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HC: No service-tax on sale of under-construction flats if contract price includes value of land

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June 6, 2016[2016] 70 taxmann.com 55 (Delhi)

Facts : Assessee purchased flat in a residential complex for charges inclusive of value of land. Assessee challenged levy of service tax on ground that composite contract (inclusive of value of land) cannot be charged to service tax in absence of any machinery provision for determination of value of service portion. Further, preferential location charges do not amount to service and cannot be charged to service tax

Held :

• Rule 2A of Valuation Rules, does not apply when price is inclusive of value of land : Whilst Rule 2A of Service Tax (Determination of Value) Rules, 2006 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.

• No machinery provision to segregate value of land - Mere abatement or circular not sufficient : 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.

• Preferential charges amount to service : Insofar as service tax on taxable services as defined under Section 65(105)(zzzzu) [Preferential Location or Development of Complex Services] is concerned, there is element of service involved in the preferential location charges levied by a builder. Such charges do not 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. 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.

No service tax on composite contracts, where price is inclusive of land : Hence, no service tax under section 66 read with Section 65(105)(zzzh) of the Act [Construction of Complex Services] and Explanation to section 65(105)(zzzh) could be charged in respect of composite contracts. The impugned explanation to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service is set aside.

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