A report from The Delhi High Court has ruled that no service tax can be levied in respect of the agreements entered into between buyers and builders for flats in an under-construction building in a housing project.
The Bench said the government shall examine whether the builder in this case has collected any service tax from the petitioners and if such amount has been deposited with it, the money shall be refunded to them with 6 per cent interest.
Regarding service tax levied on preferential location, the Bench said, “we do not find any merit in the contention that there is no element of service involved in the preferential location charges levied by a builder.”
The Bench noted that service tax cannot be levied on the value of undivided share of land acquired by a buyer of a dwelling unit or on value of goods which were incorporated in the project by a developer.
It also said there was no “machinery provision” to ascertain the service element involved in the composite contract.
High Court held that the service tax is only payable on the value of services and not on the value of land. The mechanism for ascertaining the value of services (by excluding the value of land) involved in such contracts should have been provided either under the Finance Act, 1994, or the Rules issued under the said Act. In absence of any mechanism within the Act or the Rules to exclude the value of land, no service tax can be imposed on consideration of under construction flats wherein the value of land is included in such consideration
This judgement is widely accepted across the country.
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Till the time the Supreme Court decides the said issue, ambiguity regards levy of service tax on such contracts will exist despite Delhi High Court's decision. Taking note of the observations of High Court, Central Government may make suitable amendments in the service tax law so as to insert a proper mechanism for ascertaining the value of service portion in such contracts.
Thus, inspite of favourable judgment of the High Court, possibility of relief to be extended to the home buyers looks challenging. ..