The Division Bench of the Delhi High Court in the judgment dated 3 June 2016 in Suresh Kumar Bansal vs the Union of India held that in absence of statutory machinery provisions, no service tax could be charged in respect to sale of flats/homes/apartments under agreements entered into with builders or developers for purchase of apartments or flats under group housing schemes, projects etc. However, the bench of Justices S. Muralidhar and Vibhu Bakhru categorically stated that service tax will still be applicable on preferential location charges (PLC) levied by a builder.

Facts of the Case:

The petitioners purchased apartments in a project from a builder. The builder recovered service tax from the petitioners towards services provided in relation to the construction of complex and also on account of preferential location of these units/apartments.

The buyers aggrieved by the levy of service tax on such services, particularly in respect of construction of complex as defined under Section 65 (105)(zzzh) of the Finance Act, 1994 (Act), challenged the levy of service tax on the ground that their flat buyer agreement with the builder is a composite indivisible contract for the purchase of immovable property and there was no mechanism in the legislation to arrive at the service component in this agreement. Further, it was contended that the levy of service tax on such agreements was beyond the legislative competence of the Parliament as it falls under the scope of state list.

Major Questions in the Matter:

The question before the Court was whether consideration paid by flat buyers to a builder/promoter/developer for acquiring a flat being constructed in a complex, which was under construction or development at the time of agreement between the builder and buyer, could attract service tax under Section 65(105)(zzzh) of the Act.

Section 65(105)(zzzh) of the Act provides for levy of service tax on construction of complex including construction of a new residential complex or a part thereof at a taxable value of 25% of the gross value (vide Notification No. 29/2010-ST dated 22 June 2010).

Court’s Ruling

The Court upheld the power of the Parliament to levy tax on the construction of complex intended for sale by a builder or any person before, during or after construction by creating a legal fiction. However, the Court found that neither the Act nor the rules framed therein provide any specific method to calculate the components attracting service tax. The Court held that levy of service tax at 25% of the gross value by issuing a notification cannot substitute the requisite statutory machinery provisions to determine the measure of tax. In absence of requisite statutory machinery provisions to determine the measure of tax on composite contracts, the Court quashed levy of service tax on construction of complex service under Section 65(105)(zzzh) of the Act.

The Court directed the developer to refund the service tax already collected, if any, to the petitioners with interest at the rate of 6%.

Current Statute on levy of service tax on flats/homes/apartments in an under-construction residential complex:

Construction of complex intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority, is a declared service taxable under the Act at 30% of the gross value of the flat (vide Notification No. 8/2016-Service Tax dated 1 March 2016).

Machinery for measure of tax is absent in the Act or rules framed thereunder but have been prescribed under a notification, and therefore, by applying the ratio of the judgment, levy of service tax on such flats homes/apartments in under-construction residential complex is not valid.

Comment

Since the Act is a central legislation, the implications of the judgment will be far reaching and may have a cascading effect on the taxation of immovable properties in construction projects located in other states as well. Given the impact of the judgment, government may challenge it in the Supreme Court or amend the Act or Service Tax Valuation Rules. Builders and developer having passed the burden of service tax to the home buyer, cannot seek refund of service tax paid to the government. However, home buyer who have suffered tax burden can seek refund from the government.