The very issue of service tax levying on construction of flats, has been discussed in the recent case of Suresh Kumar Bansal vs. Union of India. The Delhi High Court bench comprising S. Muralidhar J. and Vibhu Bakhru J. held that no service tax can be levied on construction of flats purchased prior to June 1, 2012. And if the service tax has already been paid to the developer then the same should be refunded at the interest rate of 6%. One of the two essential issues which the court entertained was that whether the legislature is competent enough to levy service tax on sale of construction of flats. The court held that the Parliament is fully competent to levy service tax on sale of construction of flats and this matter is indisputable. Secondly, whether the service tax law provides for a proper measure for computation of service tax which is to be imposed on under construction flats. On this question the court held that neither the Act nor the Rules provide any sort of machinery provision for the determination of the value of services. The court said that the section- 65(105)(zzzh) of the Finance Act, 1994 is applied in the case of purchase of units in a complex within the scope of taxable service and held that if the builder collects or has ever collected any sort of amount as service tax as defined in the mentioned section, then the same amount of money shall be refunded to the buyers @ 6% (from the deposit date till the date of refund).
In short, in this case, the petitioner put forward the question that how can the builder charge service tax before completing the construction work. Further, the question was raised over the competence of parliament in pursuit of levying service tax in such cases of transaction. It was held that the rules made under the Act do not provide any method of computation of service tax in the under-construction cases.
Applicability of the Order
As far as the applicability of this judgment is concerned, since the statute in question is a Central Act, therefore the judgment will bind all the authorities throughout the country. Earlier another similar issue was settled by the High Court of Bombay in the case of Commissioner of Income Tax vs. Godavari Devi Saraf, in which the court held that when one of the party is Union of India, then the binding nature of any judgment cannot be questioned by the Central Government. Just for the sake of arguing, the builders are not ready to accept the judgment which is binding upon them unless any specific notification is issued, but when a Central Legislation is interpreted, it becomes applicable without any restriction of area.
Procedure to be followed for refund
This significant judgment has given a great opportunity to a number of buyers to get refund. The procedure which they can follow starts with forming a group of residents who want to seek refund. Afterwards, they need to compute the service tax paid and collate the buyer and builder agreement, invoices and receipts mentioning the amount of service tax and confirming the payment thereof. Then approach the builders with a copy of the High Court order and ask for the service tax returns along with the challans for the deposit of the tax followed by getting an affidavit signed by the builder that the tax collected has been deposited with the government. At the end, seek refund by producing the documents before the service tax authorities. The process seems to be easy but it may take ample of time to get the final result as it will be difficult for developers and authorities to comply with the order satisfying the buyers at a large-scale.
Ramifications of the Order
The order passed is completely in favour of the buyers leaving the developers in trouble and risk of facing tax issues. The only challenge which the buyers may face is that of the tiresome procedure. On the part of developer, there are chances that the tax authorities may look into details and require service tax amount project wise or on individual flat basis. Undoubtedly, filing single returns for a number of projects will become a big deal for the developers. In those cases where the construction work is still in process, the buyers can approach the builders for the purpose of adjusting the amount of service tax paid between 2010 and 2012 against any future liability of the same.
There are chances that the Service Tax Department may appeal the Supreme Court of India for obtaining a stay order as the department has statutory right to approach the higher court and challenge the judgment. But because the judgment is being delivered following the precedent judgments to the Apex Court itself, there are less chances of grant of stay order.
Imposition of Service Tax on Preferential Location Charges
As far as Preferential Location Charges (PLC) are concerned, the service tax will be applicable. The PLC is charged by the developer on the basis of the preferences made by the customers. It simply enhances the market value of the property because of the preference made while acquiring any particular unit.