Sunil Kumar

Sunil Kumar

Under the cloud demonetization, the Sector which hampers the most was real-estate sector. The sector was heavily affected during the last quarter of calendar year 2016. However, Budget 2017 tries well to provide some relief to this sector. Some of the notable steps are as under:

Direct benefit

a) Granting Specific Infrastructure Status for Affordable housing

b) Relaxation in conditions for claiming profit linked deduction under Income tax

Indirect benefit

a) Reducing time-frame from 3 years to 2 years for calculation of Long term capital gains

b) Removing Foreign Investment Promotion Board (FIPB) would surely help this sector (apart from other sectors)

These attempts would surely help this sector to do well again.

Amid of all this steps an amendment has also been made under service tax laws relating to valuation of Construction Service. The real estate sector currently comes under the ambit of service tax, when it receives sum from its buyers during the construction period (i.e. Construction linked Payment). It’s liable to pay service tax on service portion of total contract. The leviability of same was challenged before the Hon’ble Delhi High Court (in case of Suresh Kumar Bansal Vs. union of India [2016] 70 taxmann.com 55 Delhi) and Court in the Month of June, 2016, pronounced that no service tax is liable on Works Contract (or Construction Service). To understand the amendment let us go through the judgment.

Argument of Assessee:-

The assessee before the Court of law argued that the agreement entered by the home buyer with the builder is for purchase of immovable property and the parliament does not have the legislative competence to levy service tax on such transaction.

The petitioner further claim that the Act and the rules 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.

High Court held:

The Court rejected the first ground of appeal and held that the legislative competence must be determined with reference to the object of the levy and not with reference to the incidence of tax or the machinery provisions. Therefore, the parliament would have the legislative competence to levy service tax in relation to the services rendered in construction of a complex. Therefore, leviability of service tax cannot be challenged on the ground that sale immovable property is liable to pay stamp duty.

The High court upheld the constitutional validity of service tax. However, it further held that service tax law does not provide any machinery for computation of service portion under works contract when transaction involves transfer of land along with goods and service.

Now the very first question which may come in our mind is that, we have a proper valuation mechanism i.e. Rule 2A of Service tax determination of Valuation Rules to determine the value of Works Contract. So, why such argument was put-forth before the Court? Yes, you are right but read the rule carefully. It does not cater a situation where works contract includes value of land.

There are some other important points put-forth before the Court but I am not discussing the same as the same are not relevant now.

The Court pronounced the following:

The Court referred the landmark ruling of Supreme Court [in case of Commissioner Central Excise and Customs, Kerala and Ors. v. Larsen & Toubro Ltd. and Ors.: (2016) 1 SCC 170] where Supreme Court held that in order to levy tax, the Statute must clearly specify the following elements of taxation, namely,

(i) the subject of tax;

(ii) the person who is liable to tax; and

(iii) the rate and

(iv) measure of tax

Since, law does not provide proper mechanism that how to measure service value for the purpose of discharging service tax, therefore, service tax cannot be determined and hence leviability fails.

Amendment:

The budget considered the above loophole in the statue and brought a retrospective amendment. It amends all the applicable Valuation rules which were relevant at relevant time (Appendix to this article –Sixth Schedule of Finance Bill 2017). The provision which currently prevails provides two methods for valuing Works contract.

Method-1 provides that valuation on the basis of actual values. To compute value of service under this method actual value of goods requires to be excluded. Further, retrospective amendment provides that value of land should also be excluded.

Method-2 provides a deeming provision. Under which a deemed percentage is applied to compute value service portion. The provision provides two types of contract and deemed rates for both are different:

a) Original Contract: Applicable Rate- 40% of total contract value including value of Land

b) Other Contract: Applicable Rate- 70% of total contract value

For construction the applicable rate is 40 percent. However, retrospective amendment creates an ambiguity by inserting the proviso to value such transaction at 30 percent. It is true that it is in line with the Construction Abatement. However, reducing tax liability that too with retrospective amendment is not seems logical. We can expect an immediate amendment in to the provision. Following is the amended provision:

“Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:—
in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent of the total amount charged for the works contract;

Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent of the total amount charged for the works contract.”

Practical Problem:

Query: We (Construction Company) are registered under Service tax under Delhi Jurisdiction. Using the benefit of above judgment we had not collected the service tax from home buyers. The amount works out to be more than 2 crores. Whether we had committed an offence which would result in to imprisonment?

Answer: It’s not evasion of tax. Since, there was no intent to evade tax which is an important factor to determine whether the offence is punishable as imprisonment.

Further to provide more clarity, the explanation to section 128 of Finance Bill 2017 provides that “No act or omission on the part of any person shall be punishable as offence which would not have been punishable had this section not come into force.”

Query: We (Construction Company) are registered under Service tax under Delhi Jurisdiction. Using the benefit of above judgment we (construction Company) had collected the service tax from our customers and deposited in to escrow account of the company. Now since there is retrospective amendment, therefore, we are required to deposit the service Tax. Do we need to pay any interest and penalty also?

Solution: Interest is levied on late payment of service tax and since it is retrospective amendment, therefore, it is require to be paid. However, the leviability of interest can be contested before the Court of Law. Recently in case of India bulls properties (P.) ltd Vs Commissioner of Central Excise [2016]75taxmann.com177 (Mumbai-CESTAT), it was held that “Where retrospective validation provision for renting of immovable property services mandates recovery of ‘service tax, interest or penalty or fine or other charges’, then, in view of specific clause for recovery of interest, assessee is liable to pay interest even for retrospective period.” Since there is no specific clause under the Finance Bill to levy interest, therefore, the same can be challenged.

As far as leviability of penalty is concern for sure it is not a fraud or collusion etc. Therefore, provision of section 78 would not be applicable. However, the department may issue SCN under section 76 to demand penalty. The same can be contested using the above judgment.

Appendix: The appendix contains the relevant portion of Finance Bill 2017 as applicable for above discussion.

Section 128: Amendment of rule 2A of Service Tax (Determination of Value) Rules, 2006, retrospectively

(1) In the Service Tax (Determination of Value) Rules, 2006 made by the Central Government in exercise of the powers conferred by section 94 of the Finance Act, 1994, published in the Gazette of India vide notification of the Government of India in the Ministry of Finance (Department of Revenue) number G.S.R. 228(E), dated the 19th April, 2006,—

(a) rule 2A as inserted by the Service Tax (Determination of Value) (Amendment) Rules, 2007 published vide number G.S.R. 375(E), dated the 22nd May, 2007; and

(b) rule 2A as substituted by the Service Tax (Determination of Value) Second Amendment Rules, 2012 published vide number G.S.R. 431(E), dated the 6th June, 2012, shall stand amended and shall be deemed to have been amended in the manner specified in column (3) of the Sixth Schedule, on and from and up to the corresponding date specified in column (4), against each of the rule specified in column (2) thereof.

(2) Notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority, any action taken or anything done or purported to have been taken or done at any time during the period specified in column (4) of the Sixth Schedule relating to the provisions as amended by sub-section (1) shall be deemed to be and deemed always to have been, for all purposes, as validly and effectively taken or done as if the amendment made by sub-section (1) had been in force at all material times.

(3) For the purposes of sub-section (1), the Central Government shall have and shall be deemed to have the power to make rules with retrospective effect as if the Central Government had the power to make rules under section 94 of the Finance Act, 1994, retrospectively, at all material times.

Explanation.––For the removal of doubts, it is hereby declared that no act or omission on the part of any person shall be punishable as an offence which would not have been so punishable had this section not come into force.

SIXTH SCHEDULE

Sl. No Provisions of the service tax (Determination of Value) Rules, 2006 to be amended Amendment Period of effect of amendment
1. Rule 2A as inserted by notification number G.S.R. 375(E), dated the 22nd May, 2007 (29/2007-Service Tax, dated the 22nd May, 2007) In the Service Tax (Determination of Value) Rules, 2006, in rule 2A,-  
(i) In sub rule (1), in clause (i), after the words “value of transfer of property in goods”, the words “or in goods and land or undivided share of land, as the case may be shall be inserted;  

 

1st day of July, 2010 to 30th day of June, 2012 (both days inclusive)

(II) After sub-rule (1), the following sub-rule shall be inserted namely:-

(2) Where the value has not been determined under sub-rule (1) and the gross amount charged includes the value of goods as well as land or undivided share of land, the service tax shall be payable on twenty-five percent, of the gross amount charged for the works contract, subject to the following conditions, namely,-

(i) the CENVAT credit of duty paid on inputs or capital goods or the CENVAT Credit of Service Tax on input services, used for providing such taxable service, has not been taken under the provisions CENVAT Credit Rules 2004;

(ii) the service provider has not availed the benefit under the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 12/2003-Service Tax, dated 20th June, 2003 (G.S.R. 503.(E), dated the 20th June, 2003)

Explanation: For the purposes of this sub-rule, the gross amount charged shall include the value of goods and material supplied or provided or used for providing the taxable service by the service provider.

1st day of July, 2010 to 30th day of June, 2012 (both days inclusive)
2. Rule 2A as inserted by notification number G.S.R. 431(E), dated the 06th June, 2012, (24/2012-Service Tax, dated the 06th June, 2007) In the Service Tax (Determination of Value) Rules, 2006, in rule 2A,-  
(I) in clause (i), after the words “value of property in goods” the words “or in goods and land or undivided share of land, as the case may be,” shall be inserted; 01st Day of July, 2012 onwards
(II) in clause (ii), in sub-clause (A),-

(a) the following proviso shall be inserted, namely:-

“Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on twenty-five percent, of the total amount charged for the works contract”

01st day of July, 2012 to 28th day of February, 2013 (both days Inclusive)

 

(b) for the proviso, the following provisos shall be substituted, namely:–– “Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent. of the total amount charged for the works contract: Provided further that in case of works contract for construction of residential units having carpet area up to 2000 square feet or where the amount charged per residential unit from service recipient is less than rupees one crore and the amount charged for the works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on twenty-five per cent. of the total amount charged for the works contract.”; 01st Day March, 2013 to 07th Mary, 2013 (Both days Inclusive)

 

(c )for the provisos, the following provisos shall be substituted, namely:–– “Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent. of the total amount charged for the works contract:

Provided further that in case of works contract for construction of residential units having carpet area up to 2000 square feet and where the amount charged per residential unit from service recipient is less than rupees one crore and the amount charged for the works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on twenty-five per cent. of the total amount charged for the works contract.”

08th day of May, 2013 to 31st day of March, 2016 (both days inclusive)
(d) for the provisos, the following proviso shall be substituted, namely:––

“Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent of the total amount charged for the works contract.”

1st day of April, 2016 onwards

 About Author: The author is Chartered Accountant by profession and can be reached at akhilsunil1@gmail.com. The views taken by the author are his personal views. The readers are free to take their own views. In case any query feel free to connect.

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3 responses to “Construction Industry be Careful: Budget overrides Delhi HC Judgment- Suresh Kumar Bansal”

  1. vswami says:

    firstpost.com/business/centre-assures-realty-sector-of-revenue-neutral-gst-rate-3270998.html
    Too early to even make an honest guess as to how that is going to bring about a significant change, if at all any, in the gusto with which the subject controversial levy (ies) are being discussed in knowledgeable and other circles, alike, with no let-up !

  2. vswami says:

    IMPROMPTU
    For viewpoints shared but with a different stroke /line of reasoning, suggest to look up the critique on inter alia Del. HC Judgment in Bansals’ case, as posted , repetitively so, on Linkedin may be gone through.
    As canvassed therein, in own conviction, the judicial view on the surrounding controversies, on both the levy of Service Tax and VAT – under the present law so also as proposed under GST Code, – cannot , by any logic, be rightly regarded to have been finally and conclusively settled.

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