Delhi high court rules against service tax on under construction flats

09 Jun 2016

The Delhi High court has ruled against the impost of service tax on composite contracts involving construction of houses, in a development that would bring cheer to thousands of home buyers who have booked under-construction flats.

The HC has said that builders or developers cannot charge service tax from home buyers for under-construction property. However, they can charge extra under 'preferential location charges (PLC).

The judgment comes on writ petitions filed by two home buyers who had purchased flats from Sethi Buildwell Pvt Ltd in the Max Royal group housing project in Noida's Sector 76. The two writ petitions challenging the levy of service tax on construction services provided by a builder to flat buyers, as introduced in the Finance Act, 2010.

The judgment applies to flats purchased before 1 July 2012.

HC has also said that if the developer has already collected service tax, then buyers will get it refunded with 6 per cent rate of interest by the revenue department.

The high court upheld the legislative competence of the Parliament to levy service tax on the service component of a transaction of construction and subsequent sale of immovable property, and, on preferential location charges collected by developers / builders.

However, the high court held that no service tax could be charged on construction contracts involving sale of land (immovable property), on the basis that there are no machinery provisions in the Act or the valuation rules for ascertaining the service element specifically in such contracts. It reiterated that service tax is only a levy on services, and no tax can be levied on the elements representing transfer of goods or immovable property.

The court inter-alia held that the contract between the prospective buyer and the builder is a composite one, which involves not only element of services but also goods and immovable property (land). While Parliament has the legislative competence to tax the element of service involved in such contracts, the levy will fail if it does not provide for the mechanism to ascertain the value of the services component in such contracts, which is the subject matter of the levy of service tax.