No Service Tax for buying Flats but preferential location charges Taxable; Delhi HC [ Read Judgment]

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 Bench said.

Delhi High Court in Suresh Kumar Bansal vs Union Of India, has held that no service tax under Section 66read with Section 65(105)(zzzh) of the Finance Act could be charged in respect of composite contracts entered into with builders, since neither the Act nor Rules provide for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax.

Division Bench comprising of Justices S. Muralidhar and Vibhu Bakhru set aside the explanation to Section 65(105)(zzzh) to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service. The Bench however rejected the challenge against levying service tax with respect to preferential location charges levied by a builder

LEGISLATIVE COMPETENCE

The High Court has dismissed the challenge against the Legislative Competence holding that "We do not find any merit in the contention that the imposition of service tax in relation to a transaction between a developer of a complex and a prospective buyer impinges on the legislative field reserved for the States under Entry-49 of List-II of the Seventh Schedule to the Constitution of India".

NO MACHINERY TO EXCLUDE ALL COMPONENTS OTHER THAN SERVICE COMPONENTS

The petitioners, who are parties to agreement to buy flats, contended that their agreement with the builder is a composite contract for purchase of immovable property and contend that in absence of specific provisions for ascertaining the service component of the said agreement, the levy would be beyond the legislative competence of the Parliament.

Accepting the said contention, the Court held “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.”

The Court further noted “Whilst Rule 2A of the Rules 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.”

PREFERENTIAL LOCATION CHARGES TAXABLE

Rejecting the challenge against the levy of service tax on taxable services as defined under Section 65(105)(zzzzu) the court said “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.”

Read the Judgment here.