On 6th May, 2022, The Hon'ble Gujarat HC delivered a 'soothing to the sight' of developers and builders judgement in case of MUNJAAL MANISHBHAI BHATT VERSUS UNION OF INDIA 2022 (5) TMI 397 wherein it has in principal addressed to two issues of GST on Real Estate.
- First: Taxability on Transfer of Developed Plot to the Customer
- Second: Whether Notification providing for 1/3rd Deduction with respect to land or undivided share of land in cases of construction contracts involving element of land is ultra-vires the provisions of the GST Acts?
On both the above fronts, it has predominantly issued orders in favour of the assessees. We shall discuss both the issues separately in this article.
RELIEF 1: Taxability on Transfer of Developed Plot to the Customer
1. Recently you have seen the AAR & AAAR's in case of In re Shree Dipesh Anilkumar Naik (GST AAAR Gujarat) wherein it was held that the a sale of developed plots by the Appellant is a supply of taxable service falling under the head 'Construction services' appearing at No.3 of Notification No.11/2017-Central Tax (Rate) dated June 26, 2017 ("the Service Rate Notification"), and is liable to GST @ 18%.
2. Further, The Supreme Court Judgement in case Narne Construction P. Ltd. and Ors. Vs. Union of India (UOI) and Ors. (2012) 5 SCC 359, was also referred to defend this taxability.
3. Now, Guj HC has quashed all these AAR's and further clarified that why Narne Construction P. Ltd. and Ors. Vs. Union of India (UOI) and Ors. (2012) 5 SCC 359 cannot be applied to GST Laws since it was issued under Consumer Protection Act. The Arguments upheld by the HC are as under:-
- As such, when the entry in the Schedule III says "sale of land" then it can be land in any form. In any case the charge of tax is on supply of goods or services made or agreed to be made for a consideration and therefore even in a case of a tripartite agreement for sale of land and building, the imposition of tax can only be on the construction activity which is undertaken by the supplier at the behest of the proposed buyer. Thus, if a tripartite agreement is entered into after the land is already developed by the developer, then such development activity was not undertaken for the prospective buyer and therefore there is no question of imposition of GST on the developed land.
- Hence the fact that the land is not a plain parcel of land but a developed land cannot be a ground for imposing tax on the sale of such land.
4. Further, in Para 121 of Judgement, HC held that
"The reliance placed by the revenue on the decision of the Apex Court in the case of Narne Construction Pvt. Ltd (supra) is completely misplaced. The said judgement was in the context of the Consumer Protection Act, 1986 and is thus as such inapplicable while interpreting a taxing statute. In any case it was categorically observed by the Supreme Court that the development of land was assured to the buyers. We have already observed that in a given case there may be tax liability if the development of land is undertaken pursuant to contract with buyer. However, if the land is already developed and thereafter agreement is entered into with the buyer for sale of such developed land, then it would not involve any service."
5. Hence in a nutshell we understand that where the developed Plot is Sold to the Customer WITHOUT his behest being involved then such transaction is merely Sale of Land and NOT LIABLE to GST applying the ratios of this Judgement.
Relief 2: Quashing notification providing for 1/3rd deduction with respect to land or undivided share of land in cases of construction contracts involving element of land is ultra-vires the provisions of the GST Acts and/or violative Article 14 of the Constitution of India
Next, comes the aspect of 1/3rd Deduction of Land, this was the major question seeked by Writ Petiton and has been explained as below:-
FACTS OF THE CASE
- The writ applicant entered into an agreement dated 29th September 2020 with the Navratna Organisers & Developers Pvt. Ltd for the purchase of a plot of land admeasuring about 1021 square metres. The said agreement also encompassed construction of bungalow on the said plot of land by the respondent for the writ applicant.
- It appears that separate and distinct consideration was agreed upon between the parties to the agreement for (i) the sale of land and (ii) construction of a bungalow on the land.
- The respondent No.4 however, relying upon the impugned entry no. 3(if) of the Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017 read with para 2 of the said notification informed the writ applicant that he would be liable to pay tax at the rate of 9% CGST + 9% SGST under the GST Acts on the entire consideration payable for land as well as construction of bungalow after deducting 1/3rd of the value towards the land in accordance with the impugned paragraph 2 of the said notification. The respondent No.4 raised an invoice on the writ applicant to collect such tax from the writ applicant.
- Thus it appears that, because of the impugned notification, the entire consideration towards the sale of land has not been excluded for the purpose of computing tax liability under the GST Acts. 1/3rd of the total consideration has been deemed to be land value as per paragraph 2 of the impugned notification
Without going in the arguments of Petitioner and Respondent as to why notification shall be quashed and why notififcation shall not be quashed respectively, I am detailing out the held views of the court on each matter for sake of simplicity and sticking to the objective of this Article.
WHAT COURT HELD AND WHY IT HELD SO
A. What is the Intent of Parliament to tax is to be understood?
"Supply" under Section 7 of the CGST Act includes supply of goods or services made or agreed to be made for a consideration. Thus the factum of supply would be initiated only once the agreement is entered into between the supplier and recipient and such agreement is for consideration. This is in consonance with the observation of the Supreme Court in the case of the 1st Larsen and Toubro Ltd. (supra) that there cannot be a sale in respect of construction undertaken prior to agreement with the buyer
Thus the legislative intent is to impose tax on construction activity undertaken by a supplier at the behest of or pursuant to contract with the recipient. There is no intention to impose tax on supply of land in any form and it is for this reason that it is provided in the Schedule III to the GST Acts that the supply of land will be neither supply of goods nor supply of services.
B. As such, when the entry in the Schedule III says "sale of land" then it can be land in any form including Developed Land also.
Section 15 of CGST Act, 2017 is the Principal Method of Deciding the Valuation and this Notification is Ultravires the provision of Section 15 itself
C. Section 15(1) of the CGST Act which deals with valuation needs to be referred to. The said section reads thus: "15(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply."
- Thus, ordinarily the value of supply of goods or services or both should be the value which is the price actually paid or payable for the said supply of goods.
- In the case of the writ applicant of the Special Civil Application No. 1350 of 2021, the booking agreement is a part of the record. There is specific consideration agreed for sale of land and for construction of bungalow. There is no averment in the affidavit in reply filed by the Respondents that such bifurcation is not acceptable. If that be so and if specific value of land and value of construction service is available, then can the notification provide for a fixed deduction towards land? - The answer has to be in the negative.
- When the statutory provision requires valuation in accordance with the actual price paid and payable for the service and where such actual price is available, then tax has to be imposed on such actual value. Deeming fiction can be applied only where actual value is not ascertainable.
- Thus, mandatory application of deeming fiction of 1/3rd of total agreement value towards land even though the actual value of land is ascertainable is clearly contrary to the provisions and scheme of the CGST Act and therefore ultra-vires the statutory provisions.
D. ARBITRARINESS OF THE DEEMING FICTION BY THE IMPUGNED NOTIFICATION
a. Apart from being contrary to the statutory provisions contained in the CGST Act, one of the most glaring feature of the impugned deeming fiction is its arbitrariness in as much as the same is uniformly applied irrespective of the size of the plot of land and construction therein. Two illustrations may be taken:
- Take a case of a plot of land admeasuring 5000 square yards and valued at say Rs. 2.5 crore. If suppose a buyer enters into an agreement with the developer for buying the plot of land along with getting bungalow constructed and the total area of the bungalow is say 500 square yards and the construction value is say Rs. 50 lakhs. Thus the total agreement value is Rs. 3 crores. Applying the impugned deeming fiction, deduction of 1/3rd i.e. Rs. 1 crores will be available towards land and the balance consideration of Rs. 2 crores will be taxable under the GST Acts.
- Suppose the same bungalow is constructed on a plot of land of 2000 square yards of which the value is Rs. 1 crore. The construction value being Rs. 50 lakhs, the total agreement value is Rs. 1.5 crores. Applying the impugned deeming fiction, deduction of 1/3rd i.e. Rs. 50 lakhs will be available towards land and the balance consideration of Rs. 1 crore will be taxable under the GST Acts.
b. Thus even though in both the above illustrations the actual bungalow remains the same and it is the construction of this bungalow which is taxable under the GST Acts, the taxable value in the first illustration is double the taxable value in the second illustration because of the fact that the deduction rate is uniform irrespective of the size of the plot.
c. Moreover there is no distinction made even between a flat and bungalow. While a flat would have number of floors and the transfer would only be undivided share in land, the same deduction which is available on supply of flats is made available on supply of bungalows without any regard to the vast different factual aspects.
E. Even the GST Council feared Litigation and also wished to implement this in a selective manner but it got implemented very widely
- 14th GST Council meeting minutes which led to the insertion of the impugned Notification is perused, it becomes clear that the deduction was contemplated only in the context of flats wherein it was difficult to ascertain the value of the undivided share of land. However when it came to actual issuance of Notification, a standard rate of deduction came to be provided irrespective of the nature of the transaction or whether it is a case involving transfer of land itself or undivided share in land. Moreover the discussion in the GST council meeting minutes which is part of the record would show that there was an apprehension that a standard rate of deduction for land may not withstand judicial scrutiny. Interestingly, this was in fact mentioned by the Deputy Chief Minister of the State of Gujarat. This was even when the discussion was in respect of flats while the ultimate notification was issued and made applicable even to other transactions such as sale of land with construction of bungalow.
F. SECTION 15(5) DOES NOT FURTHER THE CASE OF THE RESPONDENTS
- Even if revenue's reliance on Section 15(5) is considered, which is 15(5) Notwithstanding anything contained in sub-section (1) or subsection (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.
- At the outset it is required to be noted that the term "prescribed" is defined under Section 2(87) of the CGST Act as under:
- "2(87) "prescribed" means prescribed by rules made under this Act on the recommendations of the Council;"
- Thus, the prescription under Section 15(5) of the CGST Act has to be by rules and not by notification. Be that as it may, wherever a delegated legislation is challenged as being ultra-vires the provisions of the CGST Act as well as violating Article 14 of the Constitution of India, the same cannot be defended merely on the ground that the Government had competence to issue such delegated piece of legislation. Even if it is presumed that the Government had the competence to fix a deemed value for supplies, if the deeming fiction is found to be arbitrary and contrary to the scheme of the statute, then it can be definitely held to be ultra-vires.
G. WHAT IF THE SUPPLIER ARTIFICIALLY INFLATES THE PRICE OF LAND THEREBY DEFLATING THE VALUE OF CONSTRUCTION SERVICE ?
- One of the contentions of the learned A.S.G., while defending the impugned Notification is that the valuation cannot be determined on the basis of the value fixed into agreement, which is decided inter-se between the parties as the parties may artificially fix a higher value for land so as to reduce tax the liability under the GST Acts.
- The aforesaid contention is also required to be rejected. At the outset in the present case the values as mentioned in the agreement are not challenged in the affidavit in reply and therefore such contention is not applicable. We are supported in this regard by the judgement of the Supreme Court in the case of Mangalore Ganesh Beedi Works (supra).
- Even otherwise, the possibility of obtaining indirect consideration cannot be ruled out for any supply transaction. If in a given case it is found that the value of construction service which is declared by the supplier is not the correct value in as much as other consideration has been indirectly received, then Section 15(4) of the CGST Act will apply
- Hence by virtue of Rule 27 to 31, Department has right to value in the methods prescribed therein.
H. ALREADY SIMILAR MECHANISM EXISTED UNDER SERVICE TAX LAW WHICH IS NOT REQUIRED TO BE DEVIATED FROM
- When it was held by the Delhi High Court in the case of Suresh Kumar Bansal (supra) that since the valuation rules in service tax did not provide for deduction for land value, tax was not quantifiable and hence not leviable, the service tax valuation rules were retrospectively amended to provide for deduction of land. Deduction at fixed percentage was made applicable only where the actual value was not ascertainable. When such workable mechanism for deduction of land was already in force under the service tax regime, the same ought to have been continued. Instead, the Government has chosen to fix a standard rate of deduction without any regard to different possible factual scenarios which is completely arbitrary and violating Article 14 of the Constitution of India.
Hence the Hon'ble HC has held that Paragpragh 2 of the Notification No. 11/2017-Central Tax (Rate) dated 28.6.2017 and identical notification under the Gujarat Goods and Services Tax Act, 2017, which provide for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land is ultra-vires the provisions as well as the scheme of the GST Acts. Application of such mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India.
Concluding Author Remarks
No Doubt it is a welcome judgement as these are issues that Real Estate Industry is severely aggrieved with currently. Though it is right now with Gujarat HC, one may see department counter appealing in Supreme Court in near future. In my personal view, the court has delivered a very transparent and clear verdict and further forums will be on similar footings only.