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.
The Delhi High Court recently held that no Service Tax could be charged in respect to the contracts entered into with the builders or developers for the purchase of apartments/flats. In the case of Suresh Kumar Bansal vs the Union Of India, the bench of Justices S. Muralidhar and Vibhu Bakhru observed that the Section 65(105)(zzzh) is applicable for the purchase of units in a complex within the scope of taxable service. However, the service tax will still be applicable on preferential location charges (PLC) levied by a builder.
The Court ordered if the developer has already collected the Service Tax on such services, same should be refunded with interest at the rate of 6%.
However, the Service Tax on PLC (Preferred location charges) is still applicable.
Follow up article [20/06]: We have answered all your queries here: Exclusive – decoding the Delhi HC judgement on Service Tax refund on apartments
“update [09/06]: Who all will be benefitted? It is too early to say who all will be benefitted by this judgement. Tax experts have divided opinion about this. However, it is yet to ascertain if the Government will challenge the judgement in SC or bring any amendments in the existing Law to escape the returns. We will follow up on the story and keep you posted. Do follow us on Facebook to stay updated”
Service Tax on sale of Apartments
Till date, Service tax is levied by the Central Government on the construction services offered by the developers to buyers. Presently, Service tax is 15.0%. Service tax is applicable on almost all services that a consumer avails, including buying an under-construction property. This is so because, in the case of an under-construction property, the developer is deemed to be the provider of construction services to the homebuyer, and hence service tax is charged on the cost of construction. It is not charged on the entire value of the property but only to the extent of the cost of construction. This means that cost of land is excluded. For the purpose of calculation, 25% of the gross value of an under-construction unit with the value less than Rs.1 crore is considered to be the cost of construction, and service tax is applied on this.
Suresh Kumar Bansal vs the Union Of India in Delhi High Court
The buyers purchased apartments in Sethi Group – Max Royal, Sector 76, Noida from M/s Sethi Buildwell Pvt. Ltd. The builder has in addition to the consideration for the flats also recovered service tax from the Petitioners, which is payable by him for services in relation to the construction of complex and on preferential location charges.
The buyers are aggrieved by the levy of service tax on services ‘in relation to the construction of complex’ as defined under Section 65 (105)(zzzh) of the Finance Act, 1994 (hereafter ‘the Act’). Buyers state that their agreement with the builder is a composite contract for the purchase of immovable property and contend that in the absence of specific provisions for ascertaining the service component of the said agreement, the levy would be beyond the legislative competence of the Parliament.
The controversy of Service Tax
The controversy involved in these petition relates to the question whether the consideration paid by flat buyers to a builder/promoter/developer for acquiring a flat in a complex, which under construction/development, could be subjected to levy of service tax. According to the Petitioners, the agreements entered into by them with the builder are for the purchase of immovable property and the Parliament does not have the legislative competence to levy service tax on such transaction. The Petitioners further claim that the Act and the rules made thereunder do not provide any machinery for computation of the value of services, if any, involved in the construction of a complex and, therefore, no such tax can be imposed.
Based on the various submissions and the orders passed by the Hon’ble Supreme Court, the court made finally observations:
In the present case, 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. 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 a composite contract.
Insofar as the challenge to the levy of service tax on taxable services as defined under Section 65(105)(zzzzu) is concerned, we do not find any merit in the contention that there is no element of service involved in the preferential location charges levied by a builder. We are unable to accept that such charges 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. Such 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. As stated earlier, service tax is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction derived by a customer from certain additional attributes of the property developed. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex.
If the builder has collected any amount as service tax from the buyers for taxable service as defined in Section 65(105)(zzzh) of the Act and has deposited the same with the government authorities. Any such amount deposited shall be refunded to the buyers with interest at the rate of 6% from the date of deposit till the date of refund.
The Logical Buyer and the Buyer’s community welcome the decision of Hon’ble High Court. Homebuyers have always been burdened with various taxes. Instead of safeguarding the interests of homebuyers across the country, the governments have made them an easy source of income by levying various taxes.
The order of Hon’ble Delhi High Court if not challenged in SC by the government would be applicable to all the homebuyers. You don’t necessarily have to go to Court to get the refund if this petition succeeds.
We appreciate the homebuyers who went ahead and challenged this in the Court of Law. Respect!