APRIL 28, 2014

By Pritam Mahure, CA

DEVELOPERS engaged in construction and sale of residential projects enter into agreements with Landowners for further Development of the Land. Against the transfer of aforesaid land/ land development rights, the Landowner is entitled to constructed built-up area in the proposed developed scheme.

For ease of understanding, the aforesaid activity can be divided in two parts as under:

As regards transfer of land by Landowner to Developer,the transaction is of sale of land / land ownership rights by Landowner, so no service tax would be payable by Landowner.

As regards construction service by Developer to Landowner against land or land development rights, service tax would be payable as the same will qualify as ‘declared service' under section 66E (b) of the Finance Act, 1994. Further, levy of service tax on construction of complex has been upheld by the Apex Court in the case of Larsen & Toubro Ltd [2013-TIOL-46-SC-CT-LB].

++ Issue

However, the issue under consideration is what is the ‘value' on which service tax is payable on the aforesaid transaction by the Developer?

++ CBEC Clarifications

In this regard, the CBEC has issued two diametrically opposite clarifications on this issue of valuation of services provided by developer to Landowner as below:

So, what is the ‘value' that is to be adopted in the aforesaid case? Is it value of similar flats or value of land?

++ Analysis

'Value' needs to be determined by referring to section 67 read with Service Tax (Determination of Value) Rules, 2006. In this regard, section 67 is reproduced below:

"67. Valuation of taxable service for charging service tax provides -

(1) Service tax chargeable on any taxable service with reference to its value shall,-

(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money , be such amount in money , with the addition of service tax charged, is equivalent to the consideration;

(iii) in a case where the provision of service is for a consideration which is not ascertainable , be the amount as may be determined in the prescribed manner

From a reading of section 67 of the Act, it can be inferred that ‘consideration', is to be considered from the perspective of service provider i.e. how much the service provider receives (in cash or kind) for providing the services. Recently in the case of BhayanaBuilders (P) Ltd 2013-TIOL-1331-CESTAT-DELHI-LB, the Tribunal observed that ‘Section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided. Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later '.

Given the aforesaid, it can be stated that the consideration should be determined from the perspective of the service provider (i.e. how much he receives from service receiver) and consideration cannot be determined from the perspective of service receiver as value derived by him may differ. This can be illustrated by an example - a doctor charges a patient Rs 10,000 for an operation. The actual value for service receiver (patient) may be much more than the amount charged by doctor, however, the consideration should be restricted to Rs 10,000 i.e. the amount received by the doctor.

Thus, the value of service of construction provided by Developer should be value of land. Given this, if we determine the value from the perspective of Developer the value would be the market price of ‘land' received by the Developer.

++ Circular dated 10.02.2012 - Why it does not lay down correct law

In my view the Circular dated 10.02.2012 (which states that the value should be value of ‘similar flats' charged by Developer to third party buyers)does not lay down the correct law for the following reasons:

++ Circular dated 10.02.2012 will cease to have effect after the Negative list came into effect (i.e. post 1.7.2012). Education Guide dated 20.06.2012 being the latest clarification amongst the two clarifications, it will be presumed that it has taken into consideration the earlier Circular dated 10.02.2012 & therefore Education Guide should be preferred. Moreover, it has been issued in the context of the Negative List regime. Also, the Circular dated 10.02.2012 does not take into consideration the amendment introduced by Not. No. 24/2012-ST to the Service Tax (Determination of Value) Rules, 2006 and obviously so. More on this amendment in the next paragraph. Thus, reliance on Education Guide clarification is appropriate.

++ Section 67 (1) (iii) of the Act, which appears to be relied on by CBEC in the Circular dated 10.02.2012, is applicable in cases where ‘value is not ascertainable'.

Rule 3 of Valuation Rules was amended vide Not. No. 24/2012-ST w.e.f. 1.7.2012 to incorporate that it is applicable only in cases ‘where such value is not ascertainable'. In this regard, the CBEC vide its Circular 334/1/2012-TRU dated 16.03.2012 had clarified that ‘…it is proposed to amend Rule 3 of valuation rules to provide that ‘prescribed manner' in Rule 3 will be applicable only in the cases where valuation is not ascertainable . At present Rule 3 has been inadvertently made applicable to situation where consideration received is not wholly or partly consisting of money, which is fully covered by the Act.”

Thus, if the value can be determined in terms of section 67 (1) (ii) itself, then reference need not be made to section 67 (1) (iii) (and in-turn to Valuation Rules). In the instant case, value of land is determinable since stamp duty is paid on the said value.Thus value should be the land price transferred to Developer (and not value of similar flats given at future date).

++ As discussed above, consideration should be determined from the perspective of service provider i.e. how much the service provider receives (in cash or kind) for providing the services.Thus, value cannot be value of similar flats (the consideration received by the service receiver i.e. Landowner) as consideration is what is received by the seller from the buyer and not the other way around. As complex will be constructed later and may take years to compete and also no other schemes of any other developer / same developer are comparable (as they differ in terms of area, location, time of launch, quality of construction, reputation of developer etc.) so value of similar flats is not available at all (at the time when consideration is received). As service tax is payable at the time of receipt of consideration by Developer, it cannot be predicted as to what will be value at the time of allotment of flat to Landowner. Accordingly, value of consideration received by Developer (in terms of Development Rights) also needs to be determined at or about the same time at which the Development Rights are transferred (and not at the time when the built-up area is transferred to Landowner).

++ Even in the judgment of LCS City Makers Private Limited - 2012-TIOL-618-CESTAT-MAD, the Tribunal held that had service tax been paid immediately when the land was made available to the builder, the builder could have discharged service tax on such land value, but since he has not paid the same, the value shall be on the basis of construction charges charged to the buyers.

++ Way forward

In view of the diagonally opposite clarifications, the Real Estate industry, Consultants and even Service Tax Officers are not sure which circular is appropriate.

It would be in the interest of the Trade and the Department that the CBEC comes out with an early clarification in the matter.