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SERVICE TAX ON BUILDERSAnalysis of Suresh Kumar Bansal Judgment –
Delhi High Court
By:- Puneet Agrawal Partner
Athena Law AssociatesTAX KNOWLEDGE PARTNERS – CREDAI NCR
Coverage of the Presentation
• Factual Background of judgment in Suresh KumarBansal case (Delhi HC)
• Summary of law laid down in Suresh Kumar Bansalcase
• Way forward post 01.07.2012: Athena Analysis
FACTUAL BACKGROUND AND CONTENTIONS RAISED
Premise of the judgment and facts involved
Background - Issues Involved• Petitioners in the present case are individuals who have
entered into separate agreement with a builder to buy flats inmulti- storey building developed by the builder.
• Builder also recovered service tax from petitioners in relationto construction of complex and on preferential locationcharges.
• Arguments raised for pre negative list as also post negative list
Petitioners contentions– Parliament did not have the power to levy service tax on immovable property.– Power of parliament to tax would be limited to only on the service component
after excluding the value of goods as well as value of lands from suchcontracts.
– Section 65 (105)(zzzh) read with section 66 of the Act could be applied onlyfor imposition of service tax on service simplicitor contract and theirapplication to composite contract would render the provisions unconstitutional.
– Act and the rules made there under do not provide any machineryfor computation of value of such composite contracts, therefore, levy ofservice tax must fail.
– Preferential location charges do not amount to service and cannot be chargedto service tax.
– No service tax for the services rendered before the flat buyers agreement.– Similar arguments raised for periods post 01.07.2012 i.e. in negative list.
LAW LAID DOWN IN THE JUDGMENT
Liability of Builders to pay service tax under Construction of Complex Service [Explanation to S. 65(105)(zzzh)]
Builders Contract is a composite contract
• “Construction of complex” has three broad components :– Land on which complex is constructed;– Goods which are used in construction;– Various activities which are undertaken by the builder
directly or through other contractors.• Held: Object to tax services in relation to construction of
complex is to tax the activities involved in construction[Para 26, 30 of the judgment]
• Thus, held: It is not a tax on immovable property [Para 34 of the judgment]
Mechanism for valuation essential • Thus, while the legislative competence of the Parliament to tax
the element of service involved cannot be disputed but the levy itself would fail, if it does not provide for a mechanism to ascertain the value of the services component which is the subject of the levy.
• 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.
[Para 37 of the judgment]
No mechanism for valuation
• In the present case, we find that there is no machineryprovision for ascertaining the service element involved inthe composite contract.
[Para 39 of the judgment]• For the purposes of ascertaining the value of services, the
Central Government has made Service Tax(Determination of Value) Rules 2006 (hereafter 'theRules').
• However none of the rules provides for any machinery forascertaining the value of services involved in relation toconstruction of a complex.
[Para 43 of the judgment]
Rule 2A do not provide deduction for land
• Whilst Rule 2A of the Rules provides for 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.
[Para 45 of the judgment]
Rule 2A do not provide deduction for land
• Whilst the impugned explanation expands the scope of Section 65(105)(zzzh) of the Act, it does not provide any 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.
• Thus the said clause cannot cover composite contracts such as the one entered into by the Petitioners with the builder.
[Para 45 of the judgment]
Abatement notification is not sufficient
• Revenue’s argument: abatement of 75% takes care of land exclusion [under Not. No. 1/2006-ST]
• Held: Instructions cannot replace the need for providing provisions under the Act/ rules
Law declared regarding Construction Services
• No service tax could be charged on construction under section 66 of the Act read with Section 65(105)(zzzh) of the Act in respect of composite contracts such as the ones entered into by the Petitioners with the builder.
• The impugned explanation to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service is set aside.
[Para 55 of the judgment]
• Athena analysis: – Though argued, the High Court did not rule regarding period under negative
list. – Thus, the ratio would apply from 01.07.2012 but the judgment does not as such
deal with that period
LAW LAID DOWN IN THE JUDGMENT
Liability of Builders to pay service tax on referential location and other similar charges [S. 65(105)(zzzzu)]
Preferential location charges
• Held: – There is element of service involved in the preferential
location charges levied by builder– 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
– Section 65(105)(zzzzu) upheld
POST 01.07.2012: AFTER NEGATIVE LIST
Developer’s Liability of Service tax
Value for Service tax
Ratio of Suresh Kumar Bansal case applies:
No Service tax on:– Value of Land– Value of Materials
Is this not Works Contract• Suresh Kumar Bansal case: HC did not examine whether
covered under works contract– Although such composite contracts for development of complex
and sale of units therein would fall within the scope of works contract as held by the Supreme Court in Larsen and Toubro v. State of Karnataka (supra), we do not propose to examine whether services involved in 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) of the Act or under Section 65B(44) after the amendments brought about in the Act by virtue of Finance Act, 2012 – 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. [Para 23 of judgment]
Athena Analysis
• These are works contracts [L&T v ST. of Karnataka 2014 (1) SCC 708]
• No tax can be charged on– Land– Value of Goods
• Food for thought: – No works contract prior to date of agreement with flat
buyer – hence Services done prior to date of agreement –not taxable
Athena analysis
• Thus service tax is payable on :– Value of services on and after date of agreement with flat
buyer• No rule providing for such computation• Thus value of the above component is unascertainable
from out of composite price• The said value to be computed by the service provider
under rule 3(2) of Valuation rules
