Road ahead for Developers after Delhi High Court Judgement

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,

• Position prior to 1.7.2010 before insertion of explanation to Section 65(105)(zzzh)
• Position during the period 1.7.2010 to 1.7.2012 – Position prior to negative list scenario
• Position after 1.7.2012 – Current scenario after introduction of negative list

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

• An order passed on writ petition questioning the constitutionality of a Parliamentary Act, whether interim or final, will have effect throughout the territory of India subject of course to the applicability of the Act.”
• An order passed on writ petition questioning the constitutionality of a Parliamentary Act whether interim or final keeping in view the provisions contained in Clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject of course to the applicability of the Act.”

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:

1. Continue the present practice of collecting service tax and wait to observe what happens next. Under this option, there is no risk. If any customer wants to claim refund of taxes paid to the developer, they can file a refund claim to the Department and fight their case. Under this option, there is zero risk to the developer. However, customers may complain about the collection, for which the Developer may state that the judgement is not applicable in states other than Delhi.

2. Relying on the judgement of High court of Delhi, developers can stop collecting service tax from its customers. After which they will be required to file intimation to the Department about its stand so that the Department cannot book a case of wilful default, etc., against the developer. If the Government files an appeal before the Hon’ble Supreme court and the ruling of the High court is reversed, then the developer will have to pay the tax along with applicable interest and penalty. At that time, it is not sure whether the customers will pay the tax, interest and penalty. This could be a high risk option for the developer.

3. File a writ petition on the same grounds before the High Court where the developer is situated and get an order. This will involve costs for the developer, though there will be clarity on law. However, under this option also, if the Government files an appeal before the Hon’ble Supreme court, and the decision is reversed, tax will become payable along with interest and penalty.

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.