GST UPDATE No 185 ON GUJARAT HC DECLARES MANDATORY 1/3 DEDUCTION OF LAND AS ULTRA VIRES

The leviability of services tax on the construction of complex services/works contract services have been a matter of dispute since inception as the said services are composite in nature involving goods and land on which no service tax can be levied. It is worth mentioning here that the Hon’ble Delhi High Court in the case of SURESH KUMAR BANSAL concluded that the levy of service tax on construction of complex services was ultra vires as there was no statutory mechanism to ascertain the value of services component because service tax could not be levied on value of undivided share of land acquired by the buyer. Consequently, the government removed the lacunae by retrospectively amending the Rule 2A of the Service Tax (Determination of Value Rules), 2006 wherein it was stated that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, service tax shall be payable on 25% of the total amount charged for the works contract. Similar issue has been cropped in GST regime wherein the issue regarding mandatory 1/3 deduction as value of land was challenged before Gujarat High Court in the case of MUNJAAL MANISHBHAI BHATT VERSUS UNION OF INDIA. The outcome of this decision is the subject matter of discussion of our present update. The petitioner entered into an agreement with Navratna Organisers & Developers Pvt. Ltd. for the purchase of a plot of land and construction of bungalow on the said plot of land. Separate and distinct consideration was agreed upon between the parties to the agreement for sale of land and construction of bungalow on the land. Hence, the petitioner was of the view that he would be liable to pay GST on the construction of bungalow in as much as it would constitute supply of construction service under the GST Act. The departmental authorities on the contrary opined that GST is payable at the rate of 18% on the entire consideration including land after deducting 1/3 rd of the value towards the land in accordance with entry no. 3(if) of the Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017. CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??5 The petitioner contended that sale of land is included in the entry no. 5 of the Schedule III to the GST Act. Thus, the sale of land is neither supply of goods nor services so imposition of tax on consideration received towards sale of land is therefore ultra vires section 7 and 9 of the GST Act. It was also contended by way of illustration that the GST liability by virtue of deeming fiction exceeded the tax liability computed on actual basis which is totally erroneous. It was submitted that delegated legislation cannot travel beyond the scope the parent legislation and reliance was placed on the following decisions rendered by the Apex Court:- • INDIAN EXPRESS NEWSPAPERS (BOMBAY) PRIVATE LIMITED V. UNION OF INDIA & ORS.; (1985) 1 SCC 641 • KERALA FINANCIAL CORPORATION V. COMMISSIONER OF INCOME TAX; (1994) 4 SCC 375 • ITW SIGNODE INDIA LTD. V. COLLECTOR OF CENTRAL EXCISE; (2004) 3 SCC 48 • DEPUTY COMMERCIAL TAX OFFICER V. SHA SUKRAJ PEERAJEE; AIR 1968 SC 67 Reliance was also placed on the decision given by Supreme Court in the case of Gannon Dunkerley’s case wherein it was held that tax is to be imposed on actual taxable value of the works contract and the government could prescribe fixed percentage only for cases where actual value was not ascertainable. Moreover, it was held that even the fixed percentage as prescribed should not appreciably differ from the actual value. The petitioner placed reliance on the judgment of Delhi High Court in the case of Suresh Kumar Bansal wherein it was clearly held that there need to be a specific statutory provision excluding the value of the land from the taxable value of the works contract and mere abatement by way of notification is not sufficient. Such dictum has even been complied with by the Government by way of retrospective amendment of the Service tax valuation rules so as to provide for specific deduction for consideration charged for land. It is only in the event of such actual value not being available that the alternative methods of fixed percentage deduction were to be adopted. The impugned notification under the GST Acts giving only fixed percentage of deduction for land by way of abatement is thus contrary to the judgement of the Delhi CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??6 High Court in the case of Suresh Kumar Bansal. It was urged that the deeming fiction is ex-facie discriminatory and violative of Article 14 of the Constitution of India in as much as persons like the writ applicant who are getting a bungalow constructed on the 10-20% of the land get the same deduction as a buyer of a flat unit in a multistoried building who merely gets an undivided share in the land and the major portion of the agreement value is towards construction cost. The counsel for the revenue pleaded that government is empowered to levy tax by prescribing conditions/restrictions for which reliance was placed on following judicial pronouncements:- (A) UNION OF INDIA (UOI) AND ORS. VS. VKC FOOTSTEPS INDIA PVT. LTD. AIR 2021 SC 4407, 2021 [52] G.S.T.L. 513, (B) SPENCES HOTEL PVT. LTD. AND ORS. VS. STATE OF WEST BENGAL AND ORS. (1991) 2 SCC 154 (C) KHYERBARI TEA CO. LTD. AND ORS. VS.THE STATE OF ASSAM AIR 1964 SC 925. The revenue authorities contended that in the event if the contention of the writ applicant is accepted that the value of the land must be taken as one being declared in the agreement, then it may lead to absurd results wherein in an attempt to save tax, the developer and buyer may mutually decide that 99% of the total consideration would be the value of land and the balance would be construction. This may lead to huge losses to the public exchequer and against the basic concept of tax. Even in the realm of Stamp Duty, the duty is applicable on the value of transaction, however, such value is not left to the parties to be decided, a minimum value is taken as deemed value of the transaction (jantri value) and in cases wherein the transaction value is less than the Jantri value then the jantri value is taken as deemed transaction value and the stamp duty is paid accordingly. Similarly, the value of developed land cannot be left to be decided / declared by the parties to the transaction. The revenue authorities relied on the decision given by the Apex Court in the case of UNION OF INDIA VERSUS VKC FOOTSTEPS INDIA PVT LTD. [AIR 2021 SC 4407] wherein it was held that merely because some inequities may result from practical effect of the CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??7 formula cannot be a ground to replace the wisdom of the legislature or its delegate. The formula cannot be held illegal or unconstitutional just because it may lead to certain inequities. The High Court held that the supply of land is covered by Schedule III to the CGST Act, 2017 which is neither treated as supply of goods nor supply of services. Consequently, there is significance of sale of developed land and undeveloped land. If a tripartite agreement is entered into after the land is already developed by the developer, then such development activity was not undertaken for the prospective buyer and therefore there is no question of imposition of GST on the developed land. Thus “sale of land” under Schedule III to the GST Acts covers sale of developed land even as per the impugned notification. Hence the only question which is to be determined is whether such artificial deeming fiction of 1/3rd deduction is ultra-vires the provisions of the CGST Act or the Constitution. The High Court relied on the provisions contained in section 15 of the CGST Act, 2017 and held that when the statutory provision requires valuation in accordance with the actual price paid and payable for the service and where such actual price is available, then tax has to be imposed on such actual value. Deeming fiction can be applied only where actual value is not ascertainable. Reliance was placed on the decision given by the Apex Court in the case of 2nd Gannon Dunkerley’s case which concluded that deeming fiction is to be applied only when actual value is not ascertainable. Similarly, reference was made to the Supreme Court decision given in the case of Wipro Ltd. wherein it was held that where actual amount of loading/unloading charges are available, it was not permissible for the rule making authority to prescribe a flat rate of 1% addition to value. Thus, mandatory application of deeming fiction of 1/3rd of total agreement value towards land even though the actual value of land is ascertainable is clearly contrary to the provisions and scheme of the CGST Act and therefore ultra-vires the statutory provisions. The High Court also held that apart from being contrary to the statutory provisions contained in the CGST Act, 2017, one of the most glaring feature of the impugned deeming fiction is arbitrariness in as much as the same is uniformly applied irrespective of the size of the plot of land and construction CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??8 thereon. Such deeming fiction which leads to arbitrary and discriminatory consequences could be clearly said to be violative of Article 14 of the Constitution of India which guarantees equality to all and also frowns upon arbitrariness in law. Hence, it was held that the deeming fiction of 1/3rd will not be mandatory in nature. It will only be available at the option of the taxable person in cases where the actual value of land or undivided share in land is not ascertainable. The above decision is a landmark judgment which provides a sigh of relief to various builders due to the fact that deeming fiction created for mandatory 1/3rd deduction as value of land was discriminatory and arbitrary. It is often observed that the value of land is a variable factor which differs from region to region. The value of land is high in metro cities and so permitting standard deduction was having adverse impact on the builders. The decision to grant deduction on actual basis will definitely prove to be a boon for the real estate sector as far as leviability of GST is concerned.

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GST UPDATE No 185 ON GUJARAT HC DECLARES MANDATORY 1/3 DEDUCTION OF LAND AS ULTRA VIRES

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