R e a l I n f r a / J u n e 2 0 1 6

© 2016 K. Vaitheeswaran Page | 1 All rights reserved.

Real Infra An e-newsletter from

K. VAITHEESWARAN & CO. Advocates & Tax Consultants

Chennai, India.

R e a l I n f r a / J u n e 2 0 1 6

© 2016 K. Vaitheeswaran Page | 2 All rights reserved.

SERVICE TAX – RECENT DECISION OF THE DELHI HIGH COURT IN THE CASE

OF SURESH KUMAR BANSAL VS. UNION OF INDIA AND OTHERS

Background

Section 65(105)(zzzh) provides for a levy of service tax on services in relation to

‘construction of complex’ and an explanation was added by Finance Act, 2010. In

this case, the petitioner is an individual who had agreed to buy flats in a multi-

storey project being developed by the Builder and the Builder had recovered

service tax from the individual in addition to the consideration. The individual

petitioner challenged the levy of service tax as well as the levy of service tax under

preferential location services on the ground that their agreement with the Builder is

a composite contract for purchase of immoveable property and in the absence of

specific provisions for ascertaining the service component, the levy is beyond the

legislative competence of the Parliament.

Department’s view

The Department contended that the amendment introduced by Finance Act, 2010

has been upheld by the Karnataka High Court in the case of CREDAI and the

Bombay High Court in the case of Maharashtra Chamber of Housing Industry

and since the contract includes value of land and material, only 25% is taxable

through Notification.

Delhi High Court’s view

The Court has expressed itself in Para 23 that although composite contracts for

development of contracts and sale of units would fall within the scope of works

contract as held by the Supreme Court in Larsen & Toubro, we do not propose to

examine whether services involved in the construction of complexes is exigible to

service tax as services in relation to execution of a works contract falling within

the scope of Section 65(105)(zzzza) or under Section 65B(44) after the amendments

brought about in the Act by Finance Act, 2012 since the said controversy is outside

the scope of the present petitions and it would not be appropriate for us to examine

it in these petitions.

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© 2016 K. Vaitheeswaran Page | 3 All rights reserved.

The Delhi High Court has however set aside the explanation introduced by Finance

Act, 2010 in the context of construction of complex and has held as under:

(i) While the legislative competence of the Parliament to tax the element of

service involved cannot be disputed, the levy itself would fail if it does not

provide for a mechanism to ascertain the value of service component which

is the subject of the levy.

(ii) Clearly, service tax cannot be levied on the value of undivided share of land

acquired by a buyer of a dwelling unit or on the value of goods which are

incorporated in the project by a developer. Levying a tax on the constituent

goods or the land would clearly intrude into the legislative field reserved for

the States.

(iii) There is no machinery provision for ascertaining the service element

involved in the composite contract. 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.

(iv) While Rule 2A of the Valuation Rules provides for a mechanism to ascertain

the value of services in a composite works contract involving services and

goods, the said Rule does not cater to determination of value of services in

case of a composite contract which also involves sale of land. The gross

consideration charged by a builder - promoter of a project from a buyer

would not only include an element of goods and services but also the value

of undivided share of land which would be acquired by the buyer.

(v) The abatement to the extent of 75% by a Notification or a Circular cannot

substitute the lack of statutory machinery provisions to ascertain the value of

services involved in the composite contract.

(vi) Service Tax under Section 66 read with Section 65(105)(zzzh) cannot be

charged in respect of composite contracts such as the ones entered into by

the petitioners with the builders. The impugned explanation to the extent it

seeks to include composite contracts for the purchase of units in a complex,

within the scope of taxable service is set aside.

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© 2016 K. Vaitheeswaran Page | 4 All rights reserved.

(vii) The challenge to insertion of Section 105(zzzzu) is negated since service tax

is a tax on value addition and charges for preferential location in one sense

embody the value of satisfaction derived by a customer from certain

additional attributes of the property and such charges cannot be traced

directly to the value of goods or value of land.

Impact

(i) The decision is based on Section 65(105)(zzzh) dealing with ‘construction of

complex’ and wherever there is a transaction which involves sale of

apartment or unit by a Developer along with the undivided share of land, this

decision can be used to canvas non-applicability of service tax. However,

being a High Court decision, the Department will go on appeal to the

Supreme Court and the matter will have to be decided by the Supreme

Court. In fact, the Karnataka High Court on a similar challenge had held

that the subject of a tax is different from the measure of tax and that it is a

well settled position in law that the measure of tax cannot affect the nature

of tax.

(ii) Even though the decision is for the period prior to 01.07.2012, the deeming

fiction introduced on 01.07.2010 continues in the context of ‘construction of

complex’ referred to in Section 66E(b) and hence this decision should apply

even post 01.07.2012. Even in the new dispensation there is no mechanism

for exclusion of value of land and for identification of the service

component.

(iii) Where service tax is being discharged under works contract services in

respect of construction agreements, the Builder does not pay any service tax

on the sale of undivided share of land and this decision has no impact.

(iv) Even in jurisdictions where Builders have operated under ‘construction of

complex’, including the land portion and availing the abatement, in case,

where service tax has already been collected from the customer and paid to

the service tax Department, it may not be possible to obtain refund since the

principles of unjust enrichment would apply. In the Delhi High Court

matter, the Court has directed the department to verify whether the Builder

has collected the amount from the petitioner and deposited with the

Department and if so the Department should refund the tax with interest at

the rate of 6%.

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© 2016 K. Vaitheeswaran Page | 5 All rights reserved.

(v) Where service tax is not paid based on this decision in respect of

transactions which involve sale of unit along with undivided share of land,

the cost will increase since it may not be possible to avail cenvat credit on

various input services used for providing output services.

***

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