Introduction:

1. Paragraph 2 of the Rate Notification No. 11/2017 – CT (R) reads as under:

In case of supply of service specified in column (3), in item (i); sub-item (b), sub-item (c), sub-item (d), sub-item (da) and sub-item (db) of item (iv); sub-item (b), sub-item (c), sub-item (d) and sub-item (da) of item (v); and sub-item (c) of item (vi), against serial number 3 of the Table above, involving transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply. 

Explanation – For the purposes of this paragraph, “total amount” means the sum total of,-

(a) consideration charged for aforesaid service; and 

(b) amount charged for transfer of land or undivided share of land, as the case may be including by way of lease or sublease”

2. Above referred paragraph is to be applied for determining the value of supply of construction services which includes transfer of land or undivided share in the land (referred further only as “value of land” for enhancing readability). It provides that the value of land shall be deemed to be one-third of the total amount charged. Hence the value of supply shall be the total amount charged less deemed value of land. Let us consider an illustration to make it easier to understand:

3. Let us suppose that the total amount charged by the supplier of a flat, which is booked before receiving the completion certificate, is INR 1 crore. This price includes the cost of construction, value of share in the land as well as margin. Above referred paragraph provides that the value of supply on which tax rate is to be applied shall be INR 0.67 crore. In other words, it shall be deemed that the value of land in the total consideration of INR 1 crore shall be INR 0.33 crore (one-third). What if the fair value of the share in the land is not INR 0.33 crore but INR 0.5 crore. Question for the present article is whether the supplier can claim deduction of the fair value of land for arriving at the value of supply and hence is not bound by the deemed value of INR 0.33 crore ? Let us analyse.

Levy of tax:

4. Sec.9(1) of the CGST Act, 2017 (referred as “Act” hereinafter) provides that the tax shall be levied on all intra-state supplies of goods or services on the value determined under Sec. 15. It follows therefore that for the levy to subsist, there must be supply of goods and services. Also such levy shall be on the value determined u/s 15. Let us examine both these aspects with respect to the issue on hand.

Scope of supply:

5. Scope of supply is defined u/s 7 of the Act. Sec. 7(2)(a) provides that the activities or transactions specified in Schedule III shall not be treated as supply of goods or services. Entry No. 5 of Schedule III reads as under:

“SCHEDULE III

[See Section 7]

ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER  AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

6. Joint reading of the provision along with the Schedule Entry leads to an inescapable conclusion that the tax cannot be levied on the sale of land or building (post receipt of completion certificate). Since such sale cannot be brought to tax the issue to be addressed is the manner of the determination of the value of such land which is to be excluded ?

Value of supply:

7. Now, let us delve into the valuation aspect. Sec. 9(1) clearly provides that the tax shall be levied on the value of supply determined u/s 15. Sec. 15(1) provides that the value of supply shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both, where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Hence clearly the transaction value for the said supply of construction services can only be subjected to tax. Had we be required to determine the value of the construction services in question u/s 15(1), we could have easily argued that the concept of deemed value as provided in the concerned Rate Notification (supra) clearly violates the said provision and hence can be discarded and actual value of land be adopted.

Deemed value:

8. 15(5) nevertheless provides as under:

“(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.”

9. Hence the power to determine the value of supply in any different manner (which is to be prescribed) has been granted to the Central Government vide Sec. 15(5). Since Sec. 15(5) starts with the non-obstante clause, it shall override the provisions of Sec. 15(1) which permits levy of tax only on the transaction value.

10. It is in exercise of the said power that Notification No. 11/2017 – CT (R) provides for determination of value of supply based on the deduction of the deemed value of land. Relevant opening paragraph of the said Notification is reproduced below:

“In exercise of the powers conferred by sub-section (1) of section 9, subsection (1) of section 11, sub-section (5) of section 15 and sub-section (1) of section 16 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, and on being satisfied that it is necessary in the public interest so to do, hereby notifies …..”

11. Hence the issue to be addressed is whether Sec. 15(5) is beyond any judicial review and hence the Government can fix the value on whim having no relation with the transaction value (or the reality of land prices) of a supply in question ? Let us look at the history.

12. A similar controversy had erupted in the Excise regime in the case of Union of India vs. Century Manufacturing Company Limited 1992 (60) E.L.T. 3 (S.C.)wherein tariff values as fixed by the Government in exercise of powers conferred by Sec. 3(2) of Central Excises and Salt Act, 1944 were challenged. Sec. 3(2) read as under:

“(2) The Central Government may, by notification in the Official Gazette, fix, for the purpose of levying the said duties, tariff values of any articles enumerated, either specifically or under general headings in the First Schedule as chargeable with duty ad valorem and may alter any tariff values for the time being in force”

13. Apex Court observed as under:

“9.◊but, then, says learned counsel, to read Section 3(2) in the manner indicated above, would make the provision vulnerable to challenge on the basis of violation of Article 14 of the Constitution. Such an interpretation, it is said, would leave it open to the Central Government to fix tariff values at its whim and caprice without any statutory guidelines laying down the parameters of such fixation. We think that the contention proceeds on a misconception. While we undoubtedly say that Section 3(2) confers a power on the Central Government to fix tariff values for goods at its pleasure, unrestricted to the terms of Section 4, we do not say that this can be done at the whim and caprice of the Government. This discretion has to be exercised by the Government in accordance with the crucial guideline that is inbuilt into the statute and also illustrated by the manner in which the determination is provided for in Section 4. The statute leaves one in no doubt that the rate of duty is to be fixed ad valorem i.e. on the basis of the value of the goods. It cannot be disputed that the normal indication of the value of the goods will be its price and, that the statute intends price to be the relevant factor is clear from the language of Section 4 under which the statute itself fixes the value for the majority of cases. But where one had got bogged down, possibly due to certain earlier observations of this Court in a different context, was in thinking that the value of goods can only comprise of manufacturing cost and profit. Actually it has been made to depend on the wholesale price of the manufacturer concerned under Section 4 (old and new). But this need not be the sole criterion. The value may be derived with reference to the wholesale price, the retail price or the average price at which the goods are sold by the manufacturer concerned or even by the price at which the goods are sold by any particular person or place or the average price which the goods command in the whole country or any part thereof. It can be fixed at the lowest of such prices, at the highest of such prices or at some average (mean, media mode, etc.) of such prices as the Government may consider appropriate in the case of any particular commodity.”

14. The Court at paragraph 11 further observed as under:

“11. In our opinion, the tariff value has been notified under Section 3(2) for valid reasons and on germane grounds having a nexus to the value of the goods and the High Court erred in accepting the assessee’s plea that “the notifications are arbitrary, perverse and display a non-application of mind on the part of the authorities as the tariff values fixed are unrelated to the value or price or the manufacturing cost and manufacturing profit of the products”. That the weighted average so fixed exceeds the manufacturing cost and profit of a particular manufacturer, can be no reason for doubting its validity. Equally, there is no acceptable logic in the High Court’s suggestion that it should be fixed at the lowers of the prices at which the manufacturer is able to sell his goods in the wholesale market. To apply such a measure will restrict the fixation of the value at figures even less than those that can be arrived at under Section 4. The whole purpose of Section 3(2) is to enable the Revenue to free itself from the shackles of Section 4, inter alia, in cases where, as here, the Government feels that the application of that section would lead to difficulties and harassments. The criticism that the tariff value has been manipulated to enhance the rate of duty has also no force. The Central Government has the undoubted power to enhance the rates and the validity of a notification having such an effect is not open to challenge even if it is done under the “guise” of fixing a tariff value. But, as already pointed out by us, there is no such guise or facade in this case and the tariff value has been fixed on the basis of relevant criteria having a nexus to the value of the goods.”

15. Hence the power conferred by the Act is entirely dependent upon the satisfaction of the Government and the question of sufficiency of the ground which forms such satisfaction cannot be gone into by the Courts unless it is demonstrated that it is extraneous to the scope and purpose of the statute. The following excerpts from the judgment of the Supreme Court in case of Barium Chemicals Ltd. Company Law Boardreported in AIR 1967 SC 295 is quoted in this regard:

“Though an order passed in exercise of power under a statute cannot be challenged on the ground of propriety or sufficiency, it is liable to be quashed on the ground of mala fides dishonesty or corrupt purpose. Even if it is passed in good faith and with the best of intention to further the purpose of the legislation which confers the power, since the Authority has to act in accordance with and within the limits of that legislation, its order can also be challenged if it is beyond those limits or is passed on grounds extraneous to the legislation or if there are no grounds at all for passing it or if the grounds are such that no one can reasonably arrive at the opinion or satisfaction requisite under the legislation.”

16. Hence only if such deemed values are arbitrarily fixed (without any connection with the average prices of land and its proportion to total cost) that the Courts can go into the issue of rejecting such deemed value and accepting the actual value. Also important to note is that the guideline to be followed for such determination of deemed value should be to bring it as close to the transaction value (average) as possible.

17. Similar to the above challenge, even challenge to Sec. 14(2) of the Customs Act, 19623 which empowers the Government to fix tariff value for imposition of Custom Duties was rejected by the Calcutta High Court in the case of Bimal Kumar Modi v. Union of India 2014 (306) E.L.T. 97 (Cal.)on the ground that the tariff value fixed is relatable to the trend of the value of such or like goods, and the Board is empowered to fix the tariff values.

18. Now, the question which needs to be answered is whether the deemed value of land (which is one-third of total consideration) is arbitrary or is it with some logical base ?

19. It may be noted that the cost of construction does not vary as much as the cost of land based on the location of property. As an example, a property located in Mumbai may have more cost attributable to land as compared to a property located in a non-metro. It is for this reasons that the benefit of House Rent Allowance under Income Tax Act, 1961 is also based on whether the house is located in a metro vis-à-vis a non-metro. Hence a standard yardstick of considering one-third value of total consideration as the value of land may not be correct. However, proving the same shall be a daunting task and whether the Courts will allow it to go on such fact finding missions is also doubtful.

20. Attention is also invited to the decision of Apex Court in the case of Wipro Ltd v. Assistant Collector of Customs 2015 (319) E.L.T. 177 (S.C.). In this case, a deemed value of 1% of FOB price as the value of Loading, unloading and handling charges for imposition of Customs Duty was challenged. It was argued that since the levy of Custom Duties is on the transaction value, which is the actual price paid or payable, levy of the same on a deemed value is not tenable. Apex Court accepted the said principal reasoning and struck down the amendment providing for such notional addition to transaction value. It was held that if the amount of such charges are ascertainable, duty shall be levied on the actual amount and not on deemed value.

21. We submit that the said decision shall not be applicable to the issue on hand. This is because in the said case, the value to be determined was u/s 14(1) of the Customs Act (i.e. transaction value) and the amendment in the Rule provided for deemed value of certain charges. It was not the case where the value was determined u/s 14(2) (i.e. power to fix deemed value).

22. Hence we conclude by saying that challenging the deemed value of land shall be far more difficult than what it seems. It shall be better if an alternate structure is adopted for transfer of land (e.g. separation of land owner and developer) to keep the fair value of land outside the ambit of GST.

(views are strictly personal)

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