Levy of Service Tax on Under-Construction Flats - Unconstitutional

Reliance in this connection can be placed on the decision of Hon’ble Delhi High Court in case of Suresh Kumar Bansalvs UOI [W.P.(C) 2235/2011] wherein levy of Service Tax on the value of flats sold during construction stage has been held unconstitutional, if such value includes the value of Land.

Facts of the Case:

The petitioner has entered into an agreement with the Builder for buying flats in a housing project located at Noida. The Builder collected Service Tax from the petitioner in addition to the consideration of flats against services in relation to Construction of Flats and Preferential Location charges. The petitioner being aggrieved by the levy of Service Tax on such Services challenged the constitutional validity of levy of Service Tax on such services received by it from the Builder.

Arguments in Defense – By Petitioner

The petitioner argued that their agreement with the builder is a composite contract for purchase of immovable property and contended that in absence of any specific provisions for ascertaining the service component of the said agreement, the said levy would be beyond the legislative competence of the Parliament.

It was further contended that neither the Act nor the Rules made thereunder 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 on provision of such service.

The counsel of the petitioner relied upon the decision of Hon’ble Apex Court in case of Commissioner of Central Excise & Customs, Kerala vs Larsen & Toubro Limited [(2016) 1 SCC 170] wherein it was held that the charging Section must itself specify that the service tax is only on the service element of a composite contract and the statutory framework must provide for machinery provisions to ascertain the value of such element for the purposes of service tax.

It was also contended that for levy of Service Tax, it is necessary that there is a service provider and service receiver and therefore only services rendered after execution of flat’s buyers agreement could be subject to tax as prior to the said date, in absence of the service recipient, the Construction service provided to itself cannot be subjected to Service Tax.

Hon’ble Court Observations

It was observed by Hon’ble Court that the imposition of Service Tax on such service is not a levy on transfer of immovable property as contended on behalf of the petitioner. The intention of the legislature is to levy Service Tax on the aspect of Services involved in construction of a complex, the benefit of which is available to a prospective buyer who enters into an arrangement - whether by way of an agreement of sale or otherwise - for acquiring a unit in a project prior to its completion/development.

Further, Hon’ble Court noted that it is essential to determine the measure of tax used for the levy as it must have nexus with the object of Tax and therefore it cannot be expanded to include elements such as value of goods because that would result in extending the levy of Service Tax beyond its object and would overlap with the fields reserved for State Legislatures.

It was further stated that undisputedly the arrangement between the buyer and the builder is a composite one which involves not only the element of Service involved but also goods and immovable property and therefore the levy of Tax on such activity would fail, if it does not provide for a mechanism to ascertain the value of Service component which is the subject of the levy.

The Hon’ble Court held that -

“In the present case, we find that 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 themachinery provisions provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax.”

Hon’ble Court noted that since Rule 2A of Valuation Rules provides mechanism to ascertain the value of service in case of composite work contract involving services and goods, but it does not cater to the determination of value of services in case of composite contract which also involves value of land. It was further stated by Hon’ble High Court that the abatement provided vide Notification which provides machinery for determination of value of service is insufficient inasmuch as the charging section as well as machinery for its computation must be provided in the statute itself or rules framed thereunder.

The Hon’ble Court struck down the levy of Service Tax on such construction service provided by builders where value of land is included in the consideration on the basis of following lacuna in the provisions of Finance Act, 1994 and rules framed thereunder:

“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 a composite contract.”