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 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 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.
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, 2012 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 1st 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.
Author Bio
The Delhi High Court decision is on a concession by Respondent (Union of India) that the services were covered under Section 65(105)(zzzh) , ie construction of complex service and not under Section 65(105)(zzza) , ie works contract service. In fact the High Court observed in Para 23 that even though the present transaction would constitute a “works contract”, since the Department has not contended so, it does not propose to examine whether the services are taxable under Section 65(105)(zzza) as a works contract or after the amendments made by Finance Act 2012, (where the levy is on all services including “declared services” but excluding the exempt services and those in the negative list” . Since the L&T decision by the Supreme court on service tax on composite works contract lost its relevance after 31-05-2007, when Rule 2A was introduced in Service Tax (Determination of Value Rules ) 2006. and the Delhi High Court decision is sub-silentio with respect to applicability of service tax on works contract and also since Declared Services under Section 66E includes inter-alia , construction of a complex including a complex or building intended for sale to a buyer, it may not hold good in the post June 2012 regime
Case of N.Bala Baskar vs Union Of India on 7 April, 2016 is in which HC has taken a totally different view ! State of sheer confusion for taxpayers now.
I disagree with the author on the point that abatement provision is sufficient for working out for excluding the part of non service component. Take the case of a building contract where land is owned by the owners and only contract is given for construction, the abatement provision would relate only to the contract value. The scenario contemplated is for the person executing the works contract where land value is not part of it. Whereas in this case the undivided interest in land is a part of sale and besides includes the element of construction the rules made for the abatement should be a different component and there should be machinery provision in the act or rules to address such cases. Be the old provision or the new provision the concept is the same and it is rightly held so by the Court. Assume that the builder has sub contracted the entire job to third party agencies who have collected the ST from the builder and the builder in turn again subjecting it to ST is it not irrational.
Exactly sir, I am also of the same view. Since there are Valuation Rules whether before or after June 2012, how can it said that there is no mechanism to compute value of service?
In that case all notifications and circulars issued by the Department will not effective and can be challenged if it is benifecial to the assessee.
what will be the process of refund and who will refund to whom. Govt will take some action as huge money to be return to property holder