What A Recent Supreme Court Judgment Means For Builder-Buyer Agreements
The Supreme Court stands in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

What A Recent Supreme Court Judgment Means For Builder-Buyer Agreements

Homebuyers won some and lost some against two builders at the Supreme Court this week. While homebuyers got enhanced compensation on account of delays, the apex court dismissed their claim that it’s only the builders that need to foot the tax bill. The ruling is likely to impact provisions relating to payment of taxes in builder-buyer agreements, experts pointed out.

The top court bench of Justice DY Chandrachud and Justice KM Joseph was hearing petitions filed by 339 home buyers of DLF Southern Homes Pvt. (now known as BEGUR OMR Homes Pvt.) and Annabel Builders and Developers Pvt. Ltd.

Besides the delay in handing over the possession of flats, the homebuyers had complained that the builders didn’t discharge their tax liability for 36 months—between 2011-2012 and 2013-2014. The dues were paid in 2015 along with interest and penalty. The liability on account of interest was proportionately passed on to the homebuyers as per the builder-buyer agreement. The flat owners argued this liability was the fault of the builder and they cannot be asked to pay the interest and sought a refund on this ground.

The tax in contention was works contract tax.

In their defence, the developers argued that when the construction began in 2009, there was no clarity on whether works contract tax is liable to be paid for builder-buyer agreements where delivery of apartments is at a future date. That clarity only came in 2013 via the apex court’s ruling in the Larsen and Toubro Ltd. case. Only after it was held that such projects will be covered under the definition of works contract, the developers passed on the burden of interest on the homebuyers.

This demand was as per the agreement and no share in the penalty was sought from the homebuyers, the developers argued.

Interest Liability Lies With Homebuyers Too, Supreme Court Says

The court went through the agreement and found that the buyers were liable to bear proportionate share of taxes and there was no doubt on this position.

The court was satisfied with the developers’ explanation that the dues towards works contract tax wasn’t paid due to pending litigation. “Even if they [tax dues] were paid earlier, the purchasers would have been required to reimburse their proportionate share of taxes,” the court pointed out.

In view of the terms of the Apartment Buyers Agreement and the explanation which has been submitted by the developer, there is no deficiency of service in regard to the demand of interest payable on the tax which was required to be deposited with the revenue.
Supreme Court

The buyers could have more forcefully contested the builders’ reasoning of pending litigation being the reason for non-payment of the tax, Nand Kishore, tax partner at DSK Legal, said.

The assertion that between 2009-13, there was no clarity on whether builder-buyers agreements are covered under works contract isn’t accurate, Kishore explained. During this period, the law was laid down by the Raheja judgment and the L&T case was merely determining its correctness, he pointed out.

The Raheja judgment was clear that tax had to be paid in such situations. It seems from reading the judgment that the homebuyers did not forcefully argue this point. Even if the court had overturned the Raheja judgment in the L&T case, the builder could have sought a refund from the department and by not paying the tax he exposed himself to the interest component.
Nand Kishore, Partner, DSK Legal

That said, the judgment is likely to result in greater focus on the payment of taxes provisions in builder-buyer agreements, Rashmi Deshpande, indirect tax partner at Khaitan & Co., said. The court seems to have gone by the agreement which had provided for proportionate division between the buyer and the builder over payment of government dues, she said.

Going forward, we can expect buyers seeking greater clarity in agreements on taxes i.e if there is a pending judgment on an issue, can the builder recover the interest from the buyer or will they only be liable for payment of the taxes.
Rashmi Deshpande, Partner, Khaitan & Co.

While the homebuyers failed to recover the tax dues paid by them, the apex court did grant them enhanced compensation.

The top court rejected the contention that homebuyers are constrained by the terms of the agreed rate of compensation irrespective of the nature or extent of the delay in handing of the possession of the flats. Such a proposition would result in miscarriage of justice, held the top court.

Also read: Flat Buyers Entitled To Compensation For Delayed Possession, Lack Of Assured Amenities: Supreme Court

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