In the wake of rising cost burden of home buyers, comes a ray of hope in the form of a recent decision of the Delhi High Court in the case of Suresh Kumar Bansal Vs Union of India & Others 2016-VIL-284-DEL-ST. The High Court held that in a scenario where the price of under construction flats includes the cost of land, no service tax shall be payable.
Summary of High Court’s decision
High Court held that the service tax is only payable on the value of services and not on the value of land. The mechanism for ascertaining the value of services (by excluding the value of land) involved in such contracts should have been provided either under the Finance Act, 1994, or the Rules issued under the said Act. In absence of any mechanism within the Act or the Rules to exclude the value of land, no service tax can be imposed on consideration of under construction flats wherein the value of land is included in such consideration. The High Court further held that even though an abatement of 75% is given by a notification, it cannot substitute the lack of statutory machinery provisions in the Act or Rules framed in this regard. Considering the above, petitioner was allowed refund of tax already paid along with an interest of 6% from the date of deposit till the date of refund. The above judgment of the High Court pertains to a period before July 2012.
Applicability of the above judgment under the current law
From July 2012, a radical change was introduced in service tax wherein all services except certain services specified in the Negative List, were subjected to service tax. However, even from July 2012 and till date, the Act and Rules pertaining to service tax do not contain any provision for exclusion of value of land. An abatement is provided vide a Notification and, therefore, the legal situation from July 2012 till date is exactly same as was there in the above judgment. Thus, by drawing analogy from the above judgment, from July 2012 onwards, no service tax was payable on the under construction flats where the consideration for such flats included the value of land.
It is likely that the Central Government will file an appeal before the Supreme Court. If the Supreme Court stays the order of the High Court, the ruling would not have any operation and the matter would be settled only after the decision of Supreme Court.
Possibility of refund of service tax already paid?
Petitioner has been allowed refund by High Court along with interest at 6% p.a. Other home buyers may also apply to the tax authorities for refund of the service tax paid by them on purchase of under construction flats.
Home buyers would not get the refund of service tax from the builders, as the service tax collected by them must have already been deposited with the service tax authorities. Accordingly, approaching the builder for refund for service tax may not work.
Anticipating an appeal by the Central Government to Supreme Court, builders are likely to continue charging service tax from buyers because in case the Supreme Court rules in favour of the revenue then the builders would be required to pay service tax along with interest. In a scenario where such tax has not been collected by them, the same would be a cost to them along with interest.
One possible solution, which might be acceptable to both the builders and home buyers, is opening an escrow account wherein buyers can deposit service tax amount subject to the condition that if the High Court’s decision is overruled by the Supreme Court, the builders can use the amount for payment of service tax. However, the interest liability would always be an issue in this case. If the High Court’s judgment is upheld by the Supreme Court, then the amount will be refunded back to the customer from escrow account.
Till the time the Supreme Court decides the said issue, ambiguity regards levy of service tax on such contracts will exist despite Delhi High Court’s decision. Taking note of the observations of High Court, Central Government may make suitable amendments in the service tax law so as to insert a proper mechanism for ascertaining the value of service portion in such contracts.
Thus, inspite of favourable judgment of the High Court, possibility of relief to be extended to the home buyers looks challenging.
Credits ET Realty