TIOL-DDT 2770
21 01 2016
Thursday

SERVICE Tax - Valuation of Flats given to land owner - Board overrules Board - Board Circular superior to Education Guide. A land owner enters into an agreement with a builder, whereby, the land owner gives either land /development rights (to construct/develop a residential complex and sell flats/houses of such complex to buyers) to the builder. The builder/developer, in turn, agrees to assign a portion of the constructed area, in the form of flats in favour of the land owner. The remaining flats are sold by the builder/developer to various buyers.

In para 6.2.1 of the Education Guide released by the Board on 20.06.2012, the Board clarified:

6.2.1 What would be the liability to pay service tax on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights and to other buyers. If payable, how would the services be valued?

Construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/ developers even for the flats given to the land owner.

Value will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.

In Circular No. 151/2/2012-ST dated 10.2.2012, the Board clarified:

Value is determinable in terms of section 67(1)(iii) read with rule 3(a) of Service Tax (Determination of Value) Rules, 2006, as the consideration for these flats i.e., value of land / development rights in the land may not be ascertainable ordinarily. Accordingly, the value of these flats would be equal to the value of similar flats charged by the builder/developer from the second category of service receivers. In case the prices of flats/houses undergo a change over the period of sale (from the first sale of flat/house in the residential complex to the last sale of the flat/house), the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid by the builder/developer on the ‘construction service' involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument(eg. allotment letter).

There is apparent contradiction between the Board Circular created by the bright boys of CBEC's TRU and the Education Guide created by the bright boys of CBEC's TRU.

Now Board has given a clarification that the Service Tax assessing authorities should be guided by the Board Circular dated 10.2.2012 and not the Education Guide.

CBEC Instruction in F.No.354/311/2015-TRU., Dated: January 20, 2016

Please also see:

1. Service tax on construction services: TRU clarifies to reduce litigation

2. Service Tax on Construction Services - CBEC Clarification falls short of expectations  

3. Construction of Complex service - Complex Clarifications

4. Clarifications on applicability of service tax on Realty Sector - A Critical Peep

5. Service Tax on Construction Activities - A Comprehensive Analysis

6. Negative Blues - XII JVs in construction

7. Valuation of barter between Landowner and Developer - ‘Complex' construction

8. Service Tax Implications on Joint Development Agreements

9. ST on Construction Services - grey areas

Service Tax - Officers who authored Education guide have only broad understanding sans legal backing - CBEC reiterates Circular No 151 dated 10.02.2012

I asked a Service Tax expert for his quick views on the Board's Instruction. This is what he gave me:

"Service Tax on residential complex construction was introduced in the year 2005. We are now in the year 2016. For 11 years, nobody is clear on the elementary issue of how to arrive at the value of a flat and when a builder is liable to pay tax. Host of Circulars were issued during this 11-year period and with the officers changing at the helm, the interpretation changes and a new theory emerges. The new officer cleverly says the earlier Circular was issued based on the "BROAD" understanding of that officer and is not binding (as if the new Circular is issued after consultation with the Attorney General and is flawless!). If the officers who collect the taxes themselves are not clear and have only broad understanding, how about the poor taxpayer?

When a landowner gives development rights to a builder, and the builder hands over some of the flats to the landowner in exchange of the land given for development, how to pay Service Tax? Circular No 151 dated 10.02.2012 clarified that there is a "Service" rendered by the builder to the landowner in respect of the flats handed over to him and is liable to pay Service Tax. As far as value is considered, it was clarified that the value of similar flats sold by the builder to other buyers has to be adopted. However, as per para 6.2.1 of the Education Guide, the value of flats (given to the landowner) will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.

When Negative list was introduced, the Chairman of CBEC, in the introductory message claimed -

We, in the Central Board of Excise and Customs (CBEC) are highly conscious of our responsibility to explain the changes as lucidly and as comprehensively as possible. This educational Guide material has been prepared by a team of officers of our Tax Research Unit and goes far beyond the standard Q&A guides, budget circulars or similar tools that are commonly used for such purposes.

Now, the very same Board in a clarification issued yesterday says the clarification issued by the Team Negative List is not correct. They reaffirmed the Circular No 151 dated 10.02.2012. Presumably, the comparable flat value brings in more revenue and with the present position, the judiciary may take a view that the later clarification (Education Guide) would prevail over the earlier one dated 10.02.2012.

The present Circular dated 20.01.2016 tries to remove the conflict between para 6.2.1 of the Education Guide and Circular No 151 dated 10.02.2012. Apparently, they wanted to go with "more revenue" clarification of Circular dated 10.02.2012, i.e., comparable flat model.

Coming to the Circular dated 10.02.2012, it says, though the consideration received by the builder from land owner is value of land/development rights in land MAY not be ascertainable ordinarily. But, the question is WHY NOT? A builder may claim I have the land value recognized by a State Government for levy of stamp duty. Why cannot it be adopted? One has to go to Valuation Rules only if the value is not ascertainable. They cannot presume and jump to 67(1)(iii). The case falls under Section 67(1)(ii) and para 6.2.1 of the Education Guide drafted by TEAM NEGATIVE LIST cannot be termed as negative, for, they knew it would fall under 67(1)(ii).

Let us talk about another issue. If we adopt comparable value, there is a problem. Let us say, A Developer sells a flat (Developer share) to a buyer for 50 lakhs. This includes land cost (of undivided share of land). When he hands over an identical flat to land owner, he gets only a constructed flat (he continues to be the owner of undivided land share, developer only constructs a superstructure). How can the value of flat handed over to the land owner be also treated as Rs 50 lakhs for payment of Service Tax?

Leaving all this, there is another confusion in the field. Notification No 26/2012 ST dated 20.06.2012 provided abatement of 25% and 30% to certain specified categories of residential complexes. However, field formations are denying the benefit of this notification of the ground that a works contract has to be assessed only at 40% of the gross amount charged and demanding differential tax.

For ease of doing business, Board should immediately clarify that."

FTP - Export of Roasted Gram Permitted

GOVERNMENT has amended Sl. No. 54 in Chapter 7 of Schedule 2 of ITC(HS) Classification of Export & Import Items.

The prohibition on export of pulses till further orders as notified vide Notification No  78(RE-2013)/2009-14  dated 31.03.2014 read with Sl. No. 54 in Chapter 7 of Schedule 2 of ITC(HS) Classification of Export & Import Items, as amended from time to time, will not apply to export of Roasted Gram (whole/split) in consumer packs of 1 (one) Kg.

DGFT Notification No. 31/2015-20, Dated: January 20, 2016

FTP - Import of Natural Rubber

IMPORT of Natural Rubber under Exim code 4001 10 was allowed freely. Now the Government has introduced the policy that import will be allowed only through sea ports of Chennai and Nhava Sheva (Jawaharlal Nehru Port).

DGFT Notification No. 32/2015-20, Dated: January 20, 2016

Company Law - HUF Cannot become partner in LLP

IN Circular No.13/2013, dated 29.07.2013, the Ministry of Corporate Affairs on a question whether a 'HUF' or a karta can become partner or Designated partner (DP) in LLPs, had clarified 'as per section 5 of LLP Act, 2008 only an individual or body corporate may be a partner in a Limited Liability Partnership. A HUF cannot be treated as a body corporate for the purposes of LLP Act, 2008. Therefore, a HUF or its Karta cannot become designated partner in LLP'.

The clarification stated that an HUF cannot become a designated partner, but it did not mention that the HUF cannot become a partner.

Now the Ministry states that the word 'partner' was inadvertently missed and clarifies that a HUF or its Karta cannot become partner or designated partner in LLP.

MoCA General Circular No. 2/2016., Dated: January 15, 2016

IRS Officer is CA Business Leader Awardee

IRS Officer Upender Gupta who is Commissioner, GST in CBEC has been honoured with the C.A. BUSINESS LEADER 2015 Award in the Government by the C.A. Institute.

Gupta, a qualified chartered accountant, is a popular speaker in the GST Circuit.

Dr. Mahesh Sharma, Union Minister of Culture is seen presenting the award to Upender Gupta.

Arrest under Service Tax -Is it a Police State?

IN the last few days, it was widely reported that Make My Trip is under DGCEI investigation for evasion of Rs.67 crores of Service Tax. The DGCEI has arrested one of the top executives of the Company.

Yesterday the Delhi High Court heard a writ petition filed by the travel company. The Company submitted before the Court that it was not liable to pay the tax, but paid Rs. 40 crore after the arrest. (Voluntary of course - payment, not the arrest!)

The Delhi High Court is reported to have observed,

No show cause notice, not even a scrap of paper to show that he owes 67 crores to you. This is a remarkable way of collecting taxes. Do you have any document to prove his liability? Now, even without a notice you have collected 40 crores. We are getting reduced to a police state, that is what is happening.

Tell the FM

WE start our Budget Run Up shortly. Please send in your suggestions. Please be brief and precise if you want the powers that be to read your views. We will try to take your suggestions to the FM and maybe you can help in making the Budget 2016. Please attach your suggestions in a ‘word' document clearly mentioning your name, address, phone number and email id. We will not publish your name if you don't want to.

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Until Tomorrow with more DDT

Have a nice day.

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