Analysis and Implication of high court order of service tax exemption for under construction property

We all know that builders have been demanding service tax for under construction property since last 6 years of its formal introduction to under construction property under Finance Act 2010. But, last Fridays (3rd June, 2016) order has sent the buyers in tizzy. The order by Delhi high court has pronounced that service tax can’t be charged for under construction property provided it includes the cost of land. The order relates to a petition filed in 2011 against Sethi builder where buyer was charged service tax for under construction flat for its Max Royal project in sector 76, Noida. The order ruled Revenue department to return the said service tax paid by buyer along with interest at 6%.

Our lawyer Amarpal helps us decode the order. Read the highlighted ones in case you are falling short of time.

Listed below are few of the main points of consideration that were taken into account by Court while coming up with the judgment:

The court observed that the builder buyer agreement is of composite nature since it involves both i) an element of services and ii) transfer of property in goods. It thereby referred to amendment of Section 67 of the Act which states that a composite contract was not taxable. This is because for a composite works contract, there was no machinery for excluding the non-service components from the taxable services covered therein. The Rules also do not contain any provisions relating to determination of the value of services involved in the service covered under Section 65(105)(zzzh) of the Act.

-It was stated by Revenue department that an Assessee is entitled to abatement to the extent of 75% and only 25% of the gross amount charged by a builder from a flat buyer is charged to service tax. It was suggested on behalf of the Revenue that this indicated that the value of the immovable property as well as the property in goods incorporated in the works would stood excluded. Against this, court took leads from a previous judgment (in the case of Commissioner of Central Excise v. Larsen and Toubro Limited (supra). In that case, the Supreme Court had affirmed the decision of the Orissa High Court in Larsen and Toubro Limited v. State of Orissa and Ors: (2008) 12 VST 31 (Orissa)) wherein the Court held that Circulars or other instructions could not provide the machinery provisions for levy of tax. The charging provisions as well as the machinery for its computation must be provided in the Statute or the Rules framed under the Statute.

Delhi high court however didn’t find reasons to oppose service tax on preferential location charges i.e. PLC and ruled that service tax on PLC shall apply.

Taking account of the above discussions, Delhi HC ordered refund along with 6% interest of complete service tax amount paid by buyer excluding the service tax paid on preferential location charges.

However, there are still few key points left unanswered:

-Court felt that Levying a tax on the constituent goods or the land (in this case) would intrude into the legislative field reserved for the States under List II of the Seventh Schedule of the Constitution of India. This would have sent a strong indication to States to rest control of the 25% amount on which tax is claimed, although this will have no direct impact on buyer.

-Court also stressed that there is no machinery provision for ascertaining the service element involved in the composite contract. It felt that in order to sustain the levy of service tax on services, it is essential that the machinery provisions provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax. This may likely invite a formal amendment in Finance Act 2012 to define which service is taxable under composite contracts.

In any case, the Revenue is likely to object to the order and reach Supreme court in this regards. Supreme court has been divided in its previous judgments with regards to taxation matters and it would be interesting to see where this case eventually leads taxation in composite contracts to.

What should the buyers do meanwhile?

-They should share the judgment with the builder and ask for service tax receipts against their payments (that attracted service tax) made so far.

-Buyers can then approach Revenue for refund taking this order into account. This would ultimately lead to Revenue bringing out an amendment after/before moving a review petition at Supreme court.

Update: For now, builders in the region are replying back stating that they are awaiting Service Tax department’s notification for extending this relief. Meanwhile, few builders have also replied back with service tax receipt details.

Must related read: How practical is to expect refund of already paid service tax

Comments/Feedback invited.

Last updated: June 14, 2016 at 15:14 pm

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