth
Amendment to the Constitution has been accepted by
H
684
SUPREME COURT REPORTS
12013] 17 S.C.R.
A this Court in P.N.C. Construction case. While dealing with
this concept, the Court said that value addition was
important concept which had arisen after the Forty-sixth
Amendment by insertion of sub-clause (b) of clause (29A) in Article 366. It has now become possible for the
B States to levy sales tax on the value of the goods
involved in a works contract in the same way in which
the sales tax was leviable on the price of the goods in a
building contract. On account of the Forty-sixth
Amendment in the Constitution, the State Governments
c are empowered ·to levy sales tax on the contract value
which earlier was not possible. [Para 96] [741-E-G]
1.5. Where a contract comprises of both a works
contract and a transfer of immovable property, such
contract does not denude it of its character as works
D contract. Article 366(29.·A)(b) does contemplate a
situation where the goods may not be transferred in the
form of goods but may be transferred in some other form
which may even be in the form of immovable property.
[Para 97] [741-H; 742-A-B]
E
1.6. The State legislatures lack legislative power to
levy tax on the transfer of immovable property under
Entry 54 of List II of the Seventh Schedule. However, the
States do have competence to levy sal~s tax on the sale
F of goods in an agreement of sale of flat which also has a
component of a deemed sale of goods. Aspects theory
though does not allow the State legislature to entrench
upon the Union List and tax services by including the
cost of such service in the value of goods but that does
not detract the State to tax the sale of goods element
G involved in the execution ofworks·contract in a composite
contract like contract for construction of building and
sale of a flat therein. [Para 100] [743-F-H; 744-A]
1. 7. The legal position is summarised as follows:
H
MIS. LARSEN & TOUBRO LIMITED v. STATE OF
685
KARNATAKA
(i) For sustaining the levy of tax on the goods
A
deemed to have been sold in execution of a works
contract, three conditions must be fulfilled: (one) there
must be a works contract, (two) the goods should have
been involved in the execution of a works contract and
(three) the property in those goods must be transferred
B
to a third party either as goods or in some other form. (ii)
For the purposes of Article 366(29-A)(b), in a building
contract or any contract to do construction, if the
developer has received or is entitled to receive valuable
consideration, the above three things are fully met. It is c
so because in the performance of a contract for
construction of building, the goods (chattels) like cement,
concrete, steel, bricks etc. are intended to be
incorporated in the structure and even though they lost
their identity as goods but this factor does not prevent
0
them from being goods.(iii) Where a contract comprises
of both a works contract and a transfer of immovable
property, such contract does not denude it of its
character as works contract. The term "works contract"
in Article 366 (29-A)(b) takes within its fold all genre of E
works contract and is not restricted to. one specie of
contract to prov!.de for labour and services alone. Nothing
in Article 366(29-A)(b) limits the term "works contract". (iv)
· · Building contract!? are species of the works contract. (v)
A contract may involve both a contract of work and
labour and a contract for sale. In such composite
contract, the distinction between contract for sale ofgoods and contract for work (or service) is virtually
d.iminished. (vi) The dominant nature test has no·
application and the traditional decisions which have held
that the substance of the contract must be seen have lost G
their significance where transactions are of the nature
contemplated in Article 366(29-A). Even if the dominant
intention of the contract is not to transfer the p.roperty in ·
goods and rather it is rendering of service or the ultimate
H
686 SUPREME COURT REPORTS
(2013) 17 S.C.R.
A transaction is transfer of immovable property, then also
it is open to the States to levy sales tax on the materials
used in such contract if such contract otherwise has
elements of works contract. The enforceability test is also
not determinative. (vii) A transfer of property in goods
B under clause 29-A(b) of Article 366 is deemed to be a sale
of the goods involved in the execution of a works
contract by the person making the transfer and the
purchase of those goods by the person to whom such
transfer is made. (viii) Even in a single and indivisible
c works contract, by virtue of the legal fiction introduced
by Article 366(29-A)(b), there is a deemed sale of goods
which are involved in the execution of the works contract.
Such a deemed sale has all the incidents of the sale of
goods involved in the execution of a works contract
0 where the contract is divisible into one for the sale of
goods and the other for supply of labour and services.
In other words, the single and indivisible contract, now
by Forty-sixth Amendment has been brought on par with
a contract containing two separate agreements and
States have now power to levy sales tax on the value of
E the material in the execution of works contract. (ix) The
expression "tax on the sale or purchase of goods" in
Entry 54 in List II of Seventh Schedule when read with
the definition clause 29-A of Article 366 includes a tax on
the transfer of property in goods whether as goods or in
F the form other than goods involved in the execution of
works contract. (x) Article 366(29-A)(b) serves to bring
transactions where essential ingredients of 'sale' defined
in the Sale of Goods Act, 1930 are absent within the ambit
of sale or purchase for the purposes of levy of sales tax.
G In other words, .transfer of movable property in a works
contract is deemed to be sale even though it may not be
sale within the meaning of the Sale of Goods Act. (xi)
Taxing the sale of goods element in a works contract
under Article 366(29-A)(b) read with Entry 54 List II is
H permissible even after incorporation of goods provided
M/S. LARSEN & TOUBRO LIMITED v. STATE OF
687
KARNATAKA
tax is directed to the value of goods and does not purport A
to tax the transfer of immovable property. The value of
the goods which can constitute the measure for the levy
of the tax has to be the value of the goods at the time of
incorporation of the goods in works even though
property passes as between the developer and the flat
B
purchaser after incorporation of goods. [Para 101) [744E-H; 745-A-H; 745-A-H; 746-A-G]
1.8. The argument on behalf of the developers that
the flat purchaser is entitled to transfer of flat and
conveyance of fraction of land only when all installments
C
have been fully paid and that shows that the agreement
between the developer and the flat purchaser is the sale
of flat and not to appoint the developer as the contractor
of the flat purchaser for the purposes of carrying out the
construction of the flat for and on behalf of the flat D
purchaser has no merit. The submissiq,n overlooks the
typical nature of the development agreement which is
followed by a tripartite agreement between the owner of
the land, the developer and the flat purchaser. Effectively
and de facto it is the developer who constructs the
E
building for the flat purchaser. The developer does so for
monetary consideration. The label of payment is not
decisive but the factum of the payment is. The
construction is done on payment of price as agreed upon
between the developer and the flat purchaser. It is, thus,
F
not correct to say that the work is undertaken by the
developer for himself and for the owner and the
construction is not carried for and on behalf of the
purchaser. [Para 110] [749-G-H; 750-A-C, G]
1.9. In the development agreement between the owner G
of the land and the developer, direct monetary
consideration may not be involved but such agreement
cannot be seen in isolation to the terms contained therein
and following development agreement, the agreement in
H
688
SUPREME COURT REPORTS
[2013] 17 S.C.R.
A the nature of the tripartite agreement between the owner ·
of the land, the developer and the flat purchaser
whereunder the developer has undertaken to construct
for the flat purchaser for monetary consideration. Seen
thus, there is nothing wrong if the transaction is treated
B as a composite contract comprising of both a works
contract and a transfer of immovable property and levy
sales tax on the value of the material involved in execution
of the works contract. The observation in the referral order
that if the ratio in Raheja Development is to be accepted
C then there would be no difference between works contract
and a contract for sale of chattel as chattel overlooks the
legal position. [Para 111) [750-G-H; 751-A-C]
1.10. The argument that flat is to be sold as a flat and
not an aggregate of its component parts is already
D negated by the Constitution Bench in the case of
Builders' .Association. Further, if the developer has
undertaken to build for the prospective purchaser for
cash or deferred payment or a valuable consideration
pursuant to a contract then to that extent, the contract is
E works contract and there is deemed sale of material
(goods) used in the construction of building and merely
because the builder has a right of lien in the event due
monies a.re not paid does not alter the character of
contract being works contract. [Paras 112 and 113) [751F D; 752-G-H; 753-A]
1.11. In Article 366(29-A)(b), the term. 'works contract'
. covers all genre of works contract and it is not limited to
one specie of .. the contract. In Raheja Development, the
definition of "works contract" in KST Act was under
G consideration. The Court held that develo-per had
undertaken to build for the flat purchaser and so long as
there was no termination of the contract, the construction
is for and on behalf of the purchaser and it remains a
"works contract". The view taken by the two Judge
H
MIS. LARSEN & TOUBRO LIMITED v. STATE OF
689
KARNATAKA
Bench in Raheja Development is justified. [Para 114) [752A
B, D-E]
1.12. 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 B
made to the goods transferred after the agreement is
entered into with the flat purchaser can only be made
chargeable to tax by the State Government. [Para 115)
[753-F-G]
1.13. The submission that the view in Raheja
Development that when a completed building is sold,
there is no work contract and, therefore, no liability to tax
c
is not correct statement of law, does not appeal. If at the
time of construction and until the construction was D
completed, there was no contract for construction of the
building with the flat purchaser, the goods used in the
construction cannot be deemed to have been sold by the
builder since at that time there is no purchaser. That the
building is intended for sale ultimately after construction
does not make any difference. [Para 117) [753-B-C]
E
K. Raheja Development Corporation v. State of
Kamataka (2005) 5 SCC 162: 2005 (3) SCR 1210 - affirmed.
Builders' Association of India and others v. Union of India
and others (1989) 2 SCC 645: 1989 (2) SCR 320 - followed. F
Rainbow Colour Lab Rainbow Colour Lab & Anr. v. State
of M.P. & Ors. (2000) 2 SCC 385: 2000 (1) SCR 594 - stood
overruled.
State of Madras v. Gannon Dunkerley and Co. (1959) G
SCR 379 - held impliedly undone.
Mis. Larsen & Toubro Limited & Anr v. State of Karnataka
& Anr. 2008 (17) SCC 199; Bharat Sanchar Nigam Limited
and another v. Union of India and others (2006) 3 sec 1: H
690 SUPREME COURT REPORTS
(2013) 17 S.C.R.
A
2006 (2) SCR 823; The Assistant Sales Tax Officer and
Others v. B.C. Kame, Proprietor Kame Photo Studi (1977) 1
SCC 634: 1977 (2) SCR 435; Hindustan Shipyard Ltd. v.
State of A.P. (2000) 6 SCC 579: 2000 ( 1 ) Suppl. SCR 592;
Nahalchand La/oochand Private Limited v. Panchali
B
Cooperative Housing Society Limited; (2010) 9 SCC 536:
2010 (10) SCR 804; Commissioner of Sales Tax, M.P. v.
Purshottam Premji 1970 26 S.T.C. 38; State of Andhra
Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors. (2008) 9 SCC
191: 2008 (12) SCR 843; Mis. Gannon Dunkerley & Co. and
C others v. State of Rajasthan and Others (1993) 1 SCC 364:
1992 (3) Suppl. SCR 103; Keshav Mills Co. Ltd. v.
Commissioner of Income Tax, Bombay North, Ahmedabad
AIR 1965 SC 1636: 1965 SCR 908; Dewan Joynal Abedin
v. Abqul Wazed (1988) Supp SCC 580; Kartar Singh
D
Bhadana v. Hari Singh Na/wa & Of$ (2001) 4 SCC 661: 2001
(2) SCR 790; Associated Cement Companies Ltd. v.
Commissioner of Customs; (2001) 4 SCC 593: 2001 (1)
SCR 608; State of U.P. & Ors. v. P.N. C. Construction Co. Ltd.
& Ors. (2007) 7 sec 320: 2001 (8) SCR 927; M.R.
Hornibrook (Pty.) Ltd. v. The Federal Commissioner of
E
Taxation (1939) 62 C.L.R. 272; Federation of Hotel &
Restaurant Association of India, etc. v. Union of India & Ors.
(1989) 3 SCC 634: 1989 (2) SCR 918; State of Andhra
Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors. (2008) 9 SCC
191: 2008 (12) SCR 843; Radha Raman v. State of Uttar
F
Pradesh & Ors. AIR 1954 All 700; Lee v. Griffin (1861) 1 B.
& S. 272; Robinson v. Graves; (1935) 1 KB 579; Chandra
Bhan Gosain v. State of Orissa and Others; (1964) 2 SCR
879; The State of Punjab v. Mis. Associated Hotels of India
Ltd. (1972) 1 SCC 472: 1972 (2) SCR 937; Hindustan
G
Aeronautics Ltd. v. State of Karnataka (1984) 1 SCC 706:
1984 (2) SCR 248; State of A.P. v. Kone Elevators (India) Ltd.;
(2005) 3 SCC 389: 2005 (2) SCR 152; State of Gujarat
(Commissioner of Sales Tax, Ahmedabad) v. Mis. Variety
Body Builders; (1976) 3 SCC 500: 1976 (0) Suppl. SCR 131
H - referred to.
MIS. LARSEN & TOUBRO LIMITED v. STATE OF
691
KARNATAKA
Hudson's 'Building Engineering Contracts', Eleventh
A
edition, Volume 1; Halsbury's Laws of England, Fourth
Edition, Volume 41, para 603; Benjamin's Sale of Goods,
Fourth Edition, Para 1.042 and Pollock and Mulla on Sale
of Goods [1990, Fifth Edition, Page 53] - referred to.
2.1. There is challenge to the constitutional validity
8
of explanation (b){ii) to Si!ction 2(24) which was brought
by amendment with effect from 20.06.2006 in MVAT Act
and sub-rule (1A) which was inserted into Rule 58 of the
MVAT Rules by a notification dated 01.06.2009. There is
no doubt that the amendment in explanation b(ii) to C
Sectipn 2(24) was brought because of the judgment of
this Court in Raheja Development. Since Raheja
Dev,elopment lays down the correct legal position, thus,
there is no merit in the challenge to the constitutional
validity to the provisions of explanation (b)(ii) to Section
D
2(24) of MVAT which were amended with effect from
20.06.2006. The provision under challenge was not in
breach of any constitutional boundaries. [Paras 119, 121]
[753-E; 754-C-E]
·2.2. Sub-rule .(1A) was inserted into Rule 58 by a
notification dated 01.06.2009. As a matter of fact, Rule
58(1) of the MVAT Rules provides that the value of the
goods at the time of the transfer of the property in goods
involved in the execution of a works contract may be
determined by effecting certain deductions from the value
of the entire contract insofar as the amounts relating to
deductions pertain to the said works contract. The value
of the goods which can constitute the measure of the
levy of the tax has to be the value of the goods at the time
E
F
of incorporation of goods in the works even though
G
property·in goods passes later. Taxing the sale of goods
element in a works contract is permissible even after
incorporation of goods provided tax is directed to the
value of goods at the time of incorporation and does not:
I
H
692
SUPREME COURT REPORTS
[2013] 17 S.C.R.
· A purport to tax the transfer of immovable property. The
mode of valuation of goods provided in Rule 58(1A) has
to be read in the manner that meets this criteria and it is
read down accordingly. The Maharashtra Government
has .to bring clarity in Rule 58 (1-A) as indicated above.
B Subject to this, validity of Rule 58(1-A) of MVAT Rules is
sustained. tParas 123, 124) [756-B-C; 757-G-H; 758-A-B]
c
D
E
F
G
H
Case Law Reference:
affirm.ed
referred to
Para 2
Para 2
2005 (3) SCR 1210
2008 (17) sec 199
(1959) SCR 379
held impliedly undone
Para 17
1989 (2) SCR 320
2006 (2) SCR 823
1977 (2) SCR 435
followed
referred to
referred to
2000 (1) Suppl. SCR 592 referred to
2010 (10) SCR 804
referred to
1970 26 S.T.C. 38
2008 (12) SCR 843
referred to
referred to
1992 (3) Suppl. SCR 103 referred to
1965 SCR 908
referred to
referred to
referred to
referred to
Para 17
Para 17
Para 20
Para 20
Para 24
Para 25
Para 31
Para 41
Para 43
Para 45
Para 45
Para 46
(1988) Supp sec 580
2001 (2) SCR 790
2001 (1) SCR 608
2000 (1) SCR 594
2007 (8) SCR 927
(1939) 62 C.L.R. 272
stood overruled Para 46
referred to
referred to
Para 46
Para 47
M/S. LARSEN & TOUBRO LIMITED v. STATE OF
693
KARNATAKA
1989 (2) SCR 918
referred to
Para 48
(2008) 9 sec 191
referred to
Para 50
AIR 1954 All 700
referred to
Para 74
(1861) 1 8. & $. 272
referred to
Para 77
(1935) 1 KB 579
referred to
Para 78
(1964) 2 SCR 879.
referred to
Para 79
1972 (2) SCR 937
referred to"
Para 82
1984 (2) SCR 248
referred to
Para 84
2005 (2) SCR 152
referred to
Para 87
1976 (0) Suppl. SCR 131
referred to
Para 88
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
8672 of 2013 etc.
From the Judgment' and Order dated 06.08.2007 of the
High Court of Karnataka at Bangalore in Writ Appeal being
W.A. No. 1409 of 2007.
WITH
C. A Nos. 8673-8684, 8685, 8686, 8687, 8688, 8690, 8691.
8692, 8693, 8695, 8696, 8697, 8698 & 8699 of 2013
Dr. AM. Singhvi, K.V. Vishwanathan, N. Venkatraman, K.
A
B
c
D
E
F
N. Bhat, Shekhar Naphade, Sameer Parekh, Sumit Goel,
Rukhmini Bobde, Somanadri Goud K. (for Parekh & Co.) Amol
Chitale, Pragya Baghel, Nirnimesh Dube, Kamna Sagar,
Ardhendumauli Kumar Prasad, Parimal Shroff, Mahesh
Agarwal, Abhinav Agrawal, E. C. Agrawala, Ankur Saigal, R.
G
V. Prasad, Praveen Kumar, Shivaji M. Jadhav, Sanjay Kunur,
•
R.N. Keshwani, Rishi Agrawala, Prasenjit Keswani, Ranjeeta
Rohtagi, V. Patkar, Ashwin Acharya, S. Ravi Shankar, Sanjay
V. Kharde, Naira Jejeebhoy, Asha Gopalan Nair, Anitha
H
694 SUPREME COURT REPORTS
[2013) 17 S.C.R.
A Shenoy, Neha Singh, Chinmoy Khaladkar, Preshit V. Surshe,
Sachin J. Patil, Randhir Chawla, Renu Saigal, Amit Thakkar,
V.N. Raghupathy for the Appearing Parties.
,B
The Judgment of the Court was delivered by
R.M. LODHA, J. 1. Leave granted in all these special
leave petitions.
2. Does the two-Judge Bench decision of this Court in
Raheja Development' lay down the correct legal position? It is
c to consider this question that in Larsen and Toubro2 a twoJudge lilench of this Court has referred the matter for.
consideration by the larger Bench. In the referral order dated
19.8.2008, the two-Judge Bench after noticing the relevant
provisions of the Karnataka Sales Tax Act, 195,Z: and the
D distinction between a contract of sale and a works 'contract
E
F
G
made the reference to the larger Bench by observing as follows:
"We have prima facie some difficulty in accepting the
proposition laid down in Para 20 quoted above. Firstly, in
our view, ·prima facie, M/s Larsen & Toubro - petitioner
herein, being a developer had undertaken the contract to
develop the property of Dinesh Ranka. Secondly, the '
Show Cause Notice proceeds only on the basis that ,
Tripartite Agreement is the works contract. Thirdly, in the :
Show. Cause Notice there is no allegation made by the
Department that there is monetary consideration involved
in the first contract which is the Development Agreement.
Be that as it may, apart from the disputes in hand, the point
which we have to examine is whether the ratio of the
judgment of the Division Bench in the case of Raheja
Development Corporation (supra) as enunciated in Para
1.
K. Raheja Development CorporatioR v. State of Karnataka; (2005) 5 SCC
162.
2.
Mis. Larsen & Toubro Limited & Anr. v. State of Karnataka & Anr.; SLP(C)
H
No. 17741 of 2007.
MIS. LARSEN & TOUBRO LIMITED v. STATE OF
695
KARNATAKA [R.M. LODHA, ·J.]
20, is correct. If the Development Agreement is not a works
A
contract could the Department rely upon the second
contract, which is the Tripartite Agreement and interpret it ·
to be a works contract, as defined under the 1957 Act. The
Department has relied upon only the judgment of this Court
in Raheja Developmerit Corporation(supra) case because
B
para 20 does assist th-e Department. However, we are of
the view that if the ratio of Raheja Development case is to
be accepted then there would be no difference between
. works contract and a contract for sale of chattel as a
chattel. Lastly, could it be said that petitioner - Company
C
was the contractor for prospective flat purchaser. Under the
definition of the term "works contract" as quoted above the
contractor must have undertaken the work of construction
for and on behalf of the contractor (sic.) for cash, deferred
or any other valuable consideration. According to the
D
Department, Development Agreement is not works
contract but the Tripartite Agreement is works contract
which, prima facie, appears to be fallacious. There is no
allegation that the Tripartite Agreement is sham or .bogus.
For the aforestated reasons, we direct the Office to place
E
this matter before the Hon'ble Chief Justice for appropriate
directions in this regard, as we are of the view thatJhe
judgment of Division Bench in the case of Raheja
Development (supra) needs re-consideration by the larger
~~-"
F
•
3. Of the 26 appeals under consideration before us, 14 are
from Karnataka and 12 from Maharashtra. Insofar as Karnataka
appeals are concerned, it is appropriate that we take the facts
from the leading case being Larsen and Toubro2. The ECC
division of Larsen and Toubro (for short, "L&T") is engaged in
G
property development along with the owners of vacant sites. On
19.10.1995, L&T entered into a development agreement with
Dinesh Ranka, owner of the land bearing survey numbers 90/
1, 91, 92 (Part), 94, 95 and 96/1 (Part) together measuring 34
H
696
SUPREME COURT REPORTS
[2013] 17 S.C.R.
A acres all situated at Kothanur Village, Segur Hobli, Bangalore
South Taluk, Bangalore, for construction of a multi-storeyed
apartment complex. The owner was to contribute his land and
L& T was to coristruct the apartment complex. After
development, 25% of the total space was to belong to the
8 owner and 75% to L&T. A power of attorney was executed by
the owner of the land in favour of L& T to enable it to negotiate
and book orders from the prospective purchasers for allotment
of built up area. Accordingly, L&T entered into agreements of
sale with intended purchasers. The agreements provided that
C on completion of the construction, the apartments would be
handed over to the purchasers who will get an undivided interest
. in the land also. Sale deeds, thus, were executed in favour of
the intended purchasers by L&T and the owner.
4. On 12.07.2005, the business premises of L&T were
D inspected by the Deputy Commissioner of Commercial Taxes
{lntelligence-1) South Zone, Koramangala, Bangalore
(hereinafter referred to as the 'Deputy Commissioner') and a
detailed statement of the Finance Manager was recorded.
E
5. On 21.12.2005, the Deputy Commissioner called upon
L&T to furnish the details of development project. L&T furnished
details on 24.07.2005 and 26.09.2005.
6. On 04.10.2005, the Deputy Commissioner served a
show cause notice on L&T stating that it was liable to tax as
F per th!! decision of this Court in Raheja Development1. L&T
responded to the show cause notice and submitted preliminary
objections on 10.10.2005. By a further communication dated
10.11.2005, L& T objected to the assessment of tax for
development of projects by it. The L&T inter alia submitted that
G. the development agreement was not a works contract per se
on account of the reasons: {a) the agreement was to develop
and market flats to customers; {b) the intent and purpose of the
agreement was to develop property by the petitioners on the
one hand and the land owner on the other; {c) the construction
H and development of the said land involved no monetary
M/S. LARSEN & TOUBRO LIMITED v. STATE OF
697
KARNATAKA [R.M. LODHA, J.]
consideration; and (d) the only consideration was that upon the
A
completion of the entire project, L&T would be entitled to 75
per cent of the same.
7. Again on 04.01.2006, the business premises of L&T
were inspected and certain documents like agreement copies
8
and other documents relating to the transactions of the sale of
flats were seized for the purposes of further investigation and
verification.
8. On 02.02.2006, the Deputy Commissioner served upon
L&T a further notice proposing to tax the sale of materials used
C
in the construction of flats on the ground that it was entitled to
75 per cent of the share of the projects. L& T filed detailed
objections to this notice as well.
9. On 03.07.2006, the Deputy Commissioner issued
D
provisional assessment orders under Section 28(6) of the
Karnataka Sales Tax Act, 1957 (for short, 'KST Act') for the
years 2000-01 to 2004-05. Along with the provisional orders,
the Deputy Commissioner also issued demand notices raising
a total demand of Rs. 3,99,28,636/-.
10. Initially, L&T preferred a writ petition before this Court
challenging the above demands but that writ petition was
withdrawn and a writ petition under Art'icle 226 of the
Constitution of India was filed before the Karnataka High Court.
11. The Single Judge of the Karnataka High Court noted
that the controversy raised by the L& T was covered by the
decision of this Court in Raheja Development1 and,
accordingly, dismissed the writ petition on 10.07.2007 by
E
F
observing as follows:
G
"From the aforesaid observations of the Apex CourtJt is
very much clear that as the petitioner No. 1 had entered ·
into an agreement to carry out constn,J.ction activity on
behalf of someone else for cash or for deferred payment
or for any other valuable construction, it would be carrying
H
A
B
c
D
E
F
G
698 SUPREME COURT REPORTS
[2013] 17 S.C.R.
out works contract and therefore would become liable to
pay turnover tax on the transfer involved in such work
contracts. It is also not in dispute in this matter that the
agreement of sale is entered into between the first
petitioner and the buyers of the flat even prior to completion
of the construction of the building. Under such
circumstances, as has been held by the Apex Court in the
RAHEJA DEVELOPMENT CORPORATION's Case, the
petitioners are liable to pay the turnover tax on the transfer
of goods involved in such 'works contract'. In view of the
dictum laid down by thEj recent judgment cited supra, this
Court does not find any merit in this writ petition."
12. L& T preferred an intra-court appeal. The Division
Bench of that Court concurred with the Single Judge and
dismissed the writ appeal by expressing its opinion as follows:
"In our view, so far as the definition of 'work contract' in
almost similar situation as in the present case has been
well considered by the Hon'ble Supreme Court in the case
of K. RAHEJA DEVELOPMENT CORPORATION (supra).
The question as to whether that judgment as per Article
141 of the Constitution of India is the law of the land binding
on all the Courts in the Count!)'. Prima facie, we find that
the facts and circumstances in that case are almost similar
to the present case and as such, the ratio laid down in the
RAHEJA's Case and relied upon by the learned Single
Judge is, in our view, just and proper. So far as the other
pronouncements are concerned, if the appellant feels that
it is necessary to get the pronouncement in RAHEJA's
Case reviewed, it is open for him to approach the Apex
Court and this Court cannot substitute its own findings on
the questions since the same has already been decided
by the Apex Court in RAHEJA's case."
13. Insofar as appeals from Maharashtra are concerned,
they arise from the judgment of the Bombay High Court. The
H Bombay High Court was concerned with the group of matters
MIS. LARSEN & TOUBRO LIMITED v. STATE OF
699
KARNATAKA [R.M. LODHA, J.]
wherein challenge was laid to the constitutional validity of A
Section 2(24) of the Maharashtra Value Added Tax Act, 2002
(for short, "MVAT Act") as amended initially by Maharashtra Act
XXXll of 2006 and thereafter by Maharashtra Act XXV of 2007
and Rule 58(1A) of the Maharashtra Value Added Tax 'Rules,
2005 (for short, "MVAT Rules").
B
14.