Embargo on levy of service tax on flats under composite contracts - Dr Sanjiv Agarwal - Article published in Business Advisor, dated June 25, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/ Tweeted on www.twitter.com/BusinessAdvDM

1. Volume XV Part 6 June 25, 2016 9 Business Advisor
Embargo on levy of service tax on flats
under composite contracts
Dr Sanjiv Agarwal
Currently, construction activities are taxed as declared
services, w.e.f. 1.7.2012 under section 66E(b) of the
Finance Act, 1994. This includes construction
activities which mean construction of a complex,
building, civil structure or a part thereof, including a
complex or building 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.
Prior to 1.7.2012 (i.e., before negative list came into force), such activities
were taxed to service tax under section 65(105) (zzzh) as construction of
complex services, besides taxing preferential location charges under section
65(105) (zzzzu) of the Finance Act, 1994.
In one of the recent judgments of Delhi High Court (Division Bench), the
court while disposing the WP(C) No. 2235/2011 and WP(C)2971/2011 in the
matter of Suresh Kumar Bansal and Anuj Goyal v. Union of India (2016) 6
TMI 192 (Delhi HC) has held that service tax on flats cannot be levied on
composite contracts.
The petitioners had entered into agreements to buy residential flats in a
multi-storeyed project of group housing from builders. 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 construction
of complex and on preferential location charges. The issue involved in these
petitions relate as to 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.
The petitioners‟ contention was that the agreements with builders were for
purchase of immovable property and Parliament did not have legislative
competence to levy service tax thereon. The entries relating to taxation in
List-I and List-II of Seventh Schedule of the Constitution are mutually
exclusive.
The petitioners‟ case was that the agreements entered into by them with the
builder were for purchase of immovable property and the Parliament does

2. Volume XV Part 6 June 25, 2016 10 Business Advisor
not have the legislative competence to levy service tax on such transaction.
The petitioners further claimed that the service tax provisions in the
Finance Act, 1994 and the rules made thereunder do not provide any
machinery for computation of value of services, if any, involved in
construction of a complex and, therefore, no such tax could be imposed.
Petitioners also argued that their agreement with builders was a composite
contract for purchase of immovable property and there being no specific
provision to ascertain service element in said composite contract, service tax
was beyond Union‟s competence. Further, there was no service involved
against preferential location charges as these pertain only to location of
property and had nothing to do with service.
On the other hand, Revenue heavily relied upon the Karnataka High Court
judgment in the case of Confederation of Real Estate Developers Association
v. Union of India (W.P. 24050-51 -2010) and of Bombay High Court in
Maharashtra Chamber of Housing Industry v. Union of India (WP No.
1456/2010), wherein challenge to section 65(105) (zzzh) and zzzzu) was
rejected. It was contended that development of a project results in the
substantial value addition on bare land and includes various services such
as consulting services, engineering services, management services,
architectural services etc. These services are subsumed in the taxable
service as contemplated under section 65(105)(zzzh) of the Act. As the gross
charges include value of land and construction material, only 25% of the
base selling price (BSP) charged by a builder from the ultimate consumer is
subjected to levy of service tax. However, in the case of preferential location
charges, the entire amount charged by a developer is for value addition and,
therefore, the gross amount charged for such services is chargeable to
service tax under section 66 read with section 65(105)(zzzzu) of the Act.
The court has observed that 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. No service tax under section 66
of the Act read with section 65(105)(zzzh) of the Act could be charged in
respect of composite contracts such as the ones entered into by the
petitioners with the builder.
So far as charging service tax on booking or allotting a preferential location
is concerned, which was also one of the questions before the court, it was
held that preferential location charges are charged by the builder based on
the preferences of its customers. They are in one sense a measure of

3. Volume XV Part 6 June 25, 2016 11 Business Advisor
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 provided 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. Therefore, preferential location changes shall be liable to tax.
The court has also held that any service tax deposited shall be refunded to
the petitioners with interest at the rate of 6 per cent from the date of deposit
till the date of refund.
Comments on Delhi High Court judgment
The issues in the Hon‟ble Delhi High Court judgment are two-fold – one,
whether service tax could be levied on a consideration in a transaction of
buying a residential flat at Noida, and two, whether service tax can be levied
on preferential location charges.
Composite contract for purchase of immovable property is a works contract
and valuation of such contracts is covered under Rule 2A of the Service Tax
(Determination of Value) Rules, 2012 which has been mentioned but
perhaps appears to have been overlooked. Moreover, prior to 1.7.2012, there
was a separate set of Rules, i.e., Works Contract (Composition Scheme for
Payment of Service Tax) Rules, 2007, which provided for a composite rate of
2 or 4 per cent of total value where service component was not segregatable
as an option to the assessee.
The valuation rules had been notified under section 67 of the Finance Act,
1994 only (valuation provisions). Thus, to say that machinery provisions did
not exist may not be correct. Even post 1st July, 2012, amended valuation
rules are very much there and apply to such transactions. In the earlier
regime, Notification No. 1/2006-ST used to determine the value and
abatement which was issued under provisions of the Finance Act, 1994
only.
In the instant case, „service‟ is very much there and the incidence of tax is
rendition of service. Consideration comes later which is a measure of tax.
Even if it is assumed that there is no machinery provision for ascertaining
the service element in a composite contract, does it mean that its value can

4. Volume XV Part 6 June 25, 2016 12 Business Advisor
be taken as nil or for that matter inferred that subject transaction is not a
service at all or does not contain service component. Perhaps, no. If service
is established, valuation has to be done which may include zero or nil value
also. Absence of valuation mechanism cannot render a „service‟ as a „non-
service‟.
One needs to appreciate the fact that valuation norms have to be
understood in right earnest and in this case, since land is also involved,
abatement notification clearly provided that value will be just 25% of total
value where land is also part of total value. On what subject tax has to be
levied, how it is levied, and how and in what manner it is collected are to be
decided (and so done) by Parliament.
This is perhaps the first judgment on the issue of consideration which
seems to create ripples and further complicate the already settled law and
practice for last over a decade. This will also create disputes amongst
builders and buyers, adding to the complexities. This judgment may be a
game-changer for realty sector.
Further, the judgment shall apply only to service tax collected under
erstwhile section 65(105)(zzzh) of the Finance Act, 1994 and not to services
w.e.f. 1.7.2012. The question that will arise now is whether no service tax
can be levied w.e.f. 1.7.2012 also as so far as valuation/ abatement is
concerned, it is by and large the same.
The judgment has not touched this aspect, though the petition addressed
this issue also. Again, it is emphasised that levy of tax is on service and
consideration is only to measure the tax.
The judgment is by high court and not Supreme Court and, as such, certain
quarters also doubt the applicability of this judgment beyond the
jurisdiction of Delhi High Court.
It may be noted that service tax is a Central levy imposed by Union of India
throughout the country except the state of Jammu and Kashmir. It is
opined that, in view of settled law, the judgment of one high court should be
followed in other states in the absence of any other conflicting high court
decision. This judgment is binding unless set aside or stayed by a Supreme
Court, i.e. Supreme Court or by a larger bench of the same court.
In all probability, Union of India is likely to file an appeal before Apex Court
and seek stay/ quashing of this judgment which is likely to unsettle the
existing settled proposition.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur.)