M/s Munjal Maneesh Bhatt v. UOI
May 7, 2022
FACTS OF THE CASE:
The applicant is a practicing advocate in the Gujarat High Court. The applicant entered into an agreement dated 29th September 2020 with the Navratna Organisers & Developers Pvt. Ltd., (herein referred to as the Developers or the Respondents), for the purchase of a plot of land admeasuring about 1021 square metres located at the Unit No. 937, “Kalhar Blues and Greens”, Bopal-Sanand Bypass Road, Ahmedabad. The said agreement also encompassed construction of bungalow on the said plot of land by the developers for the applicant. As per the agreement 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.
Further, as per the said agreement, the applicant was liable to pay all taxes including the Goods and Services Tax (for short “GST”). The applicant bona fide believed that by virtue of such clause he would be liable to pay tax under the Central/Gujarat Goods and Services Tax Act, 2017 (for short “the GST Acts”) on the consideration payable for construction of bungalow in as much as it would constitute supply of construction service under the GST Acts.
The Developers 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 Developers raised an invoice on the writ applicant to collect such tax from the applicant.
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.
Prayer of the Applicant:
- To strike down and declare Entry 3(if) of Notification No. 11/2017-Central Tax (Rate) as well as Entry 3(if) of Notification No. 11/2017 – State Tax (Rate) along with paragraph no. 2 of both the notifications as being ultra-vires Section 7(2) of the GST Acts read with Entry No. 5 of Schedule III to the GST Acts as well as ultra-vires Section 9(1) and Section 15 of the GST acts; as being manifestly arbitrary, grossly discriminatory and violating Article 14 of the Constitution of India as well as ultra-vires Article 246A of the Constitution of India
- Or to read down the referred notifications as applicable only qua sale of flats/building units wherein undivided share in land is transferred along with constructed flats/units without separate consideration being fixed towards sale of land
- To declare that tax under the GST Acts cannot be imposed on consideration expressly receivable/payable towards sale/purchase of land
- Refund of the excess taxes paid under protest as per the impugned order.
FINDINGS OF THE CASE:
The court after considering all the submissions of the applicant and the respondent deduced the case to rest on the answer to the question arising i.e., is whether the impugned 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?
The decisions taken by the Court were based on the following:
History of tax:
The learned counsel of the Applicant submitted that the history of the tax on construction services was to be revisited as the erstwhile indirect tax laws have been merged into the GST law.
Initially It was held by the Supreme Court that in case of a building construction contract, the property in goods passed as immovable property as and when the goods were embedded into the earth pursuant to the construction contract and therefore the construction contract could not be treated as involving sale of goods after which the 46th Constitutional amendment was passed whereby, inter-alia, the transfer of property in goods involved in the course of execution of a works contract was deemed to be a sale of goods under the clause (b) of Article 366(29A) of the Constitution of India. Thus, sales tax became payable on sale value of goods involved in the course of execution of works contract. Further, on contracts which would also involve an element of transfer of land, it was held that a tripartite agreement between the land-owner, developer and buyer involved construction of flats at the behest of the buyer and hence it involved taxable deemed sale of goods contract.
On analysing the history of indirect taxes, the Court held that 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.
Relevance Of Developed Vis-À-Vis Undeveloped Land:
The Developers i.e., respondents relied upon a decision by the Apex court on whether sale of a developed plot is considered as Sale of Land under the Consumer Protection Act and interpreted the decisions as that the “sale of a Developed Plot is not sale of land only, it is a different transaction than a mere sale of land”.
The Court held that it cannot accept the argument of the “land is not a plain parcel of land but a developed land” on the grounds that the judgement was in the context of Consumer Protection Act and is inapplicable under taxing statute and also, 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 and that at the point of time when the buyer entered into the picture, the land was already developed because of which even without going to Schedule III, the only service which is supplied by the supplier to the recipient is the construction undertaken for the buyer and it is such supply alone which can be taxed and finally that “sale of land” under Schedule III to the GST Acts covers sale of developed land even as per the impugned notification.
Hence the only question which is to be determined is whether such artificial deeming fiction of 1/3rd deduction is ultra-vires the provisions of the CGST Act or the Constitution.
Measure of tax:
The Court held that 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 on the grounds that 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 and a notification cannot provide for a fixed deduction towards land if specific value of land and value of construction service is available
The Court referred to various judgements of the apex court to hold that, 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.
(Referred to judgements where similar orders were passed w.r.t deduction of value of Value of labour and in case of loading charges under Customs valuation.)
Arbitrariness of the Deeming Fiction by the Impugned Notification:
As illustrated by the learned counsel of the applicant, the court took up two illustrations as well to analyse the arbitrariness, in as much as the same is uniformly applied irrespective of the size of the plot of land and construction therein, of the impugned deeming fiction.
The Court held that the deeming fiction which leads to arbitrary and discriminatory consequences is clearly violative of Article 14 of the Constitution of India which guarantees equality to all and also frowns upon arbitrariness in law on the grounds that 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. In addition to the same the court also visited the14th GST Council meeting minutes to say 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.
Competence of the Government:
The respondents also argued that the Government has competent authority to issue notifications and also fix deeming provisions w.r.t the value of land.
The court referred to judgement passed by the apex court on a similar issue and held that when the 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 on the grounds that the prescription under Section 15(5) of the CGST Act has to be by rules and not by notification and also that if the deeming fiction is found to be arbitrary and contrary to the scheme of the statute, then it will be held to be ultra-vires.
Valuation undertaken by the Applicants:
The respondents also submitted that the valuation disclosed in the agreement cannot be accepted as the same maybe done with a view to save tax.
The Court held that the impugned deeming fiction which is leading to arbitrary consequences, cannot be justified on these arguments, on the grounds that the GST Act provides a detailed statutory mechanism for determination of value i.e., even where the value of supply of goods or services or both cannot be determined under Section 15 (1), then the same can be determined in the prescribed manner i.e., the valuation rules and that the revenue is not remediless even in a case where it doubts the correctness of the value assigned in the contract towards construction
The court also held that fixation of a standard rate of deduction without any regard to different possible factual scenarios is completely arbitrary and violating Article 14 of the Constitution of India and added that Deduction at fixed percentage was made applicable only where the actual value was not ascertainable and when such workable mechanism for deduction of land was already in force under the service tax regime, the same ought to have been continued.
Entry no. 5(b) of Schedule II:
While the respondents placed Considerable emphasis Entry 5(b) of Schedule II to the GST Acts. The court held that Schedule II to the GST Acts is not meant to define or expand the scope of supply but only to clarify whether a transaction will be supply of goods or service if such transaction qualifies as supply. The court also added that while originally clause (d) of Section 7(1) included transactions enlisted in Schedule II to the GST Acts within the scope of supply, such clause was retrospectively deleted w.e.f. 1st July 2017.
JUDGEMENT OF THE COURT
The Court passed the order as a result of this judgement 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. Application of such mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India.
The court did not order to strike down the impugned paragraph 2 of Notification No. 11/2017- Central Tax (Rate) dated 28th June 2017 and the parallel State tax Notification but is read down to the effect that the deeming fiction of 1/3rd will not be mandatory in nature. It will only be available at the option of the taxable person in cases where the actual value of land or undivided share in land is not ascertainable.
The court also ordered the Refund of the excess taxes paid (under protest) in this respect with 6% interest on the same to the applicant on whom the onus of tax was borne.
The court also ordered to quash and set aside the advance rulings appellate orders w.r.t the writ applications that were also taken up on the same matter.
NOVELLO COMMENTS
The Hon’ble High Court of Gujarat has passed an order which provides clarity to the real estate industry.
The Order has stated that the deeming fiction under the Notification No. 11/2017- Central Tax (Rate) dated 28th June 2017 where mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land was stated, has been declared ultra vires to the provisions of the GST Act and also the uniform deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India.
Therefore, the provisions has been read down to say that the deduction is now optional and not mandatory i.e., Deduction can be claimed either on actual value of Land or on 1/3 basis when the exact value is not ascertainable.
One of the pointers that can be noticed is where the Court has provided illustration on arbitrariness nature of the impugned notification, the same can be useful as the real estate rates in different tier cities vary by a huge margin.
For coffee and conversations on the matter, feel free to reach out to Mr. N V Raman at 9703803250 or [email protected]