On 6th May, 2022, The Hon’ble Gujarat HC delivered a ‘soothing to the sight’ of developers and builders judgement in case of MUNJAAL MANISHBHAI BHATT VERSUS UNION OF INDIA 2022 (5) TMI 397 wherein it has in principal addressed to two issues of GST on Real Estate.
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First :- Taxability on Transfer of
Developed Plot to the Customer Second :- Whether Notification providing for 1/3rd Deduction with respect to land or undivided share of land in cases of
construction contracts involving element of land is ultra-vires the
provisions of the GST Acts? Importantly
:- Our Stand that Money Collected from Customer on account of GST and where
GST has been exempted later by courts, the amount shall be refunded back to
the ultimate bearer of indirect tax i.e. Service recipient has also been
upheld by the Court referring to the judgement of Mafatlal Industries. |
On both
the above fronts, it has predominantly issued orders in favour of the
assessees. We shall discuss both the issues separately in this article.
RELIEF 1 :- Taxability on Transfer of
Developed Plot to the Customer
1. Recently you have seen the AAR &
AAAR’s in case of In re Shree Dipesh Anilkumar Naik (GST AAAR Gujarat)
wherein it was held that the a
sale of developed plots by the Appellant is a supply of taxable service falling
under the head ‘Construction services’ appearing at No.3 of Notification No.11/2017-Central Tax
(Rate) dated June 26, 2017 (“the Service Rate Notification”), and is liable to
GST @ 18%.
2.
Further, The Supreme Court Judgement in case Narne Construction
P. Ltd. and Ors. Vs. Union of India (UOI) and Ors. (2012) 5 SCC 359, was
also referred to defend this taxability.
3.
Now, Guj HC has quashed all these AAR’s and further clarified that
why Narne Construction P. Ltd. and Ors. Vs. Union of India (UOI) and Ors.
(2012) 5 SCC 359 cannot be applied to GST Laws since it was issued under
Consumer Protection Act. The Arguments upheld by the HC are as under:-
a.
As
such, when the entry in the Schedule III says “sale of land” then it can be
land in any form. In any case the charge of tax
is on supply of goods or services made or agreed to be made for a consideration
and therefore even in a case of a tripartite agreement for sale of land and
building, the imposition of tax can only be on the construction activity which
is undertaken by
the supplier at the behest of the proposed buyer. Thus, 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.
b.
Hence
the fact that the land is not a plain parcel of land but a developed land
cannot be a ground for imposing tax on the sale of such land.
4.
Further,
in Para 121 of Judgement, HC held that
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5.
Hence in a nutshell we understand that where the developed Plot
is Sold to the Customer WITHOUT his behest being involved then such
transaction is merely Sale of Land and NOT LIABLE to GST applying the ratios
of this Judgement. |
Relief 2:- Quashing notification
providing for 1/3rd deduction with respect to land or undivided share of land
in cases of construction contracts involving element of land is ultra-vires the
provisions of the GST Acts and/or violative Article 14 of the Constitution of
India
Next, comes
the aspect of 1/3rd Deduction of Land, this was the major question
seeked by Writ Petiton and has been explained as below:-
FACTS
OF THE CASE
1.
The writ applicant entered into an agreement dated 29th September
2020 with the Navratna Organisers & Developers Pvt. Ltd for the purchase of
a plot of land admeasuring about 1021 square metres. The said agreement also encompassed construction
of bungalow on the said plot of land by the respondent for the writ applicant.
2.
It appears that separate and distinct consideration was agreed upon between the
parties to the agreement for (i) the sale of land and (ii) construction of a
bungalow on the land.
3.
The respondent No.4 however, relying upon the impugned entry no.
3(if) of the Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017
read with para 2 of the said notification informed the writ applicant that he
would be liable to pay tax at the rate of 9% CGST + 9% SGST under the GST Acts
on the entire consideration payable for land as well as construction of
bungalow after deducting 1/3rd of the value towards the land in accordance with
the impugned paragraph 2 of the said notification. The respondent No.4 raised
an invoice on the writ applicant to collect such tax from the writ applicant.
4.
Thus it appears that, because of the impugned notification, the entire consideration towards
the sale of land has not been excluded for the purpose of computing tax
liability under the GST Acts. 1/3rd of the total consideration has been deemed
to be land value as per paragraph 2 of the impugned notification
Without going
in the arguments of Petitioner and Respondent as to why notification shall be
quashed and why notififcation shall not be quashed respectively, I am detailing
out the held views of the court on each matter for sake of simplicity and
sticking to the objective of this Article.
WHAT
COURT HELD AND WHY IT HELD SO
A. What is the Intent of Parliament to
tax is to be understood?
“Supply” under Section 7 of the CGST Act includes supply of goods
or services made or agreed to be made for a consideration. Thus the factum of
supply would be initiated only once the agreement is entered into between the
supplier and recipient and such agreement is for consideration. This is in
consonance with the observation of the Supreme Court in the case of the 1st
Larsen and Toubro Ltd. (supra) that there cannot be a sale in respect of
construction undertaken prior to agreement with the buyer
Thus the legislative intent is to impose tax on construction
activity undertaken by a supplier at the behest of or pursuant to contract with
the recipient. There is no intention to impose tax on supply of land in any
form and it is for this reason that it is provided in the Schedule III to the
GST Acts that the supply of land will be neither supply of goods nor
supply of services.
B. As such, when the entry in the
Schedule III says “sale of land” then it can be land in any form including
Developed Land also.
C. Section 15 of CGST Act, 2017 is the
Principal Method of Deciding the Valuation and this Notification is Ultravires
the provision of Section 15 itself
a.
Section 15(1) of the CGST Act which deals with valuation needs to
be referred to. The said section reads thus: “15(1) The value of a supply of
goods or services or both shall be the transaction value, which is the price actually
paid or payable for the said supply of goods or services or both where the
supplier and the recipient of the supply are not related and the price is the
sole consideration for the supply.”
b. Thus, ordinarily the value of supply
of goods or services or both should be the value which is the price actually
paid or payable for the said supply of goods.
c. In the case of the writ applicant of
the Special Civil Application No. 1350 of 2021, the booking agreement is a part
of the record. There is specific consideration agreed for sale of land and for
construction of bungalow. There is no averment in the affidavit in reply filed
by the Respondents that such bifurcation is not acceptable. If that be so and
if specific value of land and value of construction service is available, then
can the notification provide for a fixed deduction towards land? - The
answer has to be in the negative.
d. 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.
e. 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.
D. ARBITRARINESS OF THE DEEMING FICTION
BY THE IMPUGNED NOTIFICATION
a.
Apart from being contrary to the statutory provisions contained in
the CGST Act, one of the most glaring feature of the impugned deeming fiction
is its arbitrariness in as much as the same is uniformly applied irrespective
of the size of the plot of land and construction therein. Two illustrations may
be taken:
i. Take a case of a
plot of land admeasuring 5000 square yards and valued at say Rs. 2.5 crore. If
suppose a buyer enters into an agreement with the developer for buying the plot
of land along with getting bungalow constructed and the total area of the bungalow
is say 500 square yards and the construction value is say Rs. 50 lakhs. Thus
the total agreement value is Rs. 3 crores. Applying the impugned deeming
fiction, deduction of 1/3rd i.e. Rs. 1 crores will be available towards land
and the balance consideration of Rs. 2 crores will be taxable under the GST
Acts.
ii. Suppose the same
bungalow is constructed on a plot of land of 2000 square yards of which the
value is Rs. 1 crore. The construction value being Rs. 50 lakhs, the total
agreement value is Rs. 1.5 crores. Applying the impugned deeming fiction,
deduction of 1/3rd i.e. Rs. 50 lakhs will be available towards land and the
balance consideration of Rs. 1 crore will be taxable under the GST Acts.
b.
Thus even though in both the above illustrations the actual bungalow
remains the same and it is the construction of this bungalow which is taxable
under the GST Acts, the taxable value in the first illustration is double the
taxable value in the second illustration because of the fact that the deduction
rate is uniform irrespective of the size of the plot.
c.
Moreover there is no distinction made even between a flat
and bungalow. While a flat would have number of floors and the transfer would
only be undivided share in land, the same deduction which is available on supply
of flats is made available on supply of bungalows without any regard to the
vast different factual aspects.
E. Even the GST Council feared
Litigation and also wished to implement this in a selective manner but it got
implemented very widely
a. 14th GST Council meeting minutes
which led to the insertion of the impugned Notification is perused, it becomes
clear that the deduction was contemplated only in the context of flats wherein
it was difficult to ascertain the value of the undivided share of land. However
when it came to actual issuance of Notification, a standard rate of deduction
came to be provided irrespective of the nature of the transaction or whether it
is a case involving transfer of land itself or undivided share in land.
Moreover the discussion in the GST council meeting minutes which is part of the
record would show that there was an apprehension that a standard rate of
deduction for land may not withstand judicial scrutiny. Interestingly, this was
in fact mentioned by the Deputy Chief Minister of the State of Gujarat. This
was even when the discussion was in respect of flats while the ultimate
notification was issued and made applicable even to other transactions such as
sale of land with construction of bungalow.
F. SECTION 15(5) DOES NOT FURTHER THE
CASE OF THE RESPONDENTS
a. Even if revenue’s reliance on Section
15(5) is considered, which is 15(5) Notwithstanding anything contained in sub-section (1) or
subsection (4), the value of such supplies as may be notified by the Government
on the recommendations of the Council shall be determined in such manner as may
be prescribed.
b.
At the outset it is required to be noted that the term
“prescribed” is defined under Section 2(87) of the CGST Act as under:
i. “2(87) “prescribed”
means prescribed by rules made under this Act on the recommendations of the
Council;”
c. Thus, the prescription under Section
15(5) of the CGST Act has to be by rules and not by notification. Be that as it
may, wherever a delegated legislation is challenged as being ultra-vires the
provisions of the CGST Act as well as violating Article 14 of the Constitution
of India, the same cannot be defended merely on the ground that the Government
had competence to issue such delegated piece of legislation. Even if it is
presumed that the Government had the competence to fix a deemed value for
supplies, if the deeming fiction is found to be arbitrary and contrary to the
scheme of the statute, then it can be definitely held to be ultra-vires.
G. WHAT IF THE SUPPLIER ARTIFICIALLY
INFLATES THE PRICE OF LAND THEREBY DEFLATING THE VALUE OF CONSTRUCTION SERVICE
?
a.
One of the contentions of the learned A.S.G., while defending the
impugned Notification is that the valuation cannot be determined on the basis
of the value fixed into agreement, which is decided inter-se between the
parties as the parties may artificially fix a higher value for land so as to
reduce tax the liability under the GST Acts.
b.
The aforesaid contention is also required to be rejected. At the
outset in the present case the values as mentioned in the agreement are not
challenged in the affidavit in reply and therefore such contention is not
applicable. We are supported in this regard by the judgement of the Supreme
Court in the case of Mangalore Ganesh Beedi Works (supra).
c.
Even otherwise, the possibility of obtaining indirect
consideration cannot be ruled out for any supply transaction. If in a given
case it is found that the value of construction service which is declared by
the supplier is not the correct value in as much as other consideration has
been indirectly received, then Section 15(4) of the CGST Act will apply
d. Hence by virtue of Rule 27 to 31,
Department has right to value in the methods prescribed therein.
H. ALREADY SIMILAR MECHANISM EXISTED
UNDER SERVICE TAX LAW WHICH IS NOT REQUIRED TO BE DEVIATED FROM
a. When it was held by the Delhi High
Court in the case of Suresh Kumar Bansal (supra) that since the valuation rules
in service tax did not provide for deduction for land value, tax was not
quantifiable and hence not leviable, the service tax valuation rules were
retrospectively amended to provide for deduction of land. Deduction at fixed
percentage was made applicable only where the actual value was not
ascertainable. When such workable mechanism for deduction of land was already
in force under the service tax regime, the same ought to have been continued.
Instead, the Government has chosen to fix a standard rate of deduction without
any regard to different possible factual scenarios which is completely
arbitrary and violating Article 14 of the Constitution of India.
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Hence the Hon’ble HC has held that Paragpragh 2 of the Notification
No. 11/2017-Central Tax (Rate) dated 28.6.2017 and identical notification
under the Gujarat Goods and Services Tax Act, 2017, which provide for a
mandatory fixed rate of deduction of 1/3rd of total consideration towards the
value of land is ultra-vires the provisions as well as the scheme of
the GST Acts. Application of such mandatory uniform rate of deduction is
discriminatory, arbitrary and violative of Article 14 of the Constitution of
India. |
Concluding
Author Remarks :-
No Doubt it is
a welcome judgement as these are issues that Real Estate Industry is severely
aggrieved with currently. Though it is right now with Gujarat HC, one may see
department counter appealing in Supreme
Court in near future. In my personal view, the court has delivered a
very transparent and clear verdict and further forums will be on similar
footings only.
Take Care !
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