No Service Tax on buying under construction flats, rules Delhi High Court

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.

Court’s Observations

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.

The Order

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.

Order Copy: SURESH KUMAR BANSAL and ANUJ GOYAL vs UNION OF INDIA & ORS W.P.(C) 2235-2011 and 2971/2011


Conclusion 

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!

38 thoughts on “No Service Tax on buying under construction flats, rules Delhi High Court

  • June 8, 2016 at 2:27 pm
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    Thanks to our court n fighters who fights for the people.

  • June 8, 2016 at 2:36 pm
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    Hi
    Greetings

    Thanks for the share

    Is this possible that buyers can produce this order to builders and claim refund of service tax charged (other than on PLC) with interest @ 18%??

    Cheers

  • June 8, 2016 at 2:39 pm
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    It is too early to do that. Judgement is just out and it is yet to be seen if Union govt challenges this in SC.

    Builder is not at fault, govt had asked them to deposit ST. First, the service tax dept has to refund it to builder and then only it may be passed onto the buyers.

  • June 8, 2016 at 2:43 pm
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    Hi
    Greetings

    In that case, can a stay be requested from the court on all future payments towards service tax??

    Cheers

  • June 8, 2016 at 3:45 pm
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    is this applicable on only delhi’s project or all state’s ongoing building project ??? . plz reply

  • June 8, 2016 at 3:55 pm
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    Is this applicable only to Delhi or all over India ?

  • June 8, 2016 at 4:17 pm
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    Is it beneficial for those buyers also who took the possessions and completed their registry also.

  • June 8, 2016 at 5:48 pm
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    More clarity is needed, in our view it would be.

  • June 8, 2016 at 5:48 pm
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    Sourav,

    This order is against Govt of India, it should be applicable to all.

  • June 8, 2016 at 5:49 pm
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    Too early to say, we are taking view of Tax experts on it.

  • June 8, 2016 at 7:31 pm
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    Its amazing that the service tax which is already paid by buyers will be refunded as per ordered passes by high court, but it is very hard to accept this can happen in India.

  • June 8, 2016 at 7:38 pm
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    Yes, let’s see how things unfold.

  • June 8, 2016 at 9:16 pm
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    Service tax so levied can be refunded back directly to customers bank account through cpc

  • June 9, 2016 at 9:49 am
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    Need to know is it for all states or only Delhi

  • June 9, 2016 at 10:45 am
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    buyer community is same her in 2011 or 2012 this order can be imposed on all buyers and most important land cost should not be included because under construction procces starts after the CC

  • June 9, 2016 at 11:05 am
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    It is against the Central Govt, so it will be for all states.

  • June 9, 2016 at 12:01 pm
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    who is serving home buyers? so many delayed projects,so many issues under litigation including quality issue. Flat buyers at receiving end.

  • June 9, 2016 at 1:15 pm
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    I have Pay the Service Tax for Builder 2015 it is possible its refund or not……………

  • June 9, 2016 at 1:21 pm
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    Wait for clarity in coming days.

  • June 9, 2016 at 3:27 pm
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    i have purchased a property from builder in 2012 and pay service tax and sold in 2015 so i can claimed refund of service tax….

  • June 9, 2016 at 3:36 pm
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    You will have to wait for some time to get clarity on it.

  • June 11, 2016 at 1:58 pm
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    i recently bought a flat in march 2016 and from then i have been paying my service tax on the value of my property. my query is will i need to pay the remaining of the service tax or will i stop from paying it any further until future notice….?

  • June 13, 2016 at 6:29 am
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    Bidyut,

    Although more clarity is needed on this issue and how the govt reacts, you should give this judgement copy to builder and tell him not to charge. It is less likely tha tis will listen as if he doesn’t charge and later SC chnage the judgement, govt may put penalty on builder for not depositing ST.

  • June 13, 2016 at 3:41 pm
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    I purchased flat on 16th July 2012 and agreement signed in Aug’12. Is this judgement is applicable to my case also?
    In contract service tax part is written as separate portion.

  • June 13, 2016 at 5:13 pm
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    Dear Friend,

    We have to wait for some more time to get clarity on this. However, with the information we have gathered so far, this may not be applicable to you. It’s advised to wait for some time.

  • June 15, 2016 at 12:04 pm
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    Yes, indirectly and not directly. Indirectly because it’s against the Service Tax dept and central govt, thus applicable to all.

  • June 16, 2016 at 6:18 pm
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    I’m planning to buy a flat in Pune. When I showed this to builder, he said its not true. And he is not ready to minus Service Tax on that flat. What should I do?

  • June 16, 2016 at 6:26 pm
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    Om,

    At the moment this is just an order from Court and govt may challenge it in SC. Until govt issues a notification, builder will not agree to any such demand. This money goes to govt and builder don’t want to be on wrong side by not charging it.

  • June 18, 2016 at 2:31 pm
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    These days most of the builders does not give any lien on the flat/ property sold and show the project to be their own property and being the absolute owner of the project till the Occupation Certificate is received from the concerned authority , more over the developer has already received almost all money from the buyer and on the other hand they mortgage / pledge the property and take loans from banks , financial instituitions or from private players.

    Then how come the flat is qualified for sale as under construction property ( in the absence of any lien )and the service tax is charged from the buyer.

    How to make sure that what & when the builder has charged to the buyer has been deposited in the GOI a/c in the name of service tax.
    It should be made mandatory for the builder by the service Tax authorities to issue a certificate ( like in the case of Income Tax ) to the buyer of a property to make sure that whatever has been charged has been deposited which can be verified by the original buyer of property using his PAN no. in this case.

  • June 25, 2016 at 2:19 pm
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    levy of s.t. was ab initio wrong because the flat remains builder’s property until fully paid for by the buyer, who has signed only the Agreement to buy, so where is the question of service provided to the buyer.The builder is just completing his own designed product before sell to prospective buyers, as finished goods. Preferential location charges are also not the value adding service charges because builder has neither incurred any extra cost on construction of the preferred building, or floors, or the side(view) of a chosen flat,nor he would make any changes at the instance of the buyers. The buyer is paying extra premium as demanded by the builder over and above the normal price, not for constructing as per his specially specified locational requirements, but for being able to get as per his preference , which is just one of the several flats being offered to him in a building/complex of buildings that has been already planned, decided,finalized,and implemented by the builder of his own, without the buyer being in to picture at all. Where is the SERVICE of buyer satisfying value adding attributes of the property already developed by the builder. So, the court’s contention on this also is misplaced.

  • July 21, 2016 at 8:32 pm
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    I am60 years old, purchased a flat in2014 and also pay service tax. I’m filling very glad if u say what this procedure of refund, and who refund this(developer, or government)

  • July 21, 2016 at 9:24 pm
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    Dear Sir,

    So far, money has nit been refunded. We need for the government to give more clarity on this.

  • August 1, 2016 at 5:12 pm
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    I am60 years old, purchased a flat in2008 and also pay service tax. I’m filling very glad if u say what this procedure of refund, and who refund this(developer, or government)

  • August 2, 2016 at 2:56 pm
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    There is no direction from the Govt on refund of ST.

  • September 24, 2016 at 2:28 pm
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    Today on 24th September,after clear gap of 90 days from Delhi High Court judgement,kindly give your guidance urgently to me as to whether should I pay service tax for taking possession of Flat under construction from Housing Project of Eldeco Builder which I booked and paid lumpsum in Nov.2011 in Lucknow .
    An early guidance is urgently solicited to avoid further huge service tax payment.Thanks and regards.

  • October 1, 2016 at 8:54 am
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    Given the current scenario, you can’t escape ST for now and you will be liable to pay it under current law unless govt clarifies.

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