Section 65(105)(zzzh) provides for a levy of service tax on services in relation to ‘construction of complex’ and an explanation was added by Finance Act, 2010.

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Real Infra
An e-newsletter from
K. VAITHEESWARAN & CO.
Advocates & Tax Consultants
Chennai, India.

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SERVICE TAX – RECENT DECISION OF THE DELHI HIGH COURT IN THE CASE
OF SURESH KUMAR BANSAL VS. UNION OF INDIA AND OTHERS
Background
Section 65(105)(zzzh) provides for a levy of service tax on services in relation to
‘construction of complex’ and an explanation was added by Finance Act, 2010. In
this case, the petitioner is an individual who had agreed to buy flats in a multi-
storey project being developed by the Builder and the Builder had recovered
service tax from the individual in addition to the consideration. The individual
petitioner challenged the levy of service tax as well as the levy of service tax under
preferential location services on the ground that their agreement with the Builder is
a composite contract for purchase of immoveable property and in the absence of
specific provisions for ascertaining the service component, the levy is beyond the
legislative competence of the Parliament.
Department’s view
The Department contended that the amendment introduced by Finance Act, 2010
has been upheld by the Karnataka High Court in the case of CREDAI and the
Bombay High Court in the case of Maharashtra Chamber of Housing Industry
and since the contract includes value of land and material, only 25% is taxable
through Notification.
Delhi High Court’s view
The Court has expressed itself in Para 23 that although composite contracts for
development of contracts and sale of units would fall within the scope of works
contract as held by the Supreme Court in Larsen & Toubro, we do not propose to
examine whether services involved in the construction of complexes is exigible to
service tax as services in relation to execution of a works contract falling within
the scope of Section 65(105)(zzzza) or under Section 65B(44) after the amendments
brought about in the Act by Finance Act, 2012 since the said controversy is outside
the scope of the present petitions and it would not be appropriate for us to examine
it in these petitions.

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The Delhi High Court has however set aside the explanation introduced by Finance
Act, 2010 in the context of construction of complex and has held as under:
(i) While the legislative competence of the Parliament to tax the element of
service involved cannot be disputed, the levy itself would fail if it does not
provide for a mechanism to ascertain the value of service component which
is the subject of the levy.
(ii) Clearly, service tax cannot be levied on the value of undivided share of land
acquired by a buyer of a dwelling unit or on the value of goods which are
incorporated in the project by a developer. Levying a tax on the constituent
goods or the land would clearly intrude into the legislative field reserved for
the States.
(iii) There is no machinery provision for ascertaining the service element
involved in the composite contract. In order to sustain the levy of service tax
on services, it is essential that the machinery provisions provide for a
mechanism for ascertaining the measure of tax that is the value of services
which are charged to service tax.
(iv) While Rule 2A of the Valuation Rules provides for a mechanism to ascertain
the value of services in a composite works contract involving services and
goods, the said Rule does not cater to determination of value of services in
case of a composite contract which also involves sale of land. The gross
consideration charged by a builder - promoter of a project from a buyer
would not only include an element of goods and services but also the value
of undivided share of land which would be acquired by the buyer.
(v) 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 the composite contract.
(vi) Service Tax under Section 66 read with Section 65(105)(zzzh) cannot be
charged in respect of composite contracts such as the ones entered into by
the petitioners with the builders. The impugned explanation to the extent it
seeks to include composite contracts for the purchase of units in a complex,
within the scope of taxable service is set aside.

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(vii) The challenge to insertion of Section 105(zzzzu) is negated since service tax
is a tax on value addition and charges for preferential location in one sense
embody the value of satisfaction derived by a customer from certain
additional attributes of the property and such charges cannot be traced
directly to the value of goods or value of land.
Impact
(i) The decision is based on Section 65(105)(zzzh) dealing with ‘construction of
complex’ and wherever there is a transaction which involves sale of
apartment or unit by a Developer along with the undivided share of land, this
decision can be used to canvas non-applicability of service tax. However,
being a High Court decision, the Department will go on appeal to the
Supreme Court and the matter will have to be decided by the Supreme
Court. In fact, the Karnataka High Court on a similar challenge had held
that the subject of a tax is different from the measure of tax and that it is a
well settled position in law that the measure of tax cannot affect the nature
of tax.
(ii) Even though the decision is for the period prior to 01.07.2012, the deeming
fiction introduced on 01.07.2010 continues in the context of ‘construction of
complex’ referred to in Section 66E(b) and hence this decision should apply
even post 01.07.2012. Even in the new dispensation there is no mechanism
for exclusion of value of land and for identification of the service
component.
(iii) Where service tax is being discharged under works contract services in
respect of construction agreements, the Builder does not pay any service tax
on the sale of undivided share of land and this decision has no impact.
(iv) Even in jurisdictions where Builders have operated under ‘construction of
complex’, including the land portion and availing the abatement, in case,
where service tax has already been collected from the customer and paid to
the service tax Department, it may not be possible to obtain refund since the
principles of unjust enrichment would apply. In the Delhi High Court
matter, the Court has directed the department to verify whether the Builder
has collected the amount from the petitioner and deposited with the
Department and if so the Department should refund the tax with interest at
the rate of 6%.

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(v) Where service tax is not paid based on this decision in respect of
transactions which involve sale of unit along with undivided share of land,
the cost will increase since it may not be possible to avail cenvat credit on
various input services used for providing output services.
***
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