JANUARY 29, 2016

By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate and R Vaidyanathan, M.Com., M.Phil, Consultant

THE Ministry of Finance, TRU has been very kind enough to issue an Instruction F.No. 354/311/2015-TRU dated January 20, 2016, 'clarifying', based on a so-called report of the High Level Committee, an issue which has seen contradictory views being expressed by the very same Board on different occasions. The DDT aptly called it a case of Board vs Board.

In its latest circular, the Board reaffirms its view expressed in its earlier Circular No. 151/2/2012-ST dated 10-2-2012 while admitting that the view expressed in Para 6.2.1 of the Education Guide 2012 is erroneous.

A combined reading of the circular dated 10-2-2012 and the Education Guide would indicate that, while in the former, the view was that, the valuation of the construction activity undertaken by the Developer/Builder is to be based on the date of transfer/conveyance of the finished flats/apartments (pertaining to the Landowners) to the Landowners by the Developer/Builder, Para 6.2.1. of the Education Guide had taken the view that, such valuation is to be based on the value of the land transferred by the Landowners to the Developer/Builder as on the date of such transfer of land, which would obviously mean date of the joint development agreement in most cases. The Education Guide also stated that the point of taxation would be determined accordingly, which would have meant that the date of transfer of the land by the Landowners would be the date on which the service tax would have been leviable on the Developer/Builder, while the said Circular dated 10-2-2012 took the view that the point of taxation is the date on which the flats are transferred/conveyed to the Landowners by the Developer/Builder.

It is evident that the view expressed in the Education Guide is far more logical given the fact that, for purposes of levy of capital gains on the Landowners under the Income Tax Act, 1961, the date of transfer of the capital asset being land is taken to be the date of the joint development agreement, in most situations. The Education Guide had taken a similar view and there is nothing wrong about this, from a legal perspective. Of course, this would have meant that the service tax revenue to be generated in these cases would have been far lesser, as the valuation of land as on the date of the joint development agreement would have been much less, as compared to the valuation as on the date of the transfer of the flats by the Developer/Builder which would obviously fall at the end of the project. One is not able to see any logic in the latest salvo from the Board except that, it seems to be clearly aimed at increasing the revenue for the Government from joint development projects.

Be that as it may…..we need to bear in mind that, the circular dated 10-2-2012 was issued prior to the coming into force of the negative list based service tax law with effect from 1-7-2012 and one assumed that the said circular, having been so issued, would have to be assumed to have been rendered otiose. The Government has now given a fresh lease of life to this circular by reaffirming the views expressed therein, in its latest circular dated 20-1-2016.

The circular dated 10-2-2012 was issued prior to the introduction of the concept of continuous supply of services and based on this alone, it is to be considered that said circular is inoperative in law, not-withstanding the fact that, by and large, the concept of 'continuous supply of services' is applicable also to joint development projects. Moreover, the said circular also disregards the fact that joint development projects are Works contracts and are governed by Rule 2A of the Service Tax (Determination of Value) Rules, 2006 in terms of which, the valuation for purposes of service tax is to be based on the valuation applied for levy of sales tax/VAT. One rightfully assumed that, the said circular, having been issued prior to 1-7-2012 on which date the amended Rule 2A as aforesaid, was introduced, had become inoperative on the basis of the fundamental legal dictum that, in the event of a conflict, the rule would prevail over the circulars and notifications.

Further, the circular dated 10-2-2012 would become inoperative in the light of Section 67A of the Finance Act, 1994 which has been introduced with effect from 10-5-2012, in terms of which, the rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, or as applicable at the time when the taxable service has been provided or agreed to be provided.

It is crystal clear that the date when the service pursuant to the joint development is signed is the date where the services by the Developer/Builder is agreed to be provided, to the Landowners. This then is a clear case of the said circular dated 10-2-2012 clearly violating the provisions of Section 67A and does it require great brains to state that the Section would override the views expressed in a circular?

Taking this discussion further….. service tax on joint development projects can be levied, only if they are also subject to the levy of tax under the state Value Added Tax Act. It is to be emphasised that, the law related to the levy of VAT on joint development projects is yet to be attain finality, though, some States have amended their VAT Acts to provide that VAT shall be leviable on joint development projects. With particular reference to Karnataka, the question of levy of VAT on joint development projects is now before the Karnataka Appellate Tribunal, after the High Court has remanded some cases to the Tribunal. If it is held that VAT cannot be levied on joint development, service tax also cannot be levied for sure, as joint development arrangements are very much in the nature of works contracts.

In what would seem to be an exercise aimed with the sole objective of garnering more revenue, the Central Government, by issuing the latest instruction dated 20-1-2016 has succeeded in showing the Education Guide (which, many of us feel, to be a very well prepared guidance note) in rather poor light, which is quite unwarranted, especially, when the views expressed in Para 6.2.1 are well thought of and take into account, the developments related to the negative list based service tax law.

Of course…. there are a lot of practical issues involved in fixing point of taxation to be the date on which the flats are transferred/conveyed by the Developer/Builder to the Landowners, at the fag-end of the project. It would be impossible for the Developer/Builder to collect the service tax from the Landowners, who in turn, may have already sold or contemplated selling the flats acquired by them under the joint development agreement.

Before concluding...

As people involved in litigation practice, this circular comes as a huge opportunity, inasmuch as litigation arising out of this circular is bound to increase.

At a time when the Government is bending over backwards to simplify tax laws and thereby attract foreign investment, this circular comes as a rude shock reflecting the realities at the ground level, wherein, the mantra seems to be to garner tax revenues by any means, fair or unfair.

That it took almost four long years for our great Babus to identify the conflicting views expressed in the circular dated 20-2-2012 and the Education Guide dated 20-6-2012, is in no means, an under achievement. To expect that these Babus would be the same set of officers who will implement the GST law would be enough to send shivers down the spine of the Realty Sector.

In a masterly stroke, the new circular would seem to have demolished the importance of the Education Guide, which to many of us, is a document prepared after a lot of efforts and understanding of the negative list based taxation. To this extent, it seems to be a self-goal as the Industry would now dare to contest the issuance of any Show Cause Notice based on the Education Guide.

In our view, sooner of later the vires of the latest instruction would be put to test in a Writ. Till then, let the game of cat and mouse continue!