The Delhi High Court had ordered the refund of Service Tax collected from the buyers of under construction apartments. The order was applicable to those apartments where the parties had entered into the contract before July 2012. Following up on the development, the NCDRC directed various developers to seek the refund of the Service Tax collected from buyers and refund the same to respective buyers. The Government of India decided to contest Delhi HC’s order in the Supreme Court and same is pending before the registrar for admission.
While all this was happening, the Union Government proposed amendments to Service Tax (Determination of Value) Rules, 2006. This retrospective amendment allows the governments to charge Service Tax from under construction apartments booked before July 2012. Effectively, these amendments overturn the Delhi High Court’s order directing refund of Service Tax collected. It’s worth highlighting that the HC order had no impact on the collection of Service Tax on apartments booked after July 2012 and ST on new booking will also continue.
The High Court had 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. It observed 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.
You can read details of the judgment here: Exclusive, decoding the Delhi HC judgment on Service Tax refund on apartments
Retrospective amendment in Service Tax (Determination of Value) Rules, 2006 read with clause 128 of the Finance Bill, 2017 (Budget 2017-2018)
Under Rule 2A:
Rule 2A of Service Tax (Determination of Value) Rules, 2006, has been amended with effect from 01.07.2010 so as to make it clear that value of service portion in execution of works contract involving transfer of goods and land or undivided share of land, as the case may be, shall not include value of property in such land or undivided share of land.
Notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority, any action taken or anything done or purported to have been taken or done at any time during the period specified relating to the provisions as amended shall be deemed to be and deemed always to have been, for all purposes, as validly and effectively taken or done as if the amendment made had been in force at all material times.
the Central Government shall have and shall be deemed to have the power to make rules with retrospective effect as if the Central Government had the power to make rules under section 94 of the Finance Act, 1994, retrospectively, at all material times.
The government has proposed the amendment in finance bill 2017 to amend rule 2A retrospectively. The act yet to be notified.
The Government will be able to overturn the judgment of Delhi High Court directing the refund of Service Tax collected. No refunds shall be made to the buyers of apartments booked before July 2012. The Service Tax on all under construction properties will continue as it is.
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