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Circular on Valuation of re-hab and land owner's flats / units by developer

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Implications of Clarification F.No.354/311/2015-TRU issued by Tax Research Unit, Ministry of Finance, Government of India on 20.01.2016

The recent clarification issued by TRU has raised lot of controversy and confusion in the manner of discharging service tax liability on,
a. Society re-development
b. Land owner granting development right to a developer who will build some portion and give the same to the land owner in consideration of the development right.

As the consideration of above services are not stated in monetory terms, as stated in S.67(1) of FA 1994, the developers were discharging the service tax liability on value of development right as arrived for the purpose of stamp duty valuation on above services under works. Some developers were discharging the liability on cost of construction basis as provided in Rule 3 (b) of Service Tax Determination of Value Rules, 2012. To arrive at cost of construction they were relying on ready reckoner value of construction.

The above clarification re-iterates certain contents of earlier Circular No.151/2/2012-ST dtd. 10.02.2012, advocating that rehab flats or the flats allotted to landlord should be valued at the rates at which similar flats/units are sold by the developer/builder to outsiders. The crux/essence of the said circular is as under:

• Value of land/development rights in the land may not be ascertainable ordinarily.

• Hence, value of flats given to the land owner, is determinable in terms of section 67(1)(iii) of the Act read with rule 3(a) of Valuation Rules.

• Accordingly value of rehab flats/units (or to the landowners) would be equal to the value of similar flats/ units sold by the builder/developer to normal buyers (other than land owners).

• If the price of the flats/units undergoes a change over the period of sale, the value to be considered will be similar flats/units which are sold nearer to the date on which land is being made available for construction.

• The builder/developer would be liable to pay service tax on flats/ units given to the land owner at the time of possession or right in the property in the said flat are transferred to the land owner by entering into conveyance deed or similar instrument (Allotment letter).

Now, the TRU later states that on representation of builders/developers to clarify the issue of valuation a High Level Committee (HLC) was formed and from the representatives of the industry (?) the decision is taken to deviate from the view expressed in the education guide. It is important to know what view was expressed in the education guide dtd. 20.6.2012, explaining the provisions of Negative list based taxation from 1.7.2012.

“6.2.1 What would be the liability to pay service tax on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights and to other buyers. If payable, how would the services be valued?

Here two important transactions are identifiable: (a) sale of land by the landowner which is not a taxable service; and (b) construction service provided by the builder/developer. The builder/developer receives consideration for the construction service provided by him, from two categories of service receivers: (a) from landowner: in the form of land/development rights; and (b) from other buyers: normally in cash.

Construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/ developers even for the flats given to the land owner.

6.2.2 What would be the service tax liability in the following model - land is owned by a society, comprising members of the society with each member entitled to his share by way of an apartment. Society/individual flat owners give 'No Objection Certificate' (NOC) or permission to the builder/developer, for re-construction. The builder/ developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following: (i) construct some additional flats for sale to others; (ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of reconstruction; (iii) pay an additional amount to the original owners of flats in the society.

Under this model, the builder/developer receives consideration for the construction service provided by him, from two categories of service receivers. First category is the society/members of the society, who transfer development rights over the land (including the permission for additional number of flats), to the builder/developer. The second category of service receivers consist of buyers of flats other than the society/members. Generally, they pay by cash.

Re-construction undertaken by a building society by directly engaging a builder/developer will be chargeable to service tax as works contract service for all the flats built now.”

The HLC states that Education guide itself says that it is a mere education aid based on a broad understanding of a team of officers on the issues. It is neither a “Departmental circular” nor it is a manual instruction issued by CBEC. To that extent it does not command the required legal backing to be binding on the either side in any manner. The education guide was released purely a measure of facilitation so that all the stakeholders could obtain some preliminary understanding of new issues for smooth transition to new tax regime.

It is said that the HLC has opined that clarification given in circular no.151/2/2012 – ST dated 10.02.2012 is more appropriate and said circular prevails over the Education Guide, 2012.


It appears that since the department has collected data from many builders/developers and is in doldrum as to how to deal with the data for levy of service tax, the TRU has issued above circular purely from the angle of collecting more revenue by picking up bits and pieces which suits them from the earlier circular. The directions to the department coming out from the said TRU letter is as follows:-

• Assessing authorities to follow the Circular No. 151/2/2012 – ST dated 10.02.2012 for valuing the construction services provided by builder/developer to land owner against transfer of land / development rights and levy service tax on the basis of sale of flats from free sale portion and timing of payment of service tax. This is now made applicable for re-hab flats also.

• Assessing officers are clearly instructed not to follow the education guide for valuing flats allotted to land owner against the transfer of land/development rights.

Adverse Consequences of above referred clarification:

1. Value of FSI/development rights would be much less than the value of the free sale area flats as the value of the land is also embodied in it.
2. The society/landlord deriving right to get the constructed flats from DA which can never be equated with sale to a new buyer. The concept of adoption of value of similar flat (market rates) fails on these grounds amongst others.
3. The tax incidence on the developer would be very high as being output service provider to the landlord/society and also to the new purchasers, no cenvat can be allowed interse.

Cases of most of the builders and developers are under audit or scrutiny by the service tax department. The Departmental officers are bound by CBEC’s circulars and clarifications. This would result into following:

• Anti Evasion wing, audit wing or director general of central excise
intelligence (DGCEI) will initiate rowing inquiries and investigations for most of the builders and developers.
• Such inquiry and investigation would be for last 5 years.
• Service tax authorities would demand service tax for last 5 years on
enhanced value of services. Even the concluded audit cases and/ or pending adjudications would be vulnerable.
• Service tax authorities would levy interest ranging from 18% p.a to 30% p.a.
• Department may initiate the penalty proceedings also.
• This all may result into great chaos and harassment for entire industry.

Whether clarification lays down correct legal position?

This clarification is patently wrong as it tries to levy service tax on the value of reconstructed flats/units as a consideration received by society members /tenants / land owner for grating development rights to the builder/developer.

Service tax is a tax on consideration received by the builder/developer for providing construction services in respect of rehab construction and construction on landlord portion. The builder receives construction in form of development rights (not the reconstructed flats) for constructing such flats and hence monetary value of such consideration (development right) is only taxable.

Department is trying to tax value of the flats as if it is a consideration for sale of development rights and not the consideration actually received by the builder/ developer for providing construction services.

Circular is based on an erroneous notion that the value of development rights is not ascertainable and hence construction service in respect of Rehab flats/units are to be valued u/s 67(1)(iii) read with Rule 3 of Valuation Rules. As explained earlier, the value of the development right is ascertainable and same is ascertained by the state government for stamp duty assessment. Such value is published by State Government in Ready Reckoner. In other words, the market value of the development right is in the public domain.

As explained earlier, the monetary value of consideration (development right) is ascertainable, the rehab services is to be valued as per section 67(1)(ii) of the Act and not as per Section 67(1)(iii) of the Act as proposed by this recent TRU clarification.

It is settled jurisprudence that:

• Circulars are meant to clarify the law and not to lay down a law.
• Circular cannot prevail or override the express provision of law.
• Circular is not binding on a court.
• Circular is not binding on assessee.
• Circular which is contrary to the statutory provisions has really no existence in law.
• Circular cannot enhance the liability or abrogate the rights conferred on him by statute.

It is absolutely clear that above referred TRU clarification overrides or prevail over section 67(1)(ii) of the Act and hence is ultra virus.

Recent TRU clarification states that Education Guide is neither a ‘Departmental Circular’ nor a manual of instruction by CBEC and hence to that extent it does not command any legal backing to be binding on either side in any manner and hence Circular as such would prevail over Education Guide. The Education Guide is like a promissory estoppel given by executive arm of Finance Ministry. If the education guide does not have legal sanctity, whether the Circular which is not in conformity of legal provisions can be said to be legally tenable? And if not so, the same can be challenged.

Way forward:

• Recent TRU clarification clearly overrides express provision of the statute. It is an oppressive clarification.

• Service tax authorities will take recourse of this clarification and would act aggressively for tax collections. This would result into enquiries, investigations, issuance of Show Cause Notices (SCNs), adjudication proceedings, coercive recoveries, long drawn costly and hazardous litigations.

• This clarification need to be quashed at threshold. It may be worth to challenge the validity and vires of this clarification.

• We strongly recommend the builder/developer to seek advice of senior counsel (having expertise in service tax and property law) as to what would be advisable action.


Following aspects needs to be discussed and deliberated:

• What is ‘development right’ ? whether it can be transferred in part, for eg. if landlord keeps 40% share of constructed area and the developer gets 60% free sale, can it be said that only 60% of development right is transferred to the developer ? what is the timing of effective transfer of development right – whether when DA is entered or when necessary condition of DA are fulfilled or whether when the conveyance of the entire property is made in favour of a co-operative society or such other entity.

• Whether writ can be filed in such a case and same is maintainable?

• What is the cause of action necessitating to move to High Court?

• Jurisdiction aspect- in which court one has to file writ?

• Who will be the petitioner i.e. individual builder/developer or the institution like BAI, CREDAI, MCHI, etc?

• Whether the concept of “similar service” as a valuation method is appropriate in the context of service tax given the fact the no two service can be said to be “similar” and therefore the same cannot be applied in the context of given situation. Whether virus of those rules needs to be challenged ?

• Selection of counsel/ lawyer firm.

• Cost aspect.

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