NOVEMBER 28, 2014

By CA Manindar Kakarla

Introduction:

JOINT Development model of undertaking housing and commercial projects are widely popular because of the reason that no up front huge investments are required for acquiring lands. No cash outflows are involved in this model as a portion of the built area is exchanged in consideration for the transfer of development rights in land. This peculiar nature of transaction is the root cause for all the prevailing ambiguity as far as applicability of service tax and valuation is concerned.

Applicability of Service Tax on JDAs:

This is one of the contentious issues under service tax law. Under the previous regime, in the case of LCS City Makers Pvt. Ltd vs.CST 2012-TIOL-618-CESTAT-Mad it was held that service tax is applicable on construction services provided towards construction of landlord share.

JDAs are barter transactions which are not leviable to VAT. Whereas one of the essential conditions to be satisfied in order to call a service as works contract service is that the transfer of property in goods should be leviable to VAT. This condition fails in case of JDAs. Many optimistic tax consultants are of the view that since they are not works contracts, service tax is not applicable. In fact this aspect is not covered in the above referred LCS City Makers case.

The much stronger view that may break their faith is that there is another declared service entry i.e. Section 66E(b) which exclusively covers services provided by way of construction of complex. Moreover, unlike VAT, Service Tax can be levied even on transactions involving non-monetary consideration also. With this brief insight on issue of taxability, we move ahead to discuss on the valuation of services provided by builder under JDAs.

Valuation of Construction Services in lieu Development Rights:

The builder receives development rights over the land from the landlord in consideration of which a portion of the built-up area is transferred to landlord. From the service providers' perspective, the value of the land given for development is the consideration.

But the moot questions are how to arrive at the value of the land and at what point of time i.e. whether it is value of land at the time giving it for development or the value of built-up area as charged by developer from his other customers. We will first consider the timing issue.

i. Valuation at what point of Time:

On this issue, CBEC has given two diametrically opposite views which are given as follows;

On an average it may take around two to three years for a housing project to get completed. As compared to value of land at the time of giving it for development, the value of the built-up area as existing at the time of project nearing completion would comparatively be on higher side. It is for this reason that Revenue is initiating demands on the basis of value at which built-up area is transferred by the builder to other customers.

Going by pure commercial terms, there is no doubt that landlord may end up with some premium under development model as compared to normal sale. This is because of the reason that under normal sale, amount is required to be paid in cash in two to three installments whereas under development model, builder need not shell out anything towards land and landlord has to wait till project completion to en-cash his portion of built-up area.

In terms of Section 67 of the Finance Act, 1994, service tax is chargeable on the consideration received by the service provider for providing his service. Thus it is purely based on the benefit i.e. received by the service provider. In JDAs, the benefit derived by the service provider i.e. builder is nothing but the value of land as existing at the point of development. This cannot be compared with benefit that will be ultimately received by landlord from the project. Say for example, a professional service worth Rs.2,50,000(as normally charged to others) is rendered to a particular client for Rs.50,000. In this case, the consideration received is Rs.50,000 only but it cannot be Rs.2,50,000.

Further strength to this view can be added in terms of reference to Section 67A. This section is introduced under Negative list regime & clarifies that rate of tax, value of taxable service, rate of exchange if any shall be as in force or as applicable at the time when taxable service has been provided or agreed to be provided.

In case of JDAs, consideration is said to be received in advance i.e. the moment land is made available for development. It is as good as consideration received in advance for the service that is agreed to be provided by developing the project and transferring a portion of built-up area. Thus in terms of Section 67A, it is value of land as existing at the time of entering JDA that alone should be considered for valuation.

In view of the above discussion, the clarification given by CBEC vide Circular dated 10.02.2012 does not seem to be legally correct. Suffice to say that the value of land at the time of entering into development agreement is alone relevant for arriving at the value of taxable services. As consideration is said to be received on the date of handing over the possession of the land for development, this by itself is the point of taxation. Accordingly service tax is payable by 5th/6th of the subsequent month.

ii  Manner of arriving at value:

The next question to be considered is that what should be the value of the land. At the time of entering the joint development, two guideline values will generally be available. One is the market value of the land and the next one is stamp duty value. Generally, stamp duty value will be comparatively less than the market value of the land. In view of this, the issue that arises is whether stamp duty value alone can be considered for valuation by ignoring the market value.

Section 67(1)(iii) provides that in case where consideration is not ascertainable, the same shall be determined in the manner prescribed. Accordingly, Service Tax (Determination of Value) Rules, 2006 are notified for this purpose.

Rule 3(a) of these rules, provides that the value of service tax shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in ordinary course of business. Having regard to the peculiar nature of JDAs, it is usually impossible to find similar service provided by developer himself especially at the time of entering into JDA.

Rule 3(b) of these rules provides that wherever consideration is not ascertainable, the same shall be the equivalent money value which in no case be less than the cost of provision of such service. The cost of provision of service in case of JDAs is the cost of construction of the portion of built-up area transferred to the landlord.

Thus essentially, a risk seeking assessee may adopt registered stamp duty value for arriving at the value of taxable service in case of JDAs. However, he should ensure that the same shall be equal to or more than the cost of construction of built-up area. Whereas risk averting assessee, may adopt market value of land by keeping valuation certificate from competent person as basis.

Will Adoption of Land Value to Built-Up Area Leads to Revenue Leakage:

The whole issue of valuation arose because of CBEC Circular issued with objective not to garner revenue. If one would look at the whole transaction in a rational manner there is no leakage of revenue. Under negative list regime, even landlord is required to pay service tax with respect to his share of residential units (built-up area) when he ultimately transfers the same to customers except in cases where entire sale consideration is received after obtaining completion certificate.

Thus essentially, transfer of built-up area by builder to landlord is not the final point for tax collection. Whatever the service tax payable by builder on the built-up area transferred to landlord under JDA is CENVATable for landlord when he ultimately pays service tax on the residential units transferred to customers.

Way Forward:

However best one strives to comply with law in this regard it is very difficult until a standardized statutory guideline is available on this issue like a separate valuation rule rather than a revenue biased circular. In Indirect taxes, tax payers could authoritatively collect the taxes from the consumers only when there is a clarity in trade about taxability and quantum of tax. In view of this, Tax Authorities have to consider this issue on top priority basis and come forward with easy-to-comply valuation mechanism. Otherwise, this may lead to prolonged litigation hindering hassle free revenue collection and nightmare to assessees.

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