All of us would have observed reports in the press, that the Hon’ble Delhi High Court has ruled on 3.6.2016, in the case of a writ petition, that in the case of a composite contract between a buyer of an apartment and the developer of the apartment, wherein the total value of the apartment includes the value of land also, no service tax can be levied. Certain key features of this judgement are as follows:
a. The Government has confirmed that they want to levy service tax only under the head ‘construction of complex’ service and not under ‘works contract service’. Accordingly, the Hon’ble High court has not passed any views as to whether service tax would be payable under ‘works contract’ for such an arrangement between the buyer and developer.
b. The judgement answers the legal position as on date. In other words, it covers all the important periods under this category namely,
c. The Hon’ble High Court has found that there is no provision under the Act or Rules specifying the method of valuation of service wherein the total value includes value of land also.
d. It is a well settled legal position that a notification or circular cannot specify the valuation method.
e. Based on the above two findings, the Hon’ble High Court has concluded that service tax cannot be levied on apartments where the total value includes value of land also.
Now, the question before the developers is whether they can rely upon this judgement and not collect service tax or not pay service tax to the Department. In this connection, the following are worth noting:
a. As a general law, the ruling of a High court is binding only in the respective state over which that High court has jurisdiction.
b. However, it has been held by a three-judge bench of the Supreme Court in the case of Kusum Ingots vs Union of India [2004(6) SCC 254] as follows
c. Going by the principle laid down by the Hon’ble Apex court in Kusum Ingots, various High courts have simply relied upon the judgements of other High courts in laws applicable across the country.
d. However, the correctness of such approach of Hon’ble High courts are also being questioned by various legal stalwarts.
Given the above position, the available options for developers and their effects are as follows:
Under this option, in addition to filing a writ petition, the Developer may pay taxes out of his own source in the court to avoid interest and penalty.
Beyond all of this, if the Government makes an amendment with retrospective amendment, it might be a beginning of a new chapter.
Out of the all possible options, Option 1 is the best option wherein the customers can make a refund claim against the taxes collected and remitted by the Developer.