Delhi High Court strikes down service tax on Sale of flats before Construction in Suresh Kumar Bansal [2016] 70 taxmann.com 55 (Delhi) dtd 03-06-2016

Delhi High Court strikes down service tax on Sale of flats before Construction in Suresh Kumar Bansal [2016] 70 taxmann.com 55 (Delhi) dtd 03-06-2016. Held That

There is no machinery provision for ascertaining the service element involved in the composite contracts for sale of flats under Construction. In order to sustain the levy of service tax on services, it is essential that the machinery provisions provide for a mechanism for ascertaining the  measure of tax, that is, the value of services which are charged to service tax.

For the purposes of ascertaining the value of services, the Central Government has made Service Tax (Determination of Value) Rules 2006 (hereafter 'the Rules'). However none of the rules provides for any machinery for ascertaining the value of services involved in relation to construction of a complex.

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.

Regarding abatement of 75% in N/N 26/2012 Court held that this issue  stands concluded against the Revenue by the judgment in the case of Commissioner of Central Excise v. Larsen and Toubro Limited (supra). In that case, the Supreme Court had affirmed the decision of the Orissa High Court in Larsen and Toubro Limited v. State of Orissa and Ors: (2008) 12 VST 31 (Orissa) wherein the Court 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.

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.

Hence no service tax can be charged on composite contracts for Sale of flat before Construction