No service tax on services by builders- as no machinery provision in the Finance Act 1994 to segregate the value of land
Prior to Finance Act 2010, there was a confusion regarding the taxability of the services provided by builders/developers to prospective buyers. The issue was almost settled with the coming into force of the circular no. 96/7/2007, dated 23/8/2007 wherein CBEC clarified that builders/developers who construct buildings/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers
Finance Act, 2010 inserted an explanation to bring the concept of deemed service under the purview of service tax. In addition, Finance Act, 2010 has introduced new service to tax PLC and other charges charged from prospective buyers.
Post the introduction of Negative List, “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”, is introduced as Declared service.
Recently, on 3rd June, 2016 W.P.(C) NOS. 2235 & 2971 OF 2011 was decided by The Hon’ble Delhi High Court in the case of Suresh Kumar Bansal v. Union of India (2016) 70 taxmann.com 55 (Delhi), wherein it was held that no service tax under section 66 read with Section 65(105)(zzzh) of the Act (Construction of Complex Services) and Explanation to section 65(105)(zzzh) could be charged in respect of composite contracts. Further, the impugned explanation to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service is set aside.
In the said case, assessee purchased flat in a residential complex for charges inclusive of value of land. Assessee challenged levy of service tax on ground that composite contract (inclusive of value of land) cannot be charged to service tax in absence of any machinery provision for determination of value of service portion. Further, it was contended that preferential location charges do not amount to service and cannot be charged to service tax.
In view of the contention of the assesse, the Hon’ble Delhi High Court held that:
Rule 2A of Valuation Rules, which determines valuation of works contract does not apply when price is inclusive of value of land. Further, 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, 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.
No machinery provision is present so far in the Finance Act 1994, to segregate value of land, and mere abatement or circular not sufficient. 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.
So far as Preferential charges are concerned, the same amounts to service. To review the service tax liability on PLC, the High Court analysed the newly inserted service i.e. Preferential Location Services Section 65(105)(zzzzu) which speaks about the element of service involved in the preferential location charges levied by a builder. Such charges do not 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 include prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastu- having the bed room in a particular direction; Number- lucky numbers)
Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, any charges claimed for sale of flat or preferential location of flat will be taxable under service tax. 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.