Is there any service tax liability on builders in relation to construction of complex or the service is completely exempt?
The very answer of this question was delivered in the decision of the Hon’ble Delhi High Court in the case of Suresh Kumar Bansal vs. Union of India & ORS (W.P. (C) 2235/2011) and Anuj Goyal & ORS vs. Union of India & ORS (W.P. (c) 2971/2011) vide its order dated 3rd June,2016.
When builders render services in relation to construction of complex, it is a case of composite contract with buyers of flats. No doubt service element is involved in the construction of complex and the levy is justified by the Hon’ble Delhi High Court, but still no service tax can be charged by the builders from the buyers. The situation will become crystal clear when we have a glimpse at the background of this levy.
The Finance Act, 1994 is the legislative enactment by virtue of which service tax is levied. The said Act has been amended extensively since its enactment in 1994. The Finance Act, 2012 brought a paradigm shift in the service sector, w.e.f., almost all services as defined under Section 65B (44) except as specified under Section 66D of the Finance Act, 2012 (Negative List) were chargeable to service tax.
Clause (zzzh) was introduced in Section 65(105) of the Act by the Finance Act, 2005, w.e.f 16th June, 2005 to bring services in relation to construction of a complex within the definition of taxable service. By virtue of the Finance Act, 2010, an explanation was added to Section 65(105) (zzzh) which is impunged in the present petition. The said explanation is as under:
“Explanation : For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force ) shall be deemed to be service provided by the builder to the buyer.”
Clause (zzzzu) was also introduced in section 65 (105), the effect of which was to subject the ‘preferential location charges’ charged by a builder to service tax as a taxable service. For the purposes of this sub-clause, ‘preferential location’ means any location having extra advantage which attracts extra payment over and above the basic sale price.
Construction of a complex has three components, (i) land on which the complex is constructed; (ii) goods which are used in construction; and (iii) various activities which are undertaken by the builder directly or through other contractors. The object of taxing services in relation to construction of complex is essentially to tax the various activities that are involved in the construction of a complex and the resultant value created by such activities.
The measure of tax must have a nexus with the object of tax and it would be impermissible to expand the measure of service tax to include elements such as the value of goods because that would result in extending the levy of service tax beyond its object and would impinge on the legislative fields reserved for the State Legislatures.
There is no machinery provision for ascertaining the service element involved in the composite contract. In order to sustain the levy, the machinery provisions must provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax.
Further, for the purposes of ascertaining the value of services, the Central Government has made service Tax (Determination of Value) Rules, 2006. However, none of the rules provide for any machinery for ascertaining the value of services involved in relation to construction of a complex.
Rule 2A of the Service Tax ( Determination of Value) Rules, 2006 which provides for mechanism to ascertain the value of services in a composite works contract involving goods and services also provide no guidelines for determination of value of services in case of a composite contract which also involves sale of land.
The gross consideration charged by a builder from a buyer would not only include element of goods and services but also undivided share of land which would be passed on the buyer on completion of project.
In order to constitute valid basis of taxation, a flat rate of 75 % deduction or abatement given to assessee cannot be applied since there is lacuna in the very basis of deduction. It is inappropriate to use the same rate in each and every situation, somewhere material may account for 40% and land 30% and in other case situation may be different. How to ascertain the service portion is unjustified in the present abatement scenario?
As far as ‘preferential location charges’ are concerned, there is an element of service involved in the preferential location charges levied by a builder. Such charges relate solely to the location of land. It is a measure of additional value that a customer derives from acquiring a particular unit. These charges are a result of the development of the complex as a whole and the position of a particular unit in the context of the complex.
It is now crystal clear that 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 by the buyers with the builder.
Accordingly, the department will examine whether the builder has collected any amount as service tax from the buyers as taxable service as defined in section 65(105) (zzzh) of the Act and has deposited the same with the respondent authorities. Any such amount deposited shall be refunded to the buyers with interest @ 6% from the date of deposit till the date of refund.
However, in case of preferential location charges, the entire amount charged by a developer is for value addition, and, therefore, the gross amount charged for such services is chargeable to service tax under Section 66 read with Section 65(105)(zzzzu) of the Finance Act.