Recent Decision Of The Delhi High Court In The Case of Suresh Kumar Bansal
Vs. Union of India And Others-1 – service tax implications
Circular No. 03/2016-17 private & confidential Date: 11/06/2016
On a WRIT petition of Suresh Kumar Bansal challenging the levy of service tax [S.65(105)(zzzh)] on purchase of residential flat in a multi storey building on the ground that 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. Similarly, the petitioner challenged the levy of service tax on preferential location service [S.65(105)(zzzzu)]. The case belongs to the period prior to 30.6.2012, The petitioner approached the Hon’ble Delhi High Court for the refund of service tax paid to the builder. The Hon’ble Delhi High Court allowed refund with interest @6% p.a. to the petitioners subject to examination of the amount collected by the builder and deposited with the department. While doing so Delhi High Court held that,
• Any levy of tax should satisfy the four conditions:
i) Taxable event attracting the levy
ii) Clear indication of the person on whom the levy is imposed and who is liable to pay tax
iii) Rate of tax at which it is imposed
iv) Measure or value to which the rate is to be applied for the computation of tax liability
• The high court relied heavily on CCE, Kerala vs. Larsen and Toubro2 wherein the Hon’ble Supreme Court held that Cl. (g), (zzd), (zzh), (zzq) & (zzzh) of S. 65(105) of the Act lacked the machinery provisions to exclude the elements of goods from a composite works contract. Thus, levy of service tax on ‘Consulting Engineer Service’, ‘Erection, Commissioning and Installation Service’, ‘Technical Testing Analysis’, ‘Commercial & Industrial Construction Service’ and ‘Construction of Residential Complex Service’ were held to be invalid so far as levy of service tax on composite works contract was concerned.
• 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. 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.
• The challenge to “preferential location service” by insertion of Section 105(zzzzu) is negated by the high court 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.
• The high court did not accept the challenge to insertion of explanation to S.65(105)(zzzh) which sought to levy service tax on under constructed flats and observed that the Parliament was within its power to enact a legal fiction where a set of activities carried out by a builder himself is deemed to be carried out on behalf of the buyer.
• The high court also did not go into the question of validity of the levy from 1.7.2012.
Fall out of the decision:
From Government point of view:
• Looking to the enormous amounts involved and numerous petitions may follow from the home buyers for refund of service tax paid upto 30.6.2012, in all likelihood the Government may prefer appeal against the judgement and it is possible that a stay may also be granted by the Supreme Court.
• The Government may amend the law retrospectively by inserting an explanation to the Valuation Rules. From the point of view of the buyers of residential, commercial or industrial premises: For the period upto 30.6.2012, it is possible to claim refund of service tax paid (to the builders) from the department, however, for such claim of limitation period will have to be examined. No such refund can be claimed by the builder as it would hit by “unjust enrichment”. In case buyer approach the builder, he will have to give details of service tax collected and paid on behalf of home buyer.
For the period after 1.7.2012, the buyer may raise a claim of refund with the department citing the ratio of this judgement and keep the issue alive. However, the judgement may not be directly applicable but the ratio can be applied and tested in the court of law. Even post 1.7.2012, there is no mechanism for exclusion of value of land and goods from the gross amount charged under section 66D(a). (The judgement equally applies to the commercial or industrial construction service)
From the builder’s point of view:
- Since the judgement is for the period prior to 1.7.2012 and has explicitly stated that the period subsequent to this is not considered, the builders in the present scenario are not affected and should continue to collect the tax and pay to the government. However, in case any purchaser object to such collection he may be asked to give in writing citing this judgement alongwith a request to make his payment under protest separate record of such payment under protest will be required alongwith challans details and the department will have to be informed from time to time. Subsequent to this, the buyer will have to take the matter further by raising a refund claim.
- The builder will have to provide details of payment of service tax on behalf of any buyer who wish to apply for refund to the department. So far as the preferential location service is concerned, the same will continue to be governed in present dispensation. This judgement will not impact re-development projects so far as service to the society and members are concerned. It will also not impact in case of works contract service where the land belongs to the principal and not part of value of construction service. The builders should keep a watch on further development on the subject, i.e. Government appeal against this judgement, grant or denial of stay by Supreme Court till final disposal and retrospective amendment, if any, coming through.