Vardhman Properties Ltd. v. Value Added Tax Officer & Ors.

What happened

Vardhman Properties Ltd., a registered dealer under the Delhi Value Added Tax Act, 2004, is a builder engaged in the construction and sale of commercial complexes. It challenged a demand dated 16 January 2009 and a notice of default assessment of tax dated 28 January 2009 for 2005-06. The petitioner accepted that, under the Supreme Court's decision in Larsen and Toubro Ltd. v. State of Karnataka, its activities are a works contract under section 2(1)(zo) of the DVAT Act and are exigible to VAT, but argued that the levy could not be sustained because the machinery for computing taxable turnover was introduced only by the substitution of rule 3 of the DVAT Rules with effect from 7 September 2006.

Questions before the court

• Is a builder covered by the definition of works contract and liable to VAT under the DVAT Act?
• Can VAT on a builder's works contract be levied for a period before the rules prescribing how to compute taxable turnover came into force?

Why the court ruled this way

On the first question, the Court applied the Supreme Court's decision in Larsen and Toubro, under which construction carried out after an agreement to sell with the purchaser is a works contract, and held that the petitioner is covered by the definition in section 2(1)(zo). On the second, it relied on the Supreme Court's decision in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro, which held that service tax could not be levied on composite works contracts before 1 June 2007 in the absence of a machinery provision, and on the Punjab and Haryana High Court's Division Bench in Dhingra Jardine Infrastructure, which held that until the Rules were framed on 16 May 2010 a levy on builders was unenforceable. In Delhi, rule 3 was substituted with effect from 7 September 2006, and before that date the Act did not stipulate how to calculate taxable turnover of works contracts covering builders (paragraph 14).

Controlling point

Builders' works contracts are exigible to VAT under the DVAT Act, but a levy cannot be enforced for a period before the machinery for determining taxable turnover was introduced, which for Delhi was 7 September 2006.

Order and next steps

The demand dated 16 January 2009 and the notice of default assessment dated 28 January 2009 were set aside and the petition was allowed. Pending applications stood disposed of.

Practical implications

A builder or developer assessed to Delhi VAT for a period before 7 September 2006 on a works contract basis can raise the absence of computation rules as a ground against the demand, provided the period falls before rule 3 was substituted. The ruling does not make builders' works contracts tax-free for later periods.

Limits of this ruling

• The result is confined to the period before rule 3 was substituted on 7 September 2006; for later periods the Court accepted that the machinery exists.