Exclusive – decoding the Delhi HC judgement on Service Tax refund on apartments

Update [12/12/2016]: The Union government has challenged the Delhi Gigh Court order in the Supreme Court. The Delhi HC order is not set aside yet and SC will now decide the ultimate fate of this complaint.

A few days ago we broke out the story of Delhi High Court’s order on No Service Tax on under construction apartments from developers. The Hon’ble court also directed the developer to refund the sum collected with an interest of 6%. This exclusive story was shared more than 10500 times, it can be read here: No Service Tax on buying under construction flats rules Delhi High Court. Since then, we have received hundreds of queries related to the order and its applicability. Buyers are curious in the process of refund.

To resolve your queries, we got in touch with Tax experts and got the best possible advice for our readers. Here is an exclusive interview with Mr. Rishab Singla, from the Army Institute of Law, Mohali and is mainly working on VAT and Service Tax issues. Mr. Singla can be contacted at singla.rishab@gmail.com

Exclusive interview with Mr. Rishab Singla, Service Tax expert

Based upon the said judgment, you have raised certain queries. Before answering the queries, first, we have to understand the facts of the said case.

The facts of the judgment in question are that the petition has been filed by a flat buyer who had entered into agreements with builder/developer to buy flats in a housing project in Noida. The challenge in the present case involve, the levy of service tax on the construction services provided by a builder to flat buyers, as defined under Section 65(105)(zzh) of Finance Act, 1994 i.e. composite contracts involving sale of land and services and also explanation introduced to the said section, vide Finance Act, 2010. The petition also includes the challenge to the levy of service tax on preferential charges charged by builders under Section 65(105)(zzzzu) of the Act ibid.

In this background, the queries are addressed as under:

1. Ratio of the Judgment

In technical terms:

(i) The High Court upheld the legislative competence of the Parliament to levy Service tax on the service component of the transaction of construction and sale of immovable property. The High Court also upheld the levy of service tax on preferential charges charged by the builders. According to the High Court, such charges do not relate solely to the location of land. Thus, preferential location charges are charged by the builder based on the preferences of its customers. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit and these 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 facilities provide in the complex etc.

(ii) However, the High Court held that no service tax could be charged on construction contracts involving Sale of land (immovable property)and services i.e. composite contracts as there is no machinery provided under the Act or in the valuation Rules for ascertaining the service element specifically in such contracts. There is no method prescribed under the Act or Rules for determining the value of services involved in the contract. The court also observed though there is circular providing abatement to the extent of 75% but the same cannot substitute the lack of statutory provisions to ascertain the value of services involved in a composite contract. Here it is pertinent to mention that the High Court while passing the judgment has not expressed its opinion on Amendment of Finance Act, 2012 wherein provision (Section 65 (105) ) defining all the services under the Act was deleted and all services (as defined under Section 65B(44) of Finance Act, 2012) were made chargeable to Service Tax except the negative list meaning thereby that the said judgment is applicable to the agreements entered prior to the year 2012. But it will not have any effect on the agreements entered into by buyers with builders after 2012 also as Rule 2A has been introduced w.e.f. 1.7.2012 which provides a mechanism to ascertain the value of services in a composite contract as it does not provide a mechanism for determination of the value of services in the composite contract.

(iii) The High Court also held that though Rule 2A of Service Tax (Determination of Value) Rules, 2006 provides for mechanism to ascertain the value of services in a composite works contract involving services and goods, but the said Rule does not provide for determination of value of services in case of a composite contract which also involves sale of land.

In simple terms: It is applicable to agreements entered before 1.7.2012. Even if you have taken possession of the apartment, you can claim the refund. It is applicable to commercial properties as well.

Options before Tax Authorities to challenge the judgment chances of succeeding before Supreme Court.

As the judgment has the far-reaching effects, the revenue will definitely file an appeal before the Supreme Court. However, the judgment of the High Court is based upon the judgments of the Supreme Court itself and that too the recent judgment of the Supreme court in the case of Commissioner Central Excise and Customs, Kerala vs Larsen & Toubro Limited. Therefore, there is very less probability of same getting reversed. However, the retrospective amendment of provision by the government cannot be ruled out.

Whether the Judgment will be applicable only to the concerned buyers or can all similarly placed seek a refund?

The judgment in question is judgment in rem and is applicable to all similarly situated persons meaning thereby where the composite contracts have been entered into with by the buyers with builders/developers.

What would be the procedure to seek such refund?

The buyers have to seek a refund from the builders and in cases where it is not disputed that the service tax qua those buyers has been deposited with the department, the refund can be claimed directly from the department as held by the High Court.

Note: Logically, we should wait for the exact process/guideline from the government on refund process.

Applicability of judgment

The judgment will be binding on the authorities throughout the country even though the decision has been given by Delhi High Court as the statute in question is a Central Act. The issue in this regard is already settled by the Bombay High Court in the case of Commissioner of Income Tax vs Godavari Devi Saraf. Moreover in a recent judgment of Bombay High Court, it has been held that the binding nature of judgment cannot be questioned by Central government when the Union of India is party to it.

Builders response to this development

According to the builders, the judgment pertains to a particular case, it cannot be construed as universally binding unless the specific direction is issued to them by the Hon’ble High court and or the Central Govt. issues a notification to this effect.

As I have told earlier also that the judgment in question is applicable to all the builders situated throughout the country for the reason that the High Court has interpreted Central Legislation and the benefit has not been restricted to the parties in question. After the decision of the Court, there is no requirement on the part of the Central government to issue notification for making it applicable on other builders also.

Conclusion

The Service tax Department may approach the Hon’ble Supreme Court of India and obtain an order from them, staying the operation of the judgment of High Court of Delhi. The department has a statutory right to challenge the decision of High Court before the Hon’ble Supreme Court but there are very fewer chances of stay being granted by the Apex Court as the judgment in question is based upon the earlier judgments of the Apex Court.

It would be too early for the homebuyers to seek the refund of their already deposited Service Tax. It is advised that homebuyers wait for more clarity from the department on this. However, it makes sense to enquire about the service tax receipts from the developer.


Disclaimer

We have made every attempt to ensure the accuracy and reliability of the information provided herein above. The information provided is to the best of our belief and knowledge. However, we do not provide any warranty or make any representation of any kind, expressed or implied, as to the nature, standard, accuracy or otherwise of the information provided nor to the suitability or otherwise of the information to your particular circumstances.

Special thanks to Saikrishna & Associates for arranging the interview with Mr. Singla

4 thoughts on “Exclusive – decoding the Delhi HC judgement on Service Tax refund on apartments

  • June 23, 2016 at 3:27 pm
    Permalink

    Good analysis but some other questions:

    1) It is clear that this judgement is applicable to the contract made before 1 July 2012 . But Suppose I made a contract with builder on 1 Jan 2011 to purchase a under constructed property worth 50 lakh. I made installment of 60%(30 lakh) payment before 1 July 2012 and another second installment of 40%(20 lakh) after 1 July 2012 .

    Analysis and questions :
    a)It is clear that service tax on first installment (60% 30 lakh) shall be refunded with 6% interest .
    b)Will the service tax on second installment (40% 20 lakh) be refunded ?? As their was mechanism on 1 July 2012 and this judgement had not taken 1 July 2012 notification into consideration
    In my opinion the service tax on the installment paid after 1 July 2012 will not be refunded however contract was made before 1 July 2012 .

    Suggestion and feedback is welcomed

  • June 23, 2016 at 4:32 pm
    Permalink

    Thanks for informative post, but I have a question :

    For all those buyers who have signed FBA with builder 01-07-2012, they will still be paying service tax as Rule 2A of Service Tax (Determination of Value) Rules, 2006 provides for mechanism to ascertain the value of services in a composite works contract involving services and goods came into effect on this date.
    But how will we find out value of services out of total amount buyers are paying to builder as cost of their flat.
    I mean as per my understanding, service tax should not be chargeable on complete amount but only the service part for post 2012 buyers as well.

    Please clarify.

  • June 23, 2016 at 5:49 pm
    Permalink

    Hi, I have a query here.. Suppose I am the Buyer A, and I have paid 80% of the apartment cost to the builder alongwith the Service Tax (say amount x). However I sold this apartment to another buyer B before the completion of the apartment. The second buyer B pays rest 20% of the apartment cost and the Service TAx on it (say amount Y). The question is, “Who will get the Services Tax Refund”?
    1. Buyer A for amount x and buyer B for Amount y?
    OR
    2. Buyer A for the amount x+y?
    OR
    3. Buyer B for the amount x+y?

  • June 24, 2016 at 6:17 am
    Permalink

    Mohit,

    The person who deposited will get back his share.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.