Have apartment-buyers got a good deal?

Delhi High Court verdict will benefit those who bought apartments before July 1, 2012

In a judgment that could bring some cheer to home buyers across the country, the Delhi High Court has ruled that service tax cannot be charged on apartments in an under-construction building in a housing project.

However, the court held that tax can still be levied on preferential location charges (PLC) that builders charge from buyers, as it amounts to value addition.

Setting aside the provision Section 65(105)(zzzh) of the Finance Act, 1994— which includes “services” from any person to another person “in relation to construction of complex” within the ambit of service tax—the court said that the Rules framed under the Act did not provide for a mechanism to calculate the component of “service” in a contract between a buyer and the builder.

In the absence of Rules, the court said, there was no way to differentiate between the cost of land, cost of construction, and labour and other costs, from service costs, as the contract between a buyer and the builder was a “composite contract” that included all costs and payments, and involved not only the element of service, but also goods and immovable property.

“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 held in the case Suresh Kumar Bansal & Others versus Union of India.

Parliament has the legislative competence to tax the element of service, but the tax cannot be levied if the law does not provide a formula to calculate the value of the service component of a transaction. Legal experts feel that the decision will have wide ramifications across the country on taxability of all construction contracts which involve sale of goods and land in addition to the provision of services.

The verdict will benefit those who bought their apartments before July 1, 2012, as the Delhi High Court has looked into the subsequent amendment to the Finance Act in 2012. Today, buyers have to pay 15% service tax on an under-construction property. The rationale is that since the builder is providing the service of construction, the buyer has to pay tax on that service.

“This judgment will affect all home buyers who had purchased apartments in 2010-12 and paid taxes at a flat 25% rate. People who had bought apartments before July 1, 2012, can go and file a refund claim with the service tax authority. Service tax being a central legislation, the builder collects it from buyers and passes it to the central government,” advocate Puneet Agrawal, who represented the apartment buyers, said.

Agrawal added that buyers can approach the builder and ask for service tax receipts against the payments— which attracted service tax—made so far. After getting the information, buyers can then approach the department for refund, he said.

Although Rule 2A of Valuation Rules (introduced with effect from July 1, 2012) provides for a mechanism to ascertain the value of services in a composite works contract involving services and goods, the said Rule does not provide for the determination of the value of services in case of a composite contract that also involves transfer and sale of land.

While this is an important judgment and will provide relief to buyers throughout the country, they have a right to claim refund as the provision has been held to be bad for the lack of proper machinery provisions. “A buyer can file for a refund if he had borne the incidence of duty … In fact, the builders cannot claim refund as they have passed on the burden to the buyers and their claims will be hit by unjust enrichment,” said Tarun Gulati, taxation lawyer and partner, PDS Legal.

According to Supreme Court lawyer MR Shamshad, “For thousands of identically placed purchasers, central government should carry the exercise for refund as the taxing provision has been held to be inapplicable in such cases.”

But some experts feel the valuation mechanism of taxing 25% of gross charges had been there for some time and thejudgmentwillcreateahugelitigation.

Given the nature of the issue and the impact on the industry, Gulati feels the ruling is a good case for appealing before the Supreme Court. It would be interesting to have the last word from the apex court to settle the service tax controversy in case of such composite contracts. indu.bhan@expressindia.com