service tax Litigation & Safeguard in IndiaDelhi HC – No levy of Service Tax on Flats Prior to July 2012

June 9, 20160
Delhi HC – No levy of Service Tax  on Flats Prior to July 2012
No levy of Service Tax  on Flats Prior to July 2012
No levy of Service Tax on Flats Prior to July 2012
Delhi HC has delivered  a judgment ,which could effect home buyers across the country,  that service tax cannot be charged on property units in a complex, which include builder flats, group housing flats and builder floors. The judgment applies to flats purchased before July 1, 2012.
It was delivered on  03.06.2016 in Writ Petition No. (C) 2235/2011 in SURESH KUMAR BANSAL Versus Union of India and Ors 
Whether the Parliament has competence to levy service tax on consideration paid to a builder/promoter/developer for acquiring a flat in a complex.
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 following were challenged in writ :
i) the levy of service tax on services ‘in relation to construction of complex’ as defined under Section 65 (105)(zzzh) of the Finance Act, 1994 (hereafter ‘the Act’) and inter alia impugn the explanation to Section 65(105)(zzzh) of the Act (hereafter ̳the impugned explanation‘) introduced by virtue of Finance Act 2010 as being ultra vires of the Constitution of India.
ii) the levy of service tax , under Section 65(105)(zzzzu) of the Act , on  preferential location charges charged by a builder to service tax. The Petitioners state 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.
The entire submissions were around two aspects as below :
i) With effect from 1st July, 2012 the Act has been amended and service tax was imposed on all services other than those specified in the negative list. He submitted that services covered under Section 65(105)(zzzh) and 65(105)(zzzzu) are now sought to be taxed by virtue of Section 66E(b) read with Section 65B(22) and Section 65B(44) of the Act.
ii) The provisions of Section 65(105)(zzzh) and 65(105)(zzzzu) of the Act would also be equally valid for the taxing provisions ntroduced with effect from 1st July, 2012.
Reliance & Observation
The court relied upon the decision of Supreme Court which upheld the decision of High Court of Orissa in Commissioner Central Excise and Customs, Kerala and Ors. v. Larsen & Toubro Ltd. and Ors.: (2016) 1 SCC 170 which held that 
Circulars or other instructions could not provide the machinery provisions for levy of tax. The charging provisions as well as the machinery for its computation must be provided in the Statute or the Rules framed under the Statute.
Whereas,the Orissa High Court in  Larsen and Toubro Limited v. State of Orissa and Ors: (2008) 12 VST 31 (Orissa)  had held as under :

This Court is of the opinion that if the Act is unworkable in the absence of necessary Rules, as has been held by several judgments referred to above, any assessment under the said Act cannot be enforced even if such an assessment order is made by an authority under the Act purportedly in accordance with the provisions of the Act. The inherent infirmity of an assessment order passed on the basis of circulars which have no statutory sanction cannot be cured by an appellate order. In other words, if the assessment order itself is not sustainable on account of unworkability of the provisions under which they are purportedly made, no purpose would be served by filing appeal against the said order and this question cannot be decided by the appellate authority under the Act. In the instant case, both the assessing officer and the appellate authority are bound to follow the instructions contained in the circulars. Therefore, no purpose would be served by filing appeal before the appellate authority.


In order to constitute valid basis for taxation, the rate of deduction, specially a flat rate of deduction cannot be applied to calculate the taxable turnover in works contract. So those circulars cannot hold the field. As stated in the judgments referred to above, in the absence of any statutory basis for calculation of taxable turnover, the Act remains unworkable.Such gap in the statute cannot be filled up by the circulars which are purely ad hoc and administrative in nature and specially so when it relates to taxing law.


It is a well-settled principle that in matters of taxation either the statute or the Rules framed under the statute must cover the entire field. Taxation by way of administrative instructions which are not backed by any authority of law is unreasonable and is contrary to article 265 of the Constitution of India.


Therefore, the impugned circulars are set aside as also the impugned orders of assessment. The assessee’s liability to pay tax remains but in order to assess that the State has to act in accordance with the statutory prescription by framing Rules under its rule-making power under Section 29 of the Act and the assessing authority can pass fresh orders of assessment on the basis of such statutory Rules.‖


Relying upon the aforesaid decision , the High Court of Delhi finally held the following : 

53. As noticed earlier,in the present case, 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.


54.Insofar as the challenge to the levy of service tax on taxable services as defined under Section 65(105)(zzzzu) is concerned, 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.

If the builder has collected , prior to July 2012 , any amount as service tax from the buyers for taxable service as defined in Section 65(105)(zzzh) of the Act and has deposited the same with the government authorities.
Any such amount deposited shall be refunded to the buyers with interest at the rate of 6% from the date of deposit till the date of refund .
No levy of Service Tax  on Flats Prior to July 2012

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