NO SERVICE TAX ON FLATS UNDER COMPOSITE CONTRACTS

[Dr. Sanjiv Agarwal]

In one of the recent judgments of Delhi High Court (Division Bench), the court while disposing the WP(C) No. 2235/2011 and WP(C)2971/2011 in the matter of Suresh Kumar Bansal and Anuj Goyal v. Union of India [2016 (6) TMI 192 - DELHI HIGH COURT] has held that Service Tax on flats can not be levied on composite contracts.

The petitioners had entered into agreements to buy residential flats from builders. The builder has in addition to the consideration for the flats also recovered service tax from the Petitioners, which is payable by him for services in relation to construction of complex and on preferential location charges.  The issue involved in these petitions relate as to whether the consideration paid by flat buyers to a builder / promoter / developer for acquiring a flat in a complex, which under construction/development, could be subjected to levy of service tax.

The  petitioners case was that  the agreements entered into by them with the builder were for purchase of immovable property and the Parliament does not have the legislative competence to levy service tax on such transaction. The petitioners further claimed that the Service Tax provisions in the Finance Act, 1994 and the rules made thereunder do not provide any machinery for computation of value of services, if any, involved in construction of a complex and, therefore, no such tax can be imposed.

The court has observed that neither the Act nor the Rules framed therein provide for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax. The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract. No service tax under section 66 of the Act read with Section 65(105)(zzzh) of the Act could be charged in respect of composite contracts such as the ones entered into by the petitioners with the builder.

So far as charging Service Tax on preferential location is concerned, which was also one of the questions before the court, it held that preferential location charges are charged by the builder based on the preferences of its customers. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit. Such charges may be attributable to the preferences of a customer in relation to the directions in which a flat is constructed; the floor on which it is located; the views from the unit; accessibility to other facilities provide in the complex etc. As stated earlier, service tax is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction derived by a customer from certain additional attributes of the property developed. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex. Therefore, preferential location changes shall be liable to tax.

The court has also held that any Service Tax deposited shall be refunded to the petitioners with interest at the rate of 6 percent from the date of deposit till the date of refund.

Comments on Delhi High Court Judgment

The issues in the Hon’ble Delhi High Court judgment are two-fold – one whether Service Tax could be levied on a consideration in a transaction of buying a residential flat at Noida and two, whether Service Tax can be levied on preferential location charges.

Composite contract for purchase of immovable property is a works contract and their valuation is covered under Rule 2A of the Service Tax (Determination of Value) Rules, 2006 which has been mentioned but perhaps been overlooked. Moreover, prior to 1.7.2012, there was a separate set of Rules i.e., Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 which provided for a  composite rate of 2 or 4 percent of total value where service component was not segregable as a option to assessee. The valuation rules had been notified under section 67 of the Finance Act, 1994 only (Valuation provisions). Thus, to say that machinery provisions did not exist may not be correct. Even post 1^st July, 2012, amended valuation rules are there and apply to such transactions. In the earlier regime, Notification No. 1/2006-ST used to determine the value and abatement which was issued under provisions of Finance Act, 1994 only.

In the instant case, 'service' is very much there and the incidence of tax is rendition of service. Consideration comes later which is a measure of tax. Even if it is assumed that there is no machinery provision for ascertaining the service element in a composite contract, does it mean that its value can be taken as nil or for that matter inferred that subject transaction is not a service or does not contain service component.  Perhaps no.

One needs to appreciate the fact that valuation norms have to be understood in right earnest and in  this case, since land is also involved, abatement notification clearly  provided that value will be just 25% of total value where land was also part of total value. On what subject tax has to be levied, how it is levied and how it is collected is to be decided (and so done) by the Parliament.

This is perhaps the first judgment on the issue of consideration which seems to create ripples and further complicate the already settled law and practice for last over a decade. This will also create disputes amongst builders and buyers.

The judgment shall apply only to Service Tax collected under erstwhile section 65(105)(zzzh) of the Finance Act, 1994 and not to services w.e.f. 1.7.2012. The question that will arise is whether no Service Tax can be levied w.e.f. 1.7.2012 also as so far as valuation / abatement is concerned, they are by and large the same. Again, it is emphasized that levy of tax is on service and consideration is only to measure the tax.

In all probability, Union of India will file an appeal before Apex Court and seek stay / quashing of this judgment.