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TMI Blog2022 (5) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... III or if they are notified as such by the Government, then they shall be treated as neither supply of goods nor supply of services. It is not in dispute that the sale of land and building are not liable to tax under the GST Acts. However, as the exclusion of sale of building from the tax net is subject to clause (b) of paragraph 5 of Schedule II, the transaction with respect to the sale of building is taxable qua the construction services unless the entire consideration is received by the supplier after the receipt of completion certificate or first occupation whichever is earlier - The applicable rate of tax for all supply of services is stipulated by the Notification No. 11/2017-Central Tax (Rate). The rate of tax for construction services is provided in the Entry 3 of the said notification. It is thus provided by way of notification that in so far as the construction services involving transfer of land or undivided share of land are concerned, the deduction for such transfer of land or undivided share of land will be given to the extent of one-third of the total consideration charged for the entire transaction. In other words the value towards the transfer of land or undi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloped. Deduction is granted for any transfer of land. Mr. Vyas has also not contended that the deduction of 1/3rd as stipulated in the notification is not available to the writ applicants. Thus 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 - HELD 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 - the 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. Arbitrariness of the deeming fiction by the impugned notification - HELD THAT:- If the 14th GST Council meeting minute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the value of constuction service? - HELD THAT:- Valuation by adding 10% profit to cost of production or manufacture or the cost of acquisition of goods or cost of provision of services is a statutorily accepted method of valuation. Even if such cost based valuation is not possible then the residual method is provided under Rule 31 of the GST Rules which also provides for using reasonable means consistent with the principles and general provisions of Section 15 as well as valuation rules - the revenue is not remediless even in a case where it doubts the correctness of the value assigned in the contract towards construction. If it is established that such value was not the sole consideration for the service, then resort can be had to the valuation rules and value can be derived by applying the cost plus profit method or a reasonable value consistent with the principles and provisions of the Statute - When such detailed statutory mechanism for determination of value is available then the impugned deeming fiction cannot be justified on the basis that it is meant to curb avoidance of tax when in fact such fiction is leading to arbitrary consequences. Already similar mechanism ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us as such inapplicable while interpreting a taxing statute. In any case it was categorically observed by the Supreme Court that the development of land was assured to the buyers. We have already observed that in a given case there may be tax liability if the development of land is undertaken pursuant to contract with buyer. However, if the land is already developed and thereafter agreement is entered into with the buyer for sale of such developed land, then it would not involve any service. Application disposed off. - R/SPECIAL CIVIL APPLICATION NO. 1350 of 2021 With R/SPECIAL CIVIL APPLICATION NO. 6840 of 2021 With R/SPECIAL CIVIL APPLICATION NO. 5052 of 2022 - - - Dated:- 6-5-2022 - HONOURABLE MR. JUSTICE J.B. PARDIWALA AND HONOURABLE MS. JUSTICE NISHA M. THAKORE Appearance: MR UCHIT N SHETH(7336) for the Petitioner(s) No. 1 MR DEVANG VYAS(2794) for the Respondent(s) No. 1 MR UTKARSH SHARMA, AGP for the Respondent No.2 MR PRIYANK P LODHA(7852) for the Respondent(s) No. 3 NOTICE SERVED for the Respondent(s) No. 2,4 COMMON CAV JUDGMENT (PER : HONOURABLE MS. JUSTICE NISHA M. THAKORE) 1. Since the issues raised in all the captio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner subject to the outcome of the present Petition; G. Ex parte ad interim relief in terms of prayer F may kindly be granted; H. Such further relief(s) as deemed fit in the facts and circumstances of the case may kindly be granted in the interest of justice for which act of kindness your petitioner shall forever pray. 4. The facts giving rise to this writ application may be summarized as under: 4.1 The writ applicant is a practicing advocate in this High Court. The writ applicant entered into an agreement dated 29th September 2020 with the Navratna Organisers Developers Pvt. Ltd., i.e. the respondent No.4 herein, 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 respondent N o.4 for the writ applicant. 4.2 It appears that 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. 4.3 Further, as per the said agreement, the writ applicant was liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly indicates that the consideration towards land is separately fixed and agreed. Mr. Bhatt took us through the various relevant clauses of the agreement. Clause (C) provides for separate consideration towards the price of land and towards the cost of construction. Clause (h) fastens the tax liability on the writ applicant. Clause (Q) provides that no right, title or interest in the other development, namely, Golf Course, Club House, other facilities is agreed to be given nor any right, title or interest is given in the common development. The Schedule to the property clearly demarcates the area of land agreed to be sold by the respondent No.4 to the writ applicant. It was contended that the agreement of the writ applicant is clearly severable and the sale of land being made for separate consideration, the entire amount of consideration relating to land is outside the scope and purview of the GST Acts. It was also pointed out that the booking agreement was entered after the land was fully developed and that no further activity was required to be done by the land owner/developer in respect of the land after entering of the booking agreement with the writ applicant. 8. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e abatement of 1/3rd value towards the land was thought of only in respect of sale of Flats / Apartments and not in respect of the transactions where land was separately sold and separate value of land was specifically so available. However the entry of the notification was couched in wide terms so as to even include the sale of plots of land along with the construction of bungalows which is arbitrary and contrary to the object sought to be achieved by the deeming fiction. 12. Mr. Uchit Sheth, the learned counsel appearing on behalf of the writ applicant contended that the legislative history of tax on construction contracts which has culminated into incorporation of the GST Acts is required to be looked into closely for understanding the true scope and purport of the statutory provisions of the GST Acts. 13. According to Mr. Sheth the legislative history can be broadly divided into two parts (1) History relating to taxing the goods element of the construction contract which includes levy of sales tax/value added tax and (2) History relating to taxing the services element of the construction contract which includes levy of service tax 14. Mr. Uchit Sheth narrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State could prescribe a formula on the basis of fixed percentage of value of contract. It was however clarified that such prescribed value should not appreciably differ from the actual value. (d) Various States formulated the valuation procedure for the works contract in tune with the decision of the Supreme Court in the 2nd Gannon Dunkerley s case (supra). In so far as the State of Gujarat was concerned, Section 2(30)(c) of the Gujarat Value Added Tax Act, 2003 provided that the taxable turnover in case of works contract was to be determined after deducting charge towards the labour, service and like charges. It was further provided in the Proviso to Section 2(30)(c) of the Vat Act that where the amount of charges towards the labour, service and like charges was not ascertainable from the terms and conditions of the contract, the amount was to be calculated in the prescribed manner. Rule 18AA of the Gujarat Value Added Tax Rules, 2006 provided the manner of determining taxable value of works contract. It was provided that the actual value was to be taken if value was ascertainable from the books of account of the dealer. If value was not ascertainable then the said Rule pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n towards land was read down and it was held that taxing the sale of goods element in a works contract was permissible provided that the tax was directed to the value of goods at the time of incorporation and it did not purport to tax transfer of immovable property. (h) While conceiving the impugned notification regarding deduction towards land, the aforementioned judgement of the Supreme Court in the case of 1st Larsen and Toubro Ltd. (supra) was discussed in the GST council meeting. However the principles laid therein were not followed and an adhoc deduction of 1/3rd towards land value was proposed. 15. Mr. Sheth contended that the Entry No. 5 of the Schedule III to the GST Acts which provides for exclusion of land and building thus has a historical perspective. It was held by the Supreme Court in the case of 1st Larsen and Toubro Ltd. (supra) that sale in the course of execution of works contract would commence only from the stage when the contract is entered into during the course of construction. It was further observed that the sale of a fully constructed property would also not attract levy of tax. Hence, the sale of land and fully constructed building has been excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legislative history pertaining to the services element of construction contract as under: (a) Service tax was introduced for the first time by the Finance Act,1994 by way of a positive list of taxable services. (b) Section 65(105) of the Finance Act, 1994 contained a list of taxable services which were amended from time to time. Clause (zzq) and (zzh) of the said provision included construction service within the ambit of service tax. (c) Clause (zzzza) was introduced in Section 65(105) of the Finance Act, 1994 by the Finance Act, 2007 which included services in relation to the execution of works contract excluding the contracts in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. (d) A question arose as to whether composite contract for the supply of goods and services could be taxed prior to 1st April 2007 under the head of construction service even though works contract service became taxable only from 1st April 2007. It was held by the Supreme Court in the case of Commissioner, Central Excise and Customs, Kerala v/s Larsen and Toubro Ltd. (2016) 1 SCC 170 that the works contract service became taxable only after the Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to provide for specific deduction for consideration charged for land. It is only in the event of such actual value not being available that the alternative methods of fixed percentage deduction were to be adopted. The impugned notification under the GST Acts giving only fixed percentage of deduction for land by way of abatement is thus contrary to the judgement of the Delhi High Court in the case of Suresh Kumar Bansal (supra). 20. It was emphatically submitted by Mr. Sheth that the GST Acts have been enacted with a view to merge and consolidate earlier laws relating to indirect taxes. This is expressly stated in the Statement of Objects and Reasons in enacting the GST Acts. Moreover, while enacting the impugned notification, the GST Council has specifically referred to the judgement of the Supreme Court in the context of works contract in the case of Larsen and Toubro Ltd. (supra). Thus the legislative history of the earlier laws has to be referred to while deciding the validity of the impugned notification. If the legislative history is seen, it clearly indicates that the intention is to only impose tax on construction undertaken for a buyer from the stage when the contract is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factual eventualities. Such rule was held to be ultra-vires the provisions of the Customs Act, 1961 as well as arbitrary, irrational and violating Article 14 of the Constitution of India. 24. The learned counsel for the writ applicant also relied upon the judgement of the Supreme Court in the case of Commissioner of Central Excise, Pondicherry v/s Acer India Ltd. (2004) 8 SCC 173. In this case while the software was not liable to excise duty, duty was chargeable on computer hardware. The authorities sought to impose tax on the entire value of computer by including the value of software in the value of the computer. It was held by the Supreme Court that tax could not be indirectly levied on software by including its value in the value of computers. Such judgement was thereafter approved by the Constitution bench of the Supreme Court in the case of Commissioner of Central Excise, Indore v/s Grasim Industries Ltd. (2018) 7 SCC 233. 25. It was urged by Mr. Sheth that the ratio of judicial pronouncements with reference to different taxing statutes has been embodied in the GST Acts in as much as the primary principle of valuation as contained in Section 15(1) of the GST Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned counsel for the writ applicant that the main fulcrum of the argument of the respondents revolves around Entry 5(b) of Schedule II to the GST Acts. However, according to the learned counsel such contention is totally misconceived. It was pointed out that when the GST Acts were originally implemented, Section 7 of the GST Acts which defines scope of supply included activities to be treated as supply of goods or services as referred to in Schedule II by way of clause (d) of sub-section (1). However such clause was retrospectively deleted w.e.f. 1st July 2017 by the Central Goods and Services Tax (Amendment) Act, 2018. A new sub-section (1A) was introduced in Section 7 by the same Amendment Act providing that where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II. Thus the sole purpose of Schedule II is to provide whether a supply will be a supply of goods or supply of services. It does not provide for any deeming fiction so as to enlarge the scope of supply. Hence it was argued that Entry 5(b) of Schedule II to the GST Acts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracting parties as to its terms. For similar proposition of law, reliance was also placed on the judgements of this Court in the cases of Mohit Marketing v/s CIT Tax Appeal No. 157 of 2000 decided on 21st April 2005 and Commissioner of Income Tax v/s Parle International Ltd. Tax Appeal No. 1905 of 2009 decided on 8th August 2016. 32. Reference was also made to the judgement of the Supreme Court in the case of Commissioner of Income Tax, Hyderabad v/s Motor and General Stores (P) Ltd. AIR 1968 SC 200 wherein it was observed that if a document in question was intended to be acted upon and there was no suggestion of malafides or bad faith or fraud, then the taxing statute was required to be applied in accordance with the legal rights of the parties to the transaction. It was further observed that when the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. 33. In so far as the meaning of the term land is concerned, it was sought to be urged that developed land would also be included within the meaning of the term land . In this regard reliance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 2017 provides for levy of Central Goods and Services Tax on the supply of goods or service at such rates as may be notified by the Government on the recommendations of the GST Council which is a constitutional body. Further, as per Article 279A (4), the Council shall make recommendations to the Union and the States on the issues related to the GST. Section 9(l) of the CGST Act, 2017 provides that there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor, for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person. Thus, the levy of CGST shall be on the value as determined under Sec. 15 of the Act. Section 15(5) of the CGST Act, 2017 provides that notwithstanding anything contained in sub- section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de latitude in classification for taxation and is allowed to pick and choose rates of taxation. The concerned notifications have been issued in the pursuance of the recommendation of the GST Council. Therefore, question of impugned entry in the Notification being ultra vires Section 7(2), Section 9(1), section 15 of the CGST Act. 2017 and Article I4 and 246A of the Constitution of India does not arise at all. Reliance was placed the learned Additional Solicitor General on the following judgements: (a) Union of India (UOI) and Ors. Vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407, 2021 [52] G.S.T.L. 513, (b) Spences Hotel Pvt. Ltd. and Ors. Vs. State of West Bengal and Ors. (1991) 2 SCC 154 (c) Khyerbari Tea Co. Ltd. and Ors. Vs. The State of Assam AIR 1964 SC 925. 43. Mr. Vyas further submitted that Schedule III under Section 7 of the GST Acts provides a list of activities or transactions which shall be treated neither as a supply of goods nor a supply of services. In the said schedule item 5 is Sale of Land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. Further, Schedule II of the CGST act is also under Section 7, it provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant shall be subjected to many conditions, limitations, prohibitions and restrictions with respect to the concerned property as the writ applicant has no right to construct on the plot, no right to change the plan / layout out of all the plans provided by the developer, no right to get the construction done by any other person other than the developer, no right to divide the plot area from the scheme, no right to deal with the plot area alone and other such conditions, limitations, prohibitions and restrictions, except without the consent of the D eveloper and the concerned local authority. 48. It was contended that the concerned transaction is for sale of a developed piece of land and not of a plain land and therefore, it is subjected to many conditions, limitations, prohibitions and restrictions unlike a transaction of sale of land. The Supreme Court of India in Narne Construction P. Ltd. and Ors. Vs. Union of India (UOI) and Ors. (2012) 5 SCC 359, was dealing with an issue wherein the basic question to be answered was that in case if sale of a developed plot is considered to be sale of land then the said transaction shall be out of scope of the Consumer Protections Act, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculation of value of supply. 53. Mr. Vyas further submitted that the consideration as provided in the booking agreement with respect to the land and construction are decided inter se the parties and the same might not reflect the actual value of the land involved. The consideration provided in the booking agreement is only for the purpose of calculating the final consideration value and nothing beyond that. The final sale / conveyance deed shall also be reflecting only the final consideration amount and the stamp duty also will be paid on such consideration amount and not separately. 54. It was further submitted that the component of land as provided in the booking agreement is not only land, it is a developed land as being a part of the plotting scheme. The developer shall have to get the plans approved by the concerned local development authority. The developer shall develop common amenities and facilities like the roads, water lines, drainage, greens, electricity and transmission lines, security services etc. Thus, the land component is not only land but also consist of such development being a part of the plotting scheme and such benefits are exclusive to the occupant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the resulting inequities, but on this ground alone the said provision cannot be held illegal / unconstitutional. 57. In so far as the writ applications challenging the advance ruling orders are concerned, it was additionally argued by Mr. Vyas that writ application under Article 226 of the Constitution of India is not maintainable against such orders under the advance ruling appellate orders. ANALYSIS: 58. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration 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? STATUTORY PROVISIONS: 59. The GST Acts were enacted in our country w.e.f. 1st July 2017 with the sole intention to consolidate and streamline the earlier indirect tax laws. The provisions of the Central Goods and Services Tax Act, 2017 (for short the CGST Act ) and the Gujarat Goods and Services Tax Act, 2017, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedule II. 63. The reference to Schedule III to the GST Acts is given in sub-section (2) of Section 7 which is as under: 7(2) Notwithstanding anything contained in sub-section (1), (a) activities or transactions specified in Schedule III; or (b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services. 64. Hence, supply includes all forms of supply made or agreed to be made for a consideration by a person in the course or furtherance of business. If a transaction qualifies as supply then it shall be treated as supply of goods or services as referred to in the Schedule II. If the activities or transactions are specified in the Schedule III or if they are notified as such by the Government, then they shall be treated as neither supply of goods nor supply of services. 65. The relevant extract of Schedule II to the GST Acts reads as under: SCHEDULE II [See section 7] ACTIVITIES OR TRANSAC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion No. 11/2017-Central Tax (Rate). The rate of tax for construction services is provided in the Entry 3 of the said notification. The relevant clause in so far as the writ applicant in Special Civil Application No. 1350 of 2021 is concerned reads thus: Sl.No. Chapter, Section or Heading Description of Service Rate (per cent.) Condition (1) (2) (3) (4) (5) 3 Heading 9954 (Construction services) (if) Construction of a complex, building, civil structure or a part thereof, including,- (i) commercial apartments (shops, offices, godowns etc.) by a promoter in a REP other than RREP, (ii) residential apartments in an ongoing project, other than affordable residential apartments, in respect of which the promoter has exercised option to pay central tax on construction of apartments at the rates as specified for this item in the manner prescribed herein, but excluding supply by way of services specified at items (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and or undivided share of land are concerned, the deduction for such transfer of land or undivided share of land will be given to the extent of one-third of the total consideration charged for the entire transaction. In other words the value towards the transfer of land or undivided share in land is deemed to be one-third of the total consideration. 71. It is the validity of such mandatory deeming fiction sought to be imposed by way of delegated legislation which is being tested by this Court vis- -vis the provisions of the CGST Act as well as the Constitution of India. WHAT IS SOUGHT TO BE TAXED BY THE PARLIAMENT/STATE LEGISLATURES ? 74. In order to determine whether the impugned portion of the notification is contrary to the CGST Act or not, it is first necessary to understand what is sought to be taxed by the Parliament. 75. For this purpose it is necessary to glance through the legislative history of imposition of indirect tax on construction service as explained by Mr. Uchit Sheth since all the erstwhile indirect tax laws have been merged into the GST law. A controversy with respect to taxability of construction contracts first erupted with the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a building construction contract the contract is for getting the building constructed and not for sale of goods used in the course of construction of contract. It was further observed that the property in goods would pass to the buyer by the theory of accretion i.e. as and when the building is actually constructed for the buyer. The relevant observations of the Supreme Court in this regard are as under: 33. Another difficulty in the way of accepting the contention of the appellant as to splitting up a building contract is that the property in materials used therein does not pass to the other party to the contract as movable property. It would so pass if that was the agreement between the parties. But if there was no such agreement and the contract was only to construct a building, then the materials used therein would become the property of the other party to the contract only on the theory of accretion. The position is thus stated by Blackburn, J., at pp. 659-60 in Appleby v. Myres [(1867) LR 2 CP 651] : It is quite true that materials worked by one into the property of another become part of that property. This is equally true, whether it be fixed or movable propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, there can be no question of title to the materials passing as movables in favour of the other party to the contract. It may be, as was suggested by Mr Sastri for the respondents, that when the thing to be produced under the contract is movable property, then any material incorporated into it might pass as a movable, and in such a case the conclusion that no taxable sale will result from the disintegration of the contract can be rested only on the ground that there was no agreement to sell the materials as such. But we are concerned here with a building contract, and in the case of such a contract, the theory that it can be broken up into its component parts and as regards one of them it can be said that there is a sale must fail both on the grounds that there is no agreement to sell materials as such, and that property in them does not pass as movables. 77. It was thus 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 goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obliged to undertake or to execute works. Such activity of construction has all the characteristics or elements of works contract. The ultimate transaction between the parties may be sale of flat but it cannot be said that the characteristics of works contract are not involved in that transaction. When the transaction involves the activity of construction, the factors such as, the flat purchaser has no control over the type and standard of the material to be used in the construction of the building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or layout of the building, in our view, are not of much significance and in any case these factors do not detract the contract being works contract insofar as construction part is concerned. Xxxx 106. In the development agreement between the owner of the land and the developer, direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and following development agreement, the agreement in the nature of the tripartite agreement between the owner of the land, the developer and the flat purchaser whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be conceptualized by the Goods and Services Tax Council, the decision of the Supreme Court in the 1st Larsen and Toubro Ltd. case (supra) was specifically referred to in the minutes of the 14th GST Council meeting. The relevant extract of the minutes of the 14th GST Council meeting which are part of the record of the writ application read thus: 24.2. The Secretary stated that in the construction sector Works contracts have been deemed as service and GST would be applicable for supply of work contract services before completion of construction of building but there would be no GST on the sale of a ready built building or flat. He stated that as per the decision of the Supreme Court, no tax could be charged on the value of land, and therefore, the Fitment Committee recommended that in a supply of works contract service where the value of land was included in the amount charged from the service recipient (along with the value of building materials and the services given by the contractor), one-third of the total consideration amount could taken as the value of land for abatement purpose. He stated that full ITC on works contract would encourage purchase of building materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) From the Commencement Certificate to the completion of plinth level. 5% c) After the completion of plinth level to the completion of 100% of RCC framework 15% d) After the completion of 100% RCC framework to the Occupancy Certificate. 45% e) After the Occupancy Certificate 100% He added that for determining the value of supply of services as per the above Table, it shall be necessary for the dealer to furnish a certificate from the Competent Authority. This would make the levy compliant with Law laid down by Hon ble Courts and such deduction would avoid hardship to people in Maharashtra (mainly MMRDA region). He further proposed exemption from levy of Maharashtra SGST on ongoing construction of complex, building etc. services, where lump sum amount was already paid on full consideration under the Maharashtra Value Added Tax Act. He stated that the Government of Maharashtra proposed to grant exemption from levy of tax for such co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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- -VIS UNDEVELOPED LAND : 88. If the statutory provisions are interpreted from this perspective then the difference sought to be drawn by the learned A.S.G. between developed and undeveloped land pales into insignificance. As such, when the entry in the Schedule III says sale of land then it can be land in any form. In any case the charge of tax is on supply of goods or services made or agreed to be made for a consideration and therefore even in a case of a tripartite agreement for sale of land and building, the imposition of tax can only be on the construction activity which is undertaken by the supplier at the behest of the proposed buyer. Thus, 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. 89. We are not dealing with a case where development is undertaken at the behest of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... narily 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. Sub-sections (2) and (3) of Section 15 provide for certain inclusions and exclusions from value of supply which are not relevant for the present issue. 95. In the case of the writ applicant of the Special Civil Application No. 1350 of 2021, the booking agreement is a part of the record. There is specific consideration agreed for sale of land and for construction of bungalow. There is no averment in the affidavit in reply filed by the Respondents that such bifurcation is not acceptable. If that be so and if specific value of land and value of construction service is available, then can the notification provide for a fixed deduction towards land? 96. The answer has to be in the negative. 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. 97. Such proposition is squarely supported by the judgement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the same for all types of works contracts, it would be permissible, indeed necessary, to prescribe varying scales for deduction on account of cost of labour and services for various types of works contracts. 98. Even in the case of the 1st Larsen and Toubro case (supra), one of the points for consideration before the Supreme Court was whether a rule in the Maharashtra Value Added Tax Rules capping the value of land at 70% of the agreement value was permissible or not. Such rule was read down by the Supreme Court by observing as under: 117. Sub-rule (1-A) was inserted into Rule 58 by a Notification dated 1-6-2009. As a matter of fact, Rule 58(1) of the MVAT Rules provides that the value of the goods at the time of the transfer of the property in goods involved in the execution of a works contract may be determined by effecting certain deductions from the value of the entire contract insofar as the amounts relating to deductions pertain to the said works contract. The challenge was laid to Rule 58(1-A) of the MVAT Rules before the Bombay High Court. The Division Bench of the Bombay High Court found that there was nothing to show that the proviso to the said provision was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1-A) has to be read in the manner that meets this criteria and we read down Rule 58(1-A) accordingly. The Maharashtra Government has to bring clarity in Rule 58(1-A) as indicated above. Subject to this, validity of Rule 58(1-A) of the MVAT Rules is sustained. 99. We are also supported by the judgement of the Supreme Court in the case of Wipro Ltd. (supra) wherein, in the context of valuation under the Customs Act, 1961 it was held that where actual amount of loading/ unloading charges is available, it was not permissible for the rule making authority to prescribe a flat rate of 1% addition to value. 100. Thus, mandatory application of deeming fiction of 1/3rd of total agreement value towards land even th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was contemplated only in the context of flats wherein it was difficult to ascertain the value of the undivided share of land. However when it came to actual issuance of Notification, a standard rate of deduction came to be provided irrespective of the nature of the transaction or whether it is a case involving transfer of land itself or undivided share in land. Moreover the discussion in the GST council meeting minutes which is part of the record would show that there was an apprehension that a standard rate of deduction for land may not withstand judicial scrutiny. Interestingly, this was in fact mentioned by the Deputy Chief Minister of the State of Gujarat. This was even when the discussion was in respect of flats while the ultimate notification was issued and made applicable even to other transactions such as sale of land with construction of bungalow. 105. Such deeming fiction which leads to arbitrary and discriminatory consequences could be clearly said to be violative of Article 14 of the Constitution of India which guarantees equality to all and also frowns upon arbitrariness in law. ARBITRARY DEEMING FICTION HAS LED TO MEASURE OF TAX HAVING NO NEXUS WITH CHARGE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns prescribed by rules made under this Act on the recommendations of the Council; 109. Thus, the prescription under Section 15(5) of the CGST Act has to be by rules and not by notification. Be that as it may, wherever a 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. Even if it is presumed that the Government had the competence to fix a deemed value for supplies, if the deeming fiction is found to be arbitrary and contrary to the scheme of the statute, then it can be definitely held to be ultra-vires. We are fortified in our view by the judgement of the Apex Court in the case of Wipro Ltd. (supra) wherein it was observed as under: 34. We find that the High Court, instead of examining the matter from the aforesaid angle, has simply gone by the powers of the rule-making authority to make rules. No doubt, rule-making authority has the power to make rules but such power has to be exercised by making the rules which are consistent with the scheme of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith instances where consideration is not wholly in the form of money. Rule 28 deals with cases where the transaction is with a related person. Rule 29 is with regard to goods supplied or received through an agent. These rules are not relevant for the present writ applications. However Rule 30 and 31 reply of the GST Rules are relevant and read as under: 30. Value of supply of goods or services or both based on cost.- Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services. 31.Residual method for determination of value of supply of goods or services or both.- Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter: Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30. 114. Henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scope of supply, such clause was retrospectively deleted w.e.f. 1st July 2017 and instead a new sub-section (1A) was introduced which provides that if a transaction qualifies as a supply then it will be treated as supply of goods or services in accordance with Schedule II. Thus, it has been clarified by the Parliament 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. Such clarification is required since there are different tax rates for goods and services. 119. In any case Entry 5(b) of Schedule II is not relevant for deciding the present controversy which has more to do with valuation rather than chargeability to tax. It is not in dispute that construction of building is a taxable service unless the entire consideration is received after issuance of completion certificate. However the question is that if the transaction is taxable then what should be the value of service and whether deduction towards land value can be stipulated by way of uniform rate of 1/3rd. Detailed reasons have been given to show how such deeming ficti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same can be saved by reading it down. In our considered view, while maintaining the mandatory deduction of 1/3rd for value of land is not sustainable in cases where the value of land is clearly ascertainable or where the value of construction service can be derived with the aid of valuation rules, such deduction can be permitted at the option of a taxable person particularly in cases where the value of land or undivided share of land is not ascertainable. 124. The impugned paragraph 2 of Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017 and the parallel State tax Notification 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. 125. In so far as the writ applicant of the Special Civil Application No.1350 of 2021 is concerned, the value of land is available in the agreement to sale and the same is not challenged by the Respondents in the affidavit in reply. The writ applicant had deposited the amount of tax charged under the GST Acts by the supplier i.e. respondent No. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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