Mandatory Deduction Of 1/3rd For Value Of Land Held Ultra Vires–Gujarat High Court.
|Case Details:||Munjaal Manishbhai Bhatt Vs Union of India|
|Appeal No.:||1350, 6840 of 2021 & 5052 of 2022,|
|Ruling pronounced by:||Gujarat High Court|
|Date of Order:||6th May 2022|
The Hon’ble High Court of Gujarat vide its order dated 6th May 2022 in the matter of Munjaal Manishbhai Bhatt Vs Union of India in R/Special Application No.s – 1350, 6840 of 2021 & 5052 of 2022, held that the deeming fiction of mandatory deduction of 1/3rd of the value of the land while ascertaining the taxable value in view of entry 3(if) of Notification No. – 11/2017 – Central Tax (Rate) and similar notification in the State Tax along with paragraph 2 of both the notifications is ultra vires, and the same was struck down.
The writ Applicant preferred the Writ application praying for striking down entry 3(if) of Notification 11/2017 – Central Tax (Rate) as well as the similar entry 3(if) in notification No. 11/2017 – State Tax (Rate) along with paragraph No. 2 of both the notifications being ultra-vires and the Section 7(2) of the GST Act read with Entry 5 of Schedule III to GST Act as well as the Section 9 (1) and Section 15 of the GST Act. Further, the aforesaid entry of both the notification was prayed to be struck down as being manifestly arbitrary, grossly discriminatory, and violating Article 14 as well as ultra-vires Article 246A of the Constitution of India. It was also urged to declare that paragraph 2 of both notifications would be applicable in case wherein undivided share in land is transferred along with constructed flat without separate consideration being fixed towards the sale of land as well as GST cannot be imposed on sale and purchase of land.
- ⦁ The writ applicant is a practicing Advocate in this High Court and entered into a contract with Respondent No. 4 i.e., Navratna Organisers and Developers Pvt. Ltd. for the purchase of a plot of land measuring about 1021 square meters located the Unit No. 937, “Kalhar Blues and Greens”, Bopal-Sanand Bypass Road, Ahmedabad as well as for the construction of Bungalow on the said plot by Respondent No. 4.
- ⦁ That a separate consideration was agreed upon for the sale of land and construction of Bungalow on the land.
- ⦁ That as per the terms of the agreement, the writ-applicant was under a bonafide belief, as the liability of all taxes including GST was on him, that he would be liable to pay GST on the construction of Bungalow.
- ⦁ That, however, the respondent No. 4 in view of entry 3(if) of Notification 11/2017 – C.T. (Rate) dated 28.06.2017 and similar entry and notification in State Tax (Rate) read with paragraph 2 of both the notifications, raised an invoice for collection of GST on 1/3rd of the entire consideration received for the sale of land and construction of bungalow, and without excluding the consideration for the sale of land in computing GST. Hence, the present writ application.
Writ-Applicant Submissions: –
- ⦁ It was submitted on the behalf of the writ-applicant that Section 9 is a charging Section. The scope of supply is defined under Section 7 and by virtue of Section 7(2), the transactions specified in Schedule III to GST Act, which includes ‘sale of land’ at entry 5, are excluded from the purview of Supply. Thus, the imposition of a tax on the sale of land is ultra-vires Section 7 & 9 of the GST Act.
- ⦁ That referring to the terms/clauses of the booking agreement between the writ-applicant and the developer, it was submitted that it is quite evident from the agreement that the consideration towards the land is separately fixed and agreed, upon and is outside the purview of the GST Act.
- ⦁ Further, it was submitted that the booking agreement was entered after the land was fully developed, so no further activity is to be done by the developer in respect of the said booking agreement.
- ⦁ The writ-applicant explained the situation with an illustration submitted that ‘Total Amount’ is defined in the impugned notifications and the liability fixed by deeming fiction presuming only 1/3rd of total consideration towards land is ultra-vires the CGST Act. Moreover, the liability computed in view of the said deeming fiction is more than the liability computed as per the provisions of the statute.
- ⦁ That relying on the decisions of Indian Express Newspapers (Bombay) Private Limited v. Union C/SCA/1350/2021 CAV JUDGMENT DATED: 06/05/2022 of India & Ors.; (1985) 1 SCC 641, Kerala Financial Corporation v. Commissioner of Income Tax; (1994) 4 SCC 375, Deputy Commercial Tax Officer v. Sha Sukraj Peerajee; AIR 1968 SC 67 11 and on ITW Signode India Ltd. v. Collector of Central Excise; (2004) 3 SCC 48, it was submitted that delegated legislation cannot travel beyond the scope of parent legislation.
- ⦁ Further, reference was made to the 14th GST Council meeting to show that before the issuance of impugned notifications deliberations were made with regard to the sale of Apartment/Flat, and abatement of 1/3rd value of land was thought of only with respect to the sale of Apartment/Flats. However, the said entry in the notification was inserted with a wide scope as to even include the sale of plots along with the construction of bungalows, is arbitrary and contrary to the object sought to achieve by the deeming fiction.
- ⦁ It was submitted on the behalf of the writ-applicant that the legislative history of tax on construction is required to be looked into, which can be divided into two parts (i) tax on goods ‘element’ and (ii) tax on ‘service’ element, of the construction contracts. The legislative history with respect to the goods element involved in the construction contracts is as under: –
- 1. That Entry 54 of List II to the Constitution of India empowered the State legislatures to impose a tax on the sale or purchase of goods. The legislative competence of the State legislatures to impose a tax on goods used in the course of execution of indivisible works contracts came up for scrutiny before the Supreme Court of India in the case of State of Madras v/s Gannon Dunkerley and Co. (Madras) Ltd. (1958) 9 STC 353 (1st Gannon Dunkerley’s case) wherein it was held that ‘The property in goods does not pass as chattel pursuant to the agreement of sale and therefore it is not sale as per the Sale of Goods Act, 1930’.
- 2. The 46th Constitutional amendment was made effective to nullify the said judgment of Hon’ble Supreme Court in Gannon Dunkerley, and the transfer of property in goods involved in the course of execution of works contract was deemed to be sales.
- 3. The next issue which arose was on what amount such tax would be imposed, the issue was settled and explained by the Supreme Court in Gannon Dunkerley and Co. v/s State of Rajasthan (1993) 1 SCC 364 (Second Gannon Dunkerley’s case), wherein it was held that that tax ‘could be imposed only on the value of goods incorporated in the works contract and that the labor expenses and profit thereon were to be excluded’.
- 4. In view of the above decision various states formulated valuation procedures for Works Contract. However, so far as the State of Gujarat is concerned, Section 2(30) (c) of the Gujarat Value Added Tax Act, 2003 provided for ‘taxable turnover’ to be determined after deduction of charges towards labor, service, and like charges and Rule 18AA of Gujarat Value Added Tax Rules, 2006 provided the manner of determining the taxable value in Works Contract. It was provided that actual value is to be taken if the value is ascertainable.
- 5. That various states provided for a lump-sum tax on the total value of Works Contract at the option of the dealer, its validity was upheld by the Supreme Court in State of Kerala v/s Builders Association of India (1997) 2 SCC 183 as well as Mycon Construction Ltd. v/s State of Karnataka and Another (2003) 9 SCC 583.
- 6. Thereafter as the question arose, it was held in Raheja Development Corporation vs the State of Karnataka (2005) 5 SCC 162 – that even a tripartite agreement involving the construction of flats for the prospective buyer would constitute a sale in the course of the execution of works contract.
- 7. The above decision of Raheja was doubted and referred to a larger bench, which later on was affirmed in Larsen and Toubro Ltd. v/s State of Karnataka (2014) 1 SCC 708, however it was clarified in para 110 that only after the developer enters into a contract with the flat purchaser the activity of the construction provided by the developer would be considered as works contract and the goods transferred in the said activity of construction would be chargeable to tax. Further, in para 112, it was observed that at the time or after the completion of construction, if there is no agreement between the developer and the flat purchaser for construction, the goods used could not be deemed to be sold by the builder.
- 8. While conceiving the impugned Notification regarding deduction towards land, the aforesaid judgment in 1st Larsen and Toubro Ltd was discussed however not followed and ad hoc deduction of 1/3rd towards land was proposed.
- ⦁ That relying on the observations in Larsen and Toubro Ltd. (Supra) the exclusion of land and building has a historical perspective. Hence, the sale of land and fully constructed buildings is excluded from the purview of the GST Act as well. Further, if the agreement is entered after the land has been fully developed, the supply of goods and services would be to the extent of construction activity only, however, prior to execution of the contract, such activity would not be covered under Section 7 of GST Act and there is no charge of tax on the activity.
- ⦁ That in view of the above, the sale of land, whether developed or not, would not be exigible to GST and the tax liability is to be restricted to the construction activity only.
- ⦁ That referring to the observations made in Gannon Dunkerley’s case (2nd case), Builders Association of India & Mycon Construction Ltd., it was submitted that the impugned notification prescribed the fixed percentage of i.e., 1/3rd without taking into consideration the variants of contract and size of the land, thus contrary to the judgment of Supreme Court in 2nd Gannon Dunkerley’s case.
- ⦁ Thereafter referring to legislative history pertaining to service element, it was submitted: –
- 1. Service tax was introduced for the first time by the Finance Act, 1994 by way of a positive list of taxable services.
- 2. Section 65(105) of the Finance Act, 1994 contained a list of taxable services which were amended from time to time. Clause (zzq) and (zzh) of the said provision included construction service within the ambit of service tax.
- 3. Clause (zzzza) in Section 65(105) in 2007 for ‘services in relation to the execution of Works contract’.
- 4. Thereafter as the question arose, the Hon’ble Supreme Court in the matter of Commissioner, Central Excise and Customs, Kerala v/s Larsen and Toubro Ltd. (2016) 1 SCC 170, held that Works Contract Service was made taxable from 2007 and prior to that only pure service contract can be taxed under construction service.
- 5. That in the Finance Act, 2010 clause (zzzh) was introduced whereby ‘construction of a complex intended for sale was deemed to be service by builder to the buyer unless entire consideration was received after granting of completion certificate by the competent authority.
- 6. The imposition of tax on builder services was challenged before the Delhi High Court in Suresh Kumar Bansal v/s Union of India (2016) 92 VST 330 (Del.) wherein it was held by the Hon’ble High Court that ‘there was no mechanism for computing service tax in case of a transaction involving the transfer of land and no service tax can be demanded in absence of computation mechanism. The contention of the revenue was rejected on the ground that mere abatement by way of notification could not be a substitute for the statutory valuation mechanism which was absent.
- 7. Later to overcome the judgment of Suresh Kumar Bansal, Rule 2A of Service Tax (Determination of Value) Rules were amended retrospectively to provide for deduction of amount charged for land and undivided share of land and for lump-sum deduction where value cannot be determined.
- ⦁ It was further contended that in the judgment of Suresh Kumar Bansal, it was held that the abatement by way of notification is not sufficient and there has to be a specific provision excluding the value of land from the taxable value of the works contract. Thus, the impugned notifications under GST providing for a fixed percentage of the deduction for land by way of abatement are against the judgment of Suresh Kumar Bansal of the Delhi High Court.
- ⦁ The statement of objects and reasons for the enacting of the GST Act is to merge and consolidate earlier laws relating to indirect taxes. Moreover, when GST Council considered the judgment of the Supreme Court in Larsen and Toubro, the legislative history of earlier laws has to refer to deciding the validity of the impugned notification, from which it is quite evident that the tax can be imposed only on construction activity provided by the developer. Further, in view of entry 5 of schedule III, and when it has been clearly held that where actual value can be ascertained then the fictional value cannot be taken into consideration, the impugned notification is against the provisions of the Statue and thus ultra-vires.
- ⦁ It was contended that the total value of land is deemed to be 1/3rd of total consideration irrespective of the nature and size of the land on which the construction is to be carried on.
- ⦁ The deeming fiction is ex-facie discriminatory, completely arbitrary, and in violation of Article 14 as the person like the writ-applicant has to pay a higher tax for the construction of bungalow on only 10-20% of the land, and a similar deduction is given to a flat buyer in multi-storied building, where the major portion of agreement value is towards construction. Further, in the present case, the seller and the developer are different persons.
- ⦁ That strong reliance was placed on Wipro Ltd. v/s Assistant Collector of Customs and Others (2015) 14 SCC 161, wherein ‘the Rule provided for adding 1% of the FOB value of goods towards loading, unloading and handling charges even though the actual value of such charges was ascertainable, was held to be ultra-vires the provisions of Customs Act’.
- ⦁ That reliance was also placed on the Commissioner of Central Excise, Pondicherry v/s Acer India Ltd. (2004) 8 SCC 173, wherein it was held by the Hon’ble Court that the tax cannot be indirectly levied on software by including its value in the value of computers.
- ⦁ Further, taking reference to the law stated in Section 15 of GST Act, Rule 27, Rule 28, Rule 29, and rule 30,31, it was submitted that a detailed valuation mechanism is available in the statute primarily based on actual consideration and such provisions cannot be ignored by simply providing an arbitrary abatement of land by way of a notification.
- ⦁ That referring to the contention raised by the respondents in an affidavit in reply filed, it was submitted that Section 15(5) provides for fixing of value of goods & services, and the value of the sale of land cannot be prescribed under Section 15(5). As per Section 2(87) ‘prescribed’ means prescribed by rules, thus prescription of value for the purpose of Section 15(5) can be done only by rules, not notification.
- ⦁ That strongly relying on the case of Wipro Ltd. (supra), it was submitted that an arbitrary notification, as in the present case, could not be saved simply on the ground that the government has the power to issue such notifications.
- ⦁ That the respondent’s reliance on entry 5(b) of Schedule II is totally misconceived as the sole purpose of Schedule II is to provide whether a supply will be a supply of goods or supply of services. It does not provide for any deeming fiction so as to enlarge the scope of supply.
- ⦁ Lastly reliance was placed on the decision of State of Rajasthan v/s Rajasthan Chemists Association (2006) 6 SCC 773, wherein it was held observed’ that tax cannot be imposed on a value unconnected with the subject of tax’, and submitted that the impugned notification is ultra-vires as it leads to a consequence whereby tax is imposed on land which is never sought to be taxed by the statute.
Submissions with respect to Special Civil Application No. 6840 of 2021 & 5052 of 2022:
- ⦁ It was submitted on the behalf of the writ-applicants that the writ-applicants are developers and sought an advance ruling about the taxability under the GST Act on the supply of developed land. The Advance ruling authority in its order held that the deduction for the sale of land is available only to the extent of 1/3rd of the total consideration in view of the impugned notifications. Further, the said advance ruling order was affirmed by the Appellate Authority for advance ruling. Thus, the present writ application challenges the validity of the impugned notification and the order of the Appellate Authority for the Advance ruling.
- ⦁ That relying on Supreme Court decision in Mangalore Ganesh Beedi Works v/s Commissioner of Income Tax (2015) 378 ITR 640 (SC), Mohit Marketing v/s CIT Tax Appeal No. 157 of 2000 & Commissioner of Income Tax v/s Parle International Ltd. Tax Appeal No. 1905 of 2009, it was submitted that once a particular consideration was agreed for the sale of land between two parties, it was not open to the taxing authorities to re-write the terms of the agreement.
- ⦁ Further reliance was placed on the Supreme Court decision on Commissioner of Income Tax, Hyderabad v/s Motor and General Stores (P) Ltd. AIR 1968 SC 200 ‘wherein it was observed that if a document in question was intended to be acted upon and there was no suggestion of malafide or bad faith or fraud, then the taxing statute was required to be applied in accordance with the legal rights of the parties to the transaction.’
- ⦁ It was submitted that developed land would be included within the meaning of the term ‘land’ and if the impugned notification is not to be struck down as ultra-vires, the same is required to be read down as inapplicable where the value of land is ascertainable separately.
- ⦁ At last, it was argued that the Appellate orders of Advance Ruling, which held that 1/3rd of the deduction would be available in view of the impugned notification, were also liable to be set aside and quashed.
Submissions on the behalf of Respondents: –
- ⦁ It was submitted on the behalf of the respondents that Article 246A (1) of the Constitution empowers the Parliament and the Legislature of every state to make laws in respect of the Goods and Service Tax to be imposed by State or Central Government. Section 9 provides for the levy of GST on the supply of goods and services. As per Article 279A (4), the GST Council shall make recommendations to the Union and the States on the issue related to GST. Section 9(1) provides that GST will be levied on all intra-State supplies of goods and services, on the value determined under Section 15. Thus, the levy of CGST shall be on the value as determined under Section 15. Section 15(5) of the CGST Act, 2017 provides that notwithstanding anything contained in sub-section (1) or sub-section (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.
- ⦁ That the GST Council in the 34th meeting also agreed to apply tax at a new rate to be applicable to new projects or ongoing projects. Thereafter, notification 3/2019 Central Tax (Rate) dated 29.03.2019 was issued on the recommendation of the GST Council, which provided for deemed valuation of land as provided in paragraph 2 of the impugned notification. Thus, the contention that the determination of the value of the supply by subordinate legislation, when the value of land and cost of construction are separately ascertainable, is ultra-vires Section 15 of the CGST Act does not hold ground. Further, the contention that deduction of deemed value of land is beyond the scope of a delegation under Section 9 (1) of the CGST Act has no legal basis at all.
- ⦁ That reliance was placed on the Supreme Court decision in Union of India v. Nitdip Textile Processors Pvt. Ltd. (2012) 1 SCC 226, wherein ‘it is observed that the legislature enjoys very wide latitude in classification for taxation. Reference was also made to Anant Mills Co. Ltd. vs. State of Gujarat & Ors., (1975) 2 SCC 175.
- ⦁ That the Government is empowered to decide the rate in the public interest on the basis of recommendations from the GST Council and the GST Council is well within its power to recommend such reduction.
- ⦁ Thereafter relying on the judgments of the Union of India (UOI) and Ors. Vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407, 2021  G.S.T.L. 513, Spences Hotel Pvt. Ltd. and Ors. Vs. State of West Bengal and Ors. (1991) 2 SCC 154, Khyerbari Tea Co. Ltd. and Ors. Vs. The State of Assam AIR 1964 SC 925, it was submitted that the impugned Notification is not ultra-vires Section 7(2), Section 9 (1), Section 15 of CGST Act and Article 14 and Article 246A.
- ⦁ That taking reference to Para 5(b) of Schedule – II, it was submitted that in case of a transaction that involves the construction of a building, civil structure, or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, wherein the completion certificate with respect to such constructions have not been received, such transactions shall be treated as services under Paragraph 5(b) of Schedule II and therefore, shall be taxed as per the aforestated Notifications.
- ⦁ It was contended that the transaction in the present case comprises land, construction of Bungalow, and the development of various amenities, facilities, and common areas. None of these components of the transaction can be separated and are integral parts of the transaction.
- ⦁ Taking reference to the Supreme Court decision in Narne Construction P. Ltd. and Ors. Vs. Union of India (UOI) and Ors. (2012) 5 SCC 359, it was submitted that the transaction in the present case is for the sale of a developed piece of land and not of plain land and therefore; it is subject to many conditions, limitations, prohibitions, and restrictions unlike a transaction of sale of land.
- ⦁ The present transaction is one of the development and construction of a building, civil structure or part thereof, intended to be sold to the writ applicant, and therefore, the present transaction falls squarely under Paragraph 5(b) of Schedule II not under Schedule III.
- ⦁ Further explaining the formula in paragraph 2 of the notifications for ascertaining the value of land, submitted that deeming fiction in the notifications was recommended by the GST Council to consider the land portion in supply, apart from construction and other development services. Further, the consideration as provided in the booking agreement, entered between the parties, with respect to land and construction activity might not reflect the actual value of the land involved in the transaction.
- ⦁ That as per the booking agreement with the developer, it’s not only land but a developed land with all facilities, amenities, and common area as part of the plotting scheme. Hence, land includes these developments also and the value of such development cannot be ascertained as the same is to be enjoyed by all the occupants of the scheme.
- ⦁ That is the contention of the writ-applicants is accepted it may lead to absurd results as the buyer and developer may mutually decide that 99% of the total consideration is towards value of land and the rest is for construction. This may lead to huge losses to the public exchequer.
- ⦁ It was argued that inequities cannot render a provision susceptible to challenge to its legality/constitutionality. Further, relying on the decision of the Supreme Court in Union of India & Ors. vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407, it was submitted that the Hon’ble Supreme Court after referring to its earlier decisions, held ‘that the formula is to evolved/read down by the Courts only if it leads to absurd results or is unworkable’.
- ⦁ That in respect of advance ruling orders, it was argued that the writ application under Article 226 of the Constitution of India in not maintainable against such orders.
- ⦁ The Hon’ble High Court after considering the submissions from both sides, facts of the case, and law applicable, took note of the law stated in Section 9, Section 7, Schedule – II & Schedule – III of the CGST Act.
- ⦁ That after perusal of the above sections and schedules, it was observed that supply includes all forms of supply made or agreed to be made for a consideration by a person in the course or furtherance of business. Further, the activities falling under Schedule II would be considered as supply of service or goods and the activities falling under Schedule III would not be considered as supply of goods or services.
- ⦁ Further taking note of entry 5(b) of Schedule II which states ‘construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier and entry 6 as well as entry 5 of Schedule III which states ‘Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building’, it was observed that it is not in dispute that the sale of land and building is not subject to GST, however, the exclusion is subject to entry 5(b) of Schedule II, which provides that the transaction pertaining to the sale of land is taxable as construction services unless the consideration is received after the grant of completion certificate or occupation whichever is earlier.
- ⦁ The Hon’ble High Court after the perusal of entry 3(if) and paragraph 2 of the impugned notifications observed that in the case of construction services involving the transfer of land, the deduction of such transfer of land or undivided share will be given to the extent of 1/3rd of the total consideration charged.
What sought to be taxed by the Parliament and State Legislatures?
- ⦁ Taking reference to legislative history relied upon by the writ-applicants, it was observed that the controversy with respect to taxability of construction contracts was first raised before the Hon’ble Supreme Court in the 1st Gannon Dunkerley’s, wherein ‘it was held that wherein it was held that the State legislatures do not have the legislative competence to impose sales tax on indivisible works contracts since they did not involve the sale of goods as understood under the Sales of Goods Act, 1930’.
- ⦁ Further, relying on the observation of the Supreme Court in the said judgment it was found that in a building construction contract the contract is forgetting the building constructed not for the sale of goods used in the course of construction and the property in goods would pass to the buyer through the theory of accretion.
- ⦁ It was found based on the observations of the Supreme Court that when the goods are embedded into the earth pursuant to the construction contract, such contract could not be said to be for the sale of goods.
- ⦁ From the 46th Constitutional amendment, the state legislature was granted the powers to impose a tax on the property in goods involved in the Works Contract. Then, the question arose regarding the determination of the value of goods in the indivisible works contract, which was answered in the 2nd Gannon Dunkerley’s case wherein it was held that the value of goods can be determined by excluding the value of labor and profit element. However, these contracts were only purely construction contract,s not development agreements that involve the sale of land as well.
- ⦁ The decision of the Supreme Court in Raheja Development Corporation wherein it was held that the tripartite agreements would also be considered as works contract and would involve deemed sale of goods, was doubted and referred to a larger bench.
- ⦁ The Larger Bench in the 1st Larsen and Toubro also held that even the tripartite agreement between the buyer, developer, and owner for construction of flats at the behest of the buyer, thus it involved the taxable deemed sale of goods. It was further held that the construction which was undertaken after agreement with the purchaser was held to involve a works contract.
- ⦁ That when the impugned notifications were discussed and finalised by the GST Council, the decision of the Supreme Court in 1st Larsen and Toubro Ltd. (Supar) was specifically referred in the 14th GST Council meeting. Thus, the base of the levy is not changed under CGST Act. The construction which is carried on by a developer as per the terms of the contract with the buyer, which was earlier taxable under VAT/Service tax is now sought to be taxed under the CGST Act, and therefore the deduction is given for the sale of land.
- ⦁ That as Section 7 of CGST Act, includes the supply of goods and services made or agreed to be made for a consideration, implies that supply would be initiated only after the agreement between the supplier and the receiver is entered. The similar ratio has been laid down by Supreme Court in 1st Larsen and Toubro Ltd. that there cannot be a sale in respect of construction undertaken prior to agreement with the buyer.
- ⦁ Thus, from the legislative history, it is quite evident that there is no intention to impose tax on the supply of land in any form and for this reason, only it has been provided in Schedule III of the CGST Act.
Relevance of Developed vis-à-vis Undeveloped land: –
- ⦁ The Hon’ble Court rejecting the contention of the revenue found that if Schedule III provides for ‘sale of land’ then it can be land in any form, so even in the case of the tripartite agreement for the sale of land and building, the imposition of the tax would be on construction activity only.
- ⦁ That if the agreement is entered after the land is already developed by the developer, then such development activity was not undertaken for the prospective buyer, therefore GST cannot be imposed on the developed land and only construction activity can be taxed as supply.
- ⦁ The fact that the land is not a plain parcel of land but a developed land cannot be a ground for imposing a tax on the sale of such land. Thus “sale of land” under Schedule III to the GST Acts covers the sale of developed land even as per the impugned notification.
The measure of Tax: –
- ⦁ Taking note of Section 15, it was observed that ordinarily, the value of the supply of goods and services should be the actual price paid or payable, however, subsections (2) & (3) provide for certain inclusions and exclusions from the value of supply.
- ⦁ In the case of Writ-applicant Special Civil Application 1350 of 2021, as per the booking agreement consideration for the sale of land and construction of bungalow, has been specifically mentioned. Thus, the fixed deduction as per the impugned notification would not be applicable in the present case when the statutory provisions provide for valuation in accordance with the actual price paid or payable. Deeming Fiction can be applied only where the actual price is not ascertainable.
- ⦁ The above proposition is squarely covered by the decision of the Supreme Court in the 2nd Gannon Dunkerley’s case wherein it was held that ‘if the actual value of labor was available then the same was to be deducted and if in case actual value was not ascertainable deeming fiction could be applied’.
- ⦁ Further, in the 1st Larsen and Toubro case (supra), one of the points to be considered before the Supreme Court was whether a rule in the Maharashtra Value Added Tax Rules capping the value of the land at 70% of the agreement value was permissible or not. It was held by the hon’ble Supreme Court that Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1-A) has to be read in the manner that meets this criterion and we read down Rule 58(1-A) accordingly.
- ⦁ Further reference was also made to the judgment of the Supreme Court in the matter of Wipro Ltd. (Supra)
- ⦁ The Hon’ble Court with the all above findings held that deeming fiction of 1/3rd of deduction of total consideration for the value of land where the actual value of land is ascertainable is clearly contrary to the provisions and scheme of CGST and therefore ultra-vires the statutory provisions.
The arbitrariness of the Deeming Fiction by the Impugned Notification: –
- ⦁ Apart from being contrary to provisions the impugned notifications are also arbitrary as the deeming fiction is uniformly applied irrespective of the size of the plot of land and construction on it.
- ⦁ There is no distinction between a flat and bungalow as far as deduction provided in the deeming fiction is concerned. The deduction as per the deeming fiction has been applied without any regard to the size of land and the area constructed on such land.
- ⦁ In the 14th GST Council meeting, the discussion was in respect of flats while the ultimate notification was issued and made applicable even to other transactions such as the sale of land with the construction of bungalows.
- ⦁ 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.
Arbitrary Deeming Fiction has led to measure of Tax having no nexus with Charge: –
- ⦁ The Hon’ble Court referring to the decision of Hon’ble Supreme Court in Govind Saran Ganga Saran v. CST [1985 Supp SCC 205 : 1985 SCC (Tax) 447 : AIR 1985 SC 1041] held that the arbitrary deeming fiction by way of delegated legislation has led to a situation whereby the measure of tax imposed has no nexus with the charge of tax on supply of construction service.
Section 15 (5) does not further the case of the Respondents: –
- ⦁ It was noticed by the Hon’ble Court that it was the case of the respondents that the impugned notification is issued in exercise of powers under Section 15(5) of the CGST Act. In this regard it is to be noted that in Section 2(87) – prescribed” means prescribed by rules made under this Act on the recommendations of the Council;”. Thus, the prescription under Section 15 (5) has to be by way of rules not notification.
- ⦁ Taking reference to the judgment of the Supreme Court in Wipro Ltd. (supra), it was held that where a delegated legislation is challenged as being ultra-vires and in violation of Article 14 of the Constitution of India, the same cannot be defended merely on the ground that the Government had the competence to issue such delegated piece of legislation.
What if the Supplier Artificially Inflates the price of land thereby Deflating the value of the Construction Service? –
- ⦁ The Hon’ble Court rejecting the contention of the revenue, i.e., that the parties may artificially fix a higher value for land so as to reduce tax the liability under the GST Acts, held that value, as mentioned in the agreement, are not challenged in the affidavit in reply, therefore, such contention is not applicable.
- ⦁ That the possibility of obtaining indirect consideration cannot be ruled out for any supply transaction in view of Section 15(4) which states ‘Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.”
- ⦁ It was held that the revenue was not remediless even in a case where there is a doubt about the correctness of value assigned in the contracts toward construction. The resort can be made to valuation rules – Rule 27, Rule 28, Rule 29, Rule 30, and Rule 31 for ascertaining the value of construction.
- ⦁ When such a detailed statutory mechanism for determination of value is available, then the impugned deeming fiction cannot be justified on the basis that it is meant to curb avoidance of tax when in fact such fiction is leading to arbitrary consequences.
Already similar mechanism existed under Service Tax Law which is not required to be deviated from: –
- ⦁ When in view of the judgment of the Delhi High Court in Suresh Kumar Bansal (Supra) Deduction at a fixed percentage was made applicable only where the actual value was not ascertainable. When such a 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 for different possible factual scenarios which is completely arbitrary and violates Article 14 of the Constitution of India.
Entry 5(b) of Schedule II is not relevant for determining the validity of Impugned Notification: –
- ⦁ Originally clause (d) of Section 7(1) includes transaction enlisted in Schedule II of CGST Act however such clause was deleted retrospectively and a new clause (1A) was inserted which provides that if a transaction qualifies as supply, then it would be treated as a supply of goods or services in accordance with Schedule II. The Parliament clarified that Schedule II to GST is not meant for expanding the scope of supply but only to clarify whether a particular transaction qualifies as supply or not. Thus entry 5(b) of Schedule II is not relevant for deciding the issue in the matter.
- ⦁ Further, it was held that the judgments of VKC Footsteps Pvt. Ltd. and Narne Construction Ltd. are completely misplaced and are not applicable to the facts of the present case.
- ⦁ With the above findings, it was held by the Hon’ble Court that the impugned Paragraph 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 and in violation of Article 14 of the Constitution of India.
- ⦁ The mandatory deduction as per paragraph 2 will not be mandatory in nature and can be permitted at the option of the taxable person where the actual value of land is not ascertainable.
- ⦁ That in Special Civil Application No. 1350 of 2021 the writ-applicant has deposited the amount of GST charged by the supplier i.e. Respondent No. 4. That amount is to be refunded to the writ-applicant with interest at the rate of 6% p.a. as the burden of tax has been borne by the writ-applicant.
- ⦁ In the other two writ applications numbered Special Civil Application No. 6840 of 2021 & 5052 of 2022, since the advance ruling appellate orders are based on the impugned notification providing for mandatory deeming fiction for deduction of the value of land, the said orders are hereby quashed and set aside.
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