Whether service tax shall be leviable on sale of under construction flats?
Recently, Delhi High Court has passed a judgement confirming that service tax shall not be levied on sale of under construction flat. With respect to same, we have summarised the case as under:
1.1. Suresh Kumar Bansal (Buyer) had entered into a contract with Sethi Builders Pvt Ltd (Builder) to buy under construction flat in a multi-storey group housing project. The builder in addition to the consideration for flat has also charged preferential location charges from the buyer.
1.2. Service tax on the above was recovered from the buyer and the buyer aggrieved by the levy of service tax had filed a petition as he felt the levy of service tax on under construction flat was beyond the scope of constitution.
1.3. The revenue had intent to recover service tax on sale of under construction flat & additional consideration recovered under the name of preferential location charges as defined under Sec 65(105)(zzzh) i.e. “construction of complex” for flat consideration & Sec 65(105)(zzzzu) for “Preferential location charges” respectively
2. What was Challenged by the buyer?
2.1. The buyer has contended that the construction contract entered into by the buyer with the builder is composite in nature,meaning to say that it is composed of 3 components:
- Land on which the complex is constructed
- Goods which are used in construction
iii. Various activity which are undertaken by the builder directly or through other contractors i.e. the service element in the provision of service.
2.2. The Constitution of India has defined the taxation list in List I & List II of the Seventh Schedule which speaks that the items specified in List I are to be dealt by the Central Government & those defined under List II by the State Legislature.
2.3. “Taxes on services” are specified under List I while “Taxes on Land & Building” are specified under List II. This implies that it is beyond the scope of Parliament to levy service tax on immovable property.
2.4. Since his is a case of composite contract for purchase of immovable property, the levy would be beyond the legislative competence of the Parliament due to absence of specific provision for ascertaining the service component of the agreement.
2.5. As held in “LARSEN & TOUBRO LTD. Versus STATE OF KARNATAKA [2014 (34) S.T.R. 481 (S.C.)]”, the State Legislature would have the power to tax the element relating to transfer of property in goods & the power of Parliament to levy tax would be limited to only on the service component after excluding the value of goods as well as the value of land from such contracts.
2.6. Secondly, the builder referred to the case law “COMMISSIONER OF C. EX. & CUS., KERALA Versus LARSEN & TOUBRO LTD. [2015 (39) S.T.R. 913 (S.C.)]”, which states the charging section must itself specify that the service tax is only on the service element of the composite contract and the statutory framework must provide for machinery provisions to ascertain the value of such element for the purpose of service tax. The levy of service tax must fail if the provisions to ascertain the service element were insufficient.
2.7. The buyer contended that since Section 65(105)(zzzh) read with Section 66 of the Act did not restrict the levy of service tax only to the service element of composite contracts, the said provisions could be applied only for imposition of service tax on service contracts simplicitor and their application to composite contracts would render the said provisions unconstitutional.
2.8. Furthermore the buyer contended that, until a sale deed is executed, the ownership of complex remains with the developer/builder. Hence it was contended by the builder that the activities conducted by him were for himself meaning that the services are being provided to himself and not the customer. This implies that service tax is not leviable as there is no existence of service provider & service recipient.
2.9. Lastly, with respect to Preferential location charges, the buyer contended that these charges were only relatable to the location of the immovable property and therefore it was not leviable to service tax
3. Court Order
3.1. The imposition of service tax by virtue of the impugned explanation is not a levy on immovable property as contended on behalf of the Petitioner. The clear object of imposing the levy of service tax in relation to a construction of a complex is essentially to tax 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.
3.2. Imposition of service tax in relation to a transaction between a developer of a complex and a prospective buyer does not impinges on the legislative field reserved for the States under Entry-49 of List-II of the Seventh Schedule to the Constitution of India
3.3. The measure of tax must have a nexus with the object of tax & it would be improper to expand the measure of service tax to include value of goods as it would result in expand the levy beyond its object. The contract between a buyer and a builder/promoter/ developer in development and sale of a complex is a composite one. 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.
3.4. 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.
3.5. In the present case, neither the Act nor the Rules framed therein provide for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax. The abatement to the extent of 75% by a notificationor a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract.
3.6. That no service tax under section 66 of the Act read with Section 65(105)(zzzh) of the Act could be charged in respect of composite contracts such as the ones entered into by the Buyer with the Builder.
3.7. However it confirms that service tax is leviable for preferential location charges (PLC) collected by the builder from the buyer. PLC is an additional value that a customer derives from acquiring a particular unit. Such charges may be attributable to the preferences of a customer in relation to the directions in which a flat is constructed; the floor on which it is located; the views from the unit; accessibility to other facility provide in the complex etc.
4. My Observation
4.1. The Order striking down levy of service tax on under construction flats has been passed by the Hon’ble Delhi High Court and it is expected that Revenue shall challenge the order in the Hon’ble Supreme Court.
4.2. The Hon’ble Delhi High Court has held that no service tax could be charged under section 66 of the Act read with Section 65(105)(zzzh) of the Act on under construction flats since the Statute or Rules do not provide for machinery to ascertain the value of services involved in a such contract. In order to overcome the judgment of Hon’ble Delhi High Court, the Revenue might bring a retrospective amendment providing a mechanism for valuation of construction services which would make the levy valid and nullify the order passed by High Court
4.3. In view of foregoing observations, it is my view that the developer/ builder should continue to charge and the collect service tax from its customer and pay service tax on sale of under construction Flats to avoid any litigation in future.