The Delhi High Court has ruled that no service tax could be charged for contracts entered between builders or developers and buyers for the purchase of apartments or flats. The Court also upheld the levy of the service tax but quashed it as there was no statutory measure to ascertain the value of services involved in this composite contract, which involved sale of undivided share of land. Accepting that service tax can be applicable on preferential location charges (PLC) levied by the builder, the HC directed the builder to refund service tax collected, if any, on other services with an interest of 6%.
The question before the High Court was whether the consideration paid by flat buyers to a builder or promoter or developer for acquiring a flat in a complex which is under construction or development, could be subjected to levy of service tax.
In an order issued on 3 June 2016, a Bench of Justices S Muralidhar and Vibhu Bakhru, said, "...service tax is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction derived by a customer from certain additional attributes of the property developed. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex."
There has been widespread confusion on the question of whether construction of a residential complex attracts service tax or not. Many people believe that this was a contract for sale and not service and therefore, service tax cannot be levied on the same.
Commenting on the HC decision, Manohar Chowdhry & Associates, in its bulletin said, "The High Court ruling would be welcomed by the real estate companies as there would be levy of service tax only on the construction service element and not on the value of the land. This will reduce the tax burden considerably. Further, the ruling would also help the investors intending to buy a property as cost of the property will reduce on account of reduction in the service tax figure."
"However, till such time as the Supreme Court decides on this issue, assessees may continue to pay service tax under protest so that if the apex court gives a favourable order the assessee can go for refund without time limit. On the other hand, if the Supreme Court holds against the tax payer and in favour of the service tax department, then such tax payers will be saved from the penal consequences," the firm added.
The case relates with Suresh Kumar Bansal, Anuj Goyal and other buyers who entered into agreement with Sethi Buildwell Pvt Ltd to buy flats in in a multi-storey group housing project named 'Sethi Group - Max Royal' developed by the builder in Sector 76 of Noida in Uttar Pradesh. In addition to the value of the flats, Sethi Buildwell also collected service tax from Bansal, which was payable by him for services in relation to construction of complex and on preferential location charges.
In the petition, Bansal and others contended that the agreements entered into by them with the builder are for purchase of immovable property and the Parliament does not have the legislative competence to levy service tax on such transaction. They further claimed that the Act and the rules made thereunder do not provide any machinery for computation of value of services, if any, involved in construction of a complex and, therefore, no such tax can be imposed.
Puneet Aggarwal, counsel for Bansal and other petitioners, contended that for levy of service tax, it is necessary that there should be a service provider and service recipient. Therefore, only the services rendered after execution of the flat buyer's agreement could be subjected to tax as prior to the said date, in absence of the service recipient, the service in relation to construction of a complex, if any, is rendered by the builder to itself and cannot be subjected to service tax. He referred to the decision of the Supreme Court in Larsen & Toubro Ltd. v. State of Karnataka (supra) in support of this contention.
Sonia Sharma, counsel appearing for the Revenue submitted that development of a project results in the substantial value addition on bare land and includes various services such as consulting services, engineering services, management services, and architectural services and these services are subsumed in the taxable service as contemplated under Section 65(105)(zzzh) of the Act. She further submitted that as the gross charges include value of land and construction material, only 25% of the Base Selling Price (BSP) charged by a builder from the ultimate consumer is subjected to levy of service tax. 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 Act, she told the Bench.
The Central Board of Excise and Customs (CBEC) in a Circular (No.108/02/2009 - ST) issued on 29 January, 2009 stated...
"...as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/ builders/ developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of 'self- service' and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of 'residential complex'. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax."
Service tax is essentially a tax on the value created by services as distinct from a tax on the value added by manufacturing goods. Construction of a complex essentially has three broad components, land on which the complex is constructed; goods, which are used in construction and various activities that 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 various activities that are involved in the construction of a complex and the resultant value created by such activities.
The Delhi HC Bench of Justices S Muralidhar and Vibhu Bakhru, said, "Insofar as the challenge to the levy of service tax on taxable services as defined under Section 65(105)(zzzzu) is concerned, we do not find any merit in the contention that there is no element of service involved in the preferential location charges levied by a builder. We are unable to accept that such charges relate solely to the location of land. Thus, preferential location charges are charged by the builder based on the preferences of its customers. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit. Such charges may be attributable to the preferences of a customer in relation to the directions in which a flat is constructed; the floor on which it is located; the views from the unit; accessibility to other facilities provide in the complex."
"These petitions were admitted by an order dated 21 July 2011 and the applications for stay of recovery filed along with the petitions were disposed of by directing that if any amount is collected on the basis of the impugned explanation, the same shall be refunded with the interest in case the Petitioners succeed.
Accordingly, the concerned officer of Revenues shall examine whether the builder has collected any amount as service tax from Bansal and other petitioners for 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 Petitioners with interest at the rate of 6% from the date of deposit till the date of refund," the Bench said in its order.