KVAT: Prime Location Charges/Floor Rise Charges not includible in Taxable Service

Smart Value Homes (Peenya Project) Private Limited Vs Joint Commissioner Commercial Taxes (Karnataka High Court)

The Hon’ble Karnataka High Court in the case M/s. Smart Value Homes (Peenya Projects) Private Limited vs. Joint Commissioner, Commercial Taxes (Appeals) and Others [S.T.R.P No. 47 of 2022 dated August 23, 2023] allowed the revision petition and held that the Prime Location Charges (“PLC”)/ Floor Rise Charges (“FRC”) would not fall within the definition of works contract under the Karnataka Value Added Tax Act, 2003 (“the KVAT Act”) and such charges incurred by the buyer would fall within the purview of Service Tax.

Facts:

M/s. Smart Values Homes (Peenya Projects) Private Limited (“the Petitioner”) is engaged in the business of Development and Construction of Residential Apartments. The Petitioner, while undertaking a project, collected PLC/FRC for flats located in prime locations. The Petitioner has discharged the service tax liability which is payable on PLC/FRC. However, the Petitioner has claimed exemption from payment of tax under the KVAT Act.

The Assistant Commissioner of Commercial Tax (“the Respondent”) vide order dated February 17, 2018 (“the Order in Original”) rejected the claim of exemption from payment of tax under the KVAT Act and imposed tax along with penalty. Aggrieved by OIO, the Petitioner filed an appeal before the Joint Commissioner of Commercial Taxes vide order VAT.AP.NO.161/17-18 dated April 26, 2019 (“the Order in Appeal”) wherein the Joint Commissioner dismissed the appeal on the ground that PLC/FRC charges are part of taxable turnover under VAT.

Aggrieved by OIA, the Petitioner filed an appeal before the Karnataka Appellate Tribunal (“the KAT”). However, the KAT vide order STA No. 265/2019 dated July 31, 2021 (“the Impugned Order”) upheld the order of the Joint Commissioner stating that PLC/FRC charges would be included in taxable turnover and tax should be levied on the said amount under the KVAT Act.

Aggrieved by the Impugned Order, the Petitioner filed a State Tax Revision Petition (“S.T.R.P.”) before the Hon’ble Karnataka High Court.

Issue:

Whether Prime Location Charges/Floor Rise Charges would be included in Taxable Service under the KVAT Act?

Held:

The Hon’ble Karnataka High Court in S.T.R.P No. 47 of 2022 held as under:

• Observed that, PLC/FRC are included within the definition of Taxable Service under Section 65(105)(zzzzu) of the Finance Act, 1994.
• Further observed that, the Works Contract is an act carried out for consideration, construction, improvement, repair or any other related activity of movable or immovable property as per definition of Works Contract stated under Section 2(37) of the KVAT Act.
• Relying upon the judgment of Suresh Kumar Bansal and Anuj Goyal & Ors. Vs. Union of India & Ors [P.(C) 2235/2011, dated June 03, 2016], wherein the Court held that, PLC/FRC are based on the choice of the buyer, who could be willing to pay extra cost for prime location. Thus, it is not to be treated as cost of construction and such extra cost would fall within the purview of service tax.
• Held that, the PLC/FRC is exempted from payment of KVAT. Hence, the revision petition is allowed.

Relevant Provisions:

Section 65(105)(zzzzu) of the Finance Act, 1994:

“(105) “taxable service” means any service provided: (zzzzu) to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorized by such builder, for providing preferential location or development of such complex but does not include services covered under sub –clauses (zzg), (zzq), (zzzh) and in relation to parking place.”

Section 2(37) of the KVAT Act

“(37) Works contract” includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;”

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

These Revision Petitions by the assessee are directed against the orders dated July 31, 2021 in STA No.264/2019¹ STA No.265/2019² and STA No.266/2019³, passed by the KAT⁴, Bengaluru.

STRP No.47/2022 has been admitted to consider following questions of law:

1. Whether the Karnataka Appellate Tribunal is correct in rejecting Petitioner’s claim of deduction/exemption on Prime Location charges?

2. Whether, in the facts and circumstances of the case, the Karnataka Appellate Tribunal is right in dismissing the STA No.266/2019 filed by the Petitioner, by upholding the orders of the First Appellant Authority and the Assessing Authority, insofar as the rejection of deduction claimed by the Petitioner on Prime Location Charges?

STRP No.3/2022 has been admitted to consider following questions of law

3. Whether the Karnataka Appellate Tribunal is correct in rejecting Petitioner’s claim of deduction/exemption on Prime Location charges?

4. Whether, in the facts and circumstances of the case, the Karnataka Appellate Tribunal is right in dismissing the STA No.264/2019 filed by the Petitioner, by upholding the orders of the First Appellant Authority and the Assessing Authority, insofar as the rejection of deduction claimed by the Petitioner on Prime Location Charges?

STRP No.41/2022 has been admitted to consider following questions of law:

5. Whether the Karnataka Appellate Tribunal is correct in rejecting Petitioner’s claim of deduction/exemption on Prime Location charges?

6. Whether, in the facts and circumstances of the case, the Karnataka Appellate Tribunal is right in dismissing the STA  No.265/2019 filed by the Petitioner, by upholding the orders of the First Appellant Authority and the Assessing Authority, insofar as the rejection of deduction claimed by the Petitioner on Prime Location Charges?

2. These Revision Petitions involve common questions of law and hence disposed of by this common order.

3. Heard Shri. P.B.Harish, learned Advocate for Assessee and Shri. Jeevan J. Neeralgi, learned AGA for Revenue.

4. Brief facts of the case are, assessee is a Private
Limited Company registered under the Karnataka Value Added Tax Act, 2003⁵. Assessee is in the business of development and construction of residential apartments. It had undertaken a project at Peenya. Assessee has collected ‘Prime Location Charges (PLC)/ Floor Rise Charges (FRC)’ in respect of those flats which are situated in the prime locations. Assessee’s case is that it has discharged the service tax liability payable on the PLC/FRC and it is not liable to pay any tax under the KVAT Act attributable to PLC/FRC.

5. Assessee claimed exemption from payment of KVAT on PLC/FRC. The ACCT⁶ cum the AO⁷ rejected the exemption claim and levied tax and penalty. Aggrieved, assessee filed an appeal before the JCCT⁸. The JCCT also rejected assessee’s claim for deduction from total turnover on the ground that these PLC and FRC charges are part of the taxable turnover under KVAT. On further appeal, the KAT has confirmed the JCCT’s order. Hence, these petitions.

6. Shri. P.B.Harish, for the Assessee, praying to allow these petitions submitted that:

• service tax is leviable on PLC/FRC and the same is not the part of the consideration for transfer of property;
• VAT cannot be levied because service tax has been paid on PLC/FRC as they are mutually exclusive laws;
• once a consideration is subject to levy, it cannot be subject to additional levy under the VAT;
• consideration for PLC cannot be taxed under the KVAT Act as none of the necessary attributes to levy tax are fulfilled;
• there is no rule for determination of sale price under the KVAT Act.

7. In support of his contention, Shri. Harish has placed reliance on following authorities:

i) Suresh Kumar Bansal and Anuj Goyal & Ors. Vs. Union of India & Ors⁹;

ii) Maharashtra Chamber of Housing Industry & Anr Vs. Union of India & Ors¹⁰.

8. Opposing the appeal, Shri. Neeralgi, for the Revenue submitted that:

• PLC/FRC are collected as a part and parcel of the construction;
• transfer of flats to the buyers forms a part of the contract receipts;
• it is only a nomenclature that is given by assessee as PLC/FRC whereas the said amount is collected as part and parcel of the selected residential flats by flat buyers and PLC/FRC is included in the contract receipts and therefore, PLC/FRC cannot be exempted from levy of tax under the KVAT Act.

9. In support of his contentions, Shri. Neeralgi has placed reliance on Larsen and Toubro Limited and Another Vs. State of Karnataka and Anr¹¹.

10. We have carefully considered the rival contentions and perused the records.

11. Undisputed facts of the case are, assessee is engaged in the business of development and construction of residential apartments. Assessee has collected PLC and FRC from the buyers and discharged the service tax payable on PLC/FRC.

12. Revenue’s main contention is that, PLC/FRC falls within the definition of ‘works contract’ and taxable under the KVAT Act.

13. Section 65(105)(zzzzu) of the Finance Act, 1994 reads as follows:

“(105) “taxable service” means any service provided:

(zzzzu) to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorized by such builder, for providing preferential location or development of such complex but does not include services covered under sub –clauses (zzg), (zzq), (zzzh) and in relation to parking place.”

14. The above provision makes it clear that PLC/FRC are ‘taxable services’ within the meaning of Finance Act.

15. Section 2(37) of the KVAT Act defines ‘works contract’ as follows:

“(37) Works contract” includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;”

16. Thus, ‘works contract’ is an act carried out for consideration, the building, construction, etc mentioned in the definition.

17. Harish has placed reliance on Suresh Kumar Bansal¹². In para 54 of the said judgment, the Delhi High Court has held that the preferential location charges are based on the customer’s preferences. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit. Such charges are attributable to the preferences of a customer in relation to the direction in which a flat is constructed, the floor on which it is located and view from the residential unit etc.

18. The estimate and actual cost of construction depends upon the material used for construction. The cost of construction shall be the same without reference to the direction of the flat, the view from a particular flat vis-à-vis the other flat situated on the same floor. The PLC/FRC are based on the choice of buyer and cannot be treated as cost of construction. For example, a flat situated on a higher floor over-looking a garden or seashore shall have better locational advantage than the flat in the same floor from where the garden or the seashore may not be visible. Nonetheless the cost of construction of both flats situated in a particular floor shall be the same.

19. In order to get the benefit of locational advantage, a purchaser may be prepared to pay extra cost. Such extra cost has been brought within the preview of service tax.

20. By definition, ‘works contract’ does not include preferential location. Therefore the Revenue rejecting assessee’s request to exempt PLC/FRC from payment of KVAT is not sustainable in law. Resultantly, these revision petitions merit consideration.

21. Hence the following:

ORDER

(i) These revision petitions are allowed.

(ii) The substantial questions of law are answered in the favour of Assessee and against the Revenue.

(iii) The order dated July 31, 2021 in STA No. 264/2019 passed by the KAT, Bengaluru is set aside.

(iv) The order dated July 31, 2021 in STA No. 265/2019 passed by the KAT, Bengaluru is set aside.

(v) The order dated July 31, 2021 in STA No. 266/2019 passed by the KAT, Bengaluru is set aside.

No Costs.

Notes

1 Assessment Year 2013-14

² Assessment Year 2014-15

³ Assessment Year 2015-16
⁴Karnataka Appellate Tribunal

⁵‘the KVAT Act’ for short

⁶ Assistant Commissioner of Commercial Tax

⁷Assessing Officer

⁸ Joint Commissioner Of Commercial Taxes

⁹2016 (6) TMI 192

¹⁰2012 (1) TMI 98

¹¹(2014) 1 SCC 708

¹²2016 (6) TMI 192

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