VAT on BOT contracts - A view point

The concept of Public-Private partnership in� infrastructural� development has given rise to the concepts of BOT contracts. BOT contract means Build-Operatre-Transfer, i.e. the contractor is given a contract to build some infrastructure out of his own funds and thereafter he is given right to operate such infrastructure and recover his cost of funds and profits therefrom for a certain period and thereafter the� infrastructure is transferred to the Government.

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The point which I want to discuss here is the taxability of BOT contracts as works contracts in relation to the VAT laws. As we know that in works contracts the goods incorporated� by the contractor is considered as deemed sales to the contractee, since the contractor execute such works contract on the behalf of the contractee, hence such contractors have to pay VAT on such goods incorporated.

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The main objective of the BOT contracts is to build or improve infrastructure for furtherance of economic growth and development and there is no intention in granting the BOT contracts to purchase or sale of any goods as incorporated in such contracts and the infrastructure is built by the concessionaire to enjoy the fruits of it afterwards to the exclusion of the grantor for a specified period.

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It should be noted hereby that deemed sales of material incorporated in the works contract arises due to the fact that the contractor execute the contract for and on behalf of the contractee. In K. Raheja Development corporation vs. State of Karnataka (2005) 141 STC 298 (SC) it was held by the apex court that where the owner of the flats were engaged in the business of construction of the residential apartments and/or commercial complexes, and for this purpose, they entered into agreements of sale with the intended/prospective purchasers, It was held that even an owner of the property might also be said to be carrying on a works contract if he enters into an agreement to construct. However if the agreement is entered into after the unit is already constructed, then there will be no works contract.

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However the above said judgement of Raheja Development Corporation was referred to a larger bench of the SC in the case of Larsen & Trurbo Limited vs. State of Karnataka (2008) 17 VST 460 (SC) with the following remarks:

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�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 contracts and a contract for sale of chattel as a chattel. Lastly, could it be said that petitioner-company 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 contractee for cash, deferred or any other valuable consideration�.�

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In BOT contracts the sponsor or concessionaire build the infrastructure which is the subject matter of the contract not for the purpose of transferring the same to the contractee, but to earn and enjoy the fruits of it after construction during the operation part of the BOT contract.� After the operation part of the BOT contract the infrastructure as a whole i.e an immovable property is transferred to the grantor/contractee. Hence it cannot be said that the goods incorporated in the BOT contract in the earlier building part of such contract, were deemed sales to the grantor/contractee.

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Another thing to be noted is that one of the essential ingredient of sale is the valuable consideration. In works contract such valuable consideration should be received from the contractee or from a third person on behalf of the contractee. In BOT contracts the concessionaire generates revenue from the ultimate user of the service who pays the toll for using the infrastructure and does not pay any amount on behalf of the grantor of such BOT contract.

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In the BOT contracts the concessionaire enjoys the right to accession of the site of infrastructure to the exclusion of the grantor for a specified period of lease and the goods used in building the infrastructure does not pass on to the grantor after construction and remains the property of the concessionaire for a specified period and the fruit of it are enjoyed by the concessionaire to the exclusion of the grantor, hence there is no deemed sales which would attract any tax in entry 54 of the State list as appended to the Constitution of India.

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Conclusion: No law has been legislated as yet nor any clarification or instructions have been issued by the Government as yet regarding the applicability of VAT in BOT Contracts. But in the light of above discussion and especially in the absence of any settled law, one view point which safely emerges is that BOT contracts are not works contracts and are not liable for VAT as there is no deemed sales involved in it.�

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Please Note: The above is only a view point