In a judgment that could have ramifications for home buyers across the country, the Delhi High Court has held that service tax cannot be charged on property units in a complex, which include builder flats, group housing flats and builder floors. The Delhi High Court bench of Justice S Muralidhar and Justice Vibhu Bakhru in its judgment on June 3 has set aside the provision of Section 65(105)(zzzh) of the Finance Act, 1994, which includes “services” from any person to another person “in relation to construction of complex” within the ambit of service tax. The bench has also directed the service tax department to refund the tax charged from the two petitioners. The judgment applies to flats purchased before July 1, 2012.
The petitioners, who are senior public sector employees, had purchased flats from Sethi Buildwell Pvt. Ltd in the Max Royal group housing project in Sector 76, Noida. The flats had been purchased in 2010, and the petitioners completed payments in 2012. The petitioners, in their plea filed through advocate Puneet Agrawal, challenged the demand of service tax as well as ‘Preferential Location Charges (PLC)’ which were charged by the builder in addition to the cost of the flat.
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The provision, which had been added to the Act in 2010 and was amended in 2012, stated that “construction of complex” includes any construction “which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer.”
The bench, in its judgment, struck down the provision, observing that the Rules framed under the Service Tax Act 1994 did not provide for a mechanism to calculate the component of “service” in a contract between a buyer and builder. In the absence of rules, noted the court, there was no way to distinguish between other components of the cost of the flat, which would include cost of land, construction material and other charges. “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,” held the bench.
Citing Supreme Court judgments, the court held that “the charging provisions as well as the machinery for its computation must be provided in the Statute or the Rules framed under the Statute.” The court also accepted the argument made by advocate Puneet Agrawal that it was not possible to differentiate between the cost of land, cost of construction, labour and other costs, from service costs, as the contract between a buyer and the builder was a “composite contract” that included all costs and payments.
The tax department had argued that a service tax is only charged on 25 per cent of the gross amount charged by a builder. The revenue department also argued that “the value of the immovable property as well as the property in goods incorporated in the works” was excluded from the ambit of service charge. The court, however, found that “machinery provisions” i.e. the proper mechanism for calculations were not provided.
“The measure of tax assumes significance in such contracts as a levy of the service tax taking the gross amount charged by a builder for a composite contract would amount to a levy of service tax not only on the service element but also on the immovable property and the property in goods transferred or intended to be transferred to the ultimate buyer,” noted the court.
Service tax cannot be charged on transfer of property, as it is covered under other laws, including stamp duty charges. The bench has now directed Centre to look into whether the builder had collected service tax from the buyers, and refund the money. The court, however, said tax on the Preferential Location Charges were valid as it was a ‘service’.
“This judgment will affect all home buyers who had purchased flats in 2010-12 and paid taxes on the flat 25 per cent rate,” said Agrawal, adding that buyers can also claim refund if the builder had not calculated specific value of service tax but had charged on the “presumptive rate.”
“The 2012 amendment had introduced a rule saying that builders could calculate service tax on the basis of value of labour and services according to their books of account. unfortunately many builders don’t do that and just add the flat rate.” said Puneet Agrawal.
Tax law practitioner and author Sanjiv Agarwal says that the valuation mechanism of taxing 25 per cent of gross charges had been there “for years,” and the judgment will create a “roller coaster of litigation”.