9911796707
TMI Blog2022 (5) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing reliefs: "A. This Hon'ble Court may be pleased to strike down and declare Entry 3(if) of Notification No. 11/2017-Central Tax (Rate) as well as Entry 3(if) of Notification No. 11/2017 - State Tax (Rate) along with paragraph no. 2 of both the notifications as being ultra-vires Section 7(2) of the GST Acts read with Entry No. 5 of Schedule III to the GST Acts as well as ultra-vires Section 9(1) and Section 15 of the GST acts; B. In any case this Hon'ble Court may be pleased to strike down and declare Entry 3(if) of Notification No. 11/2017-Central Tax (Rate) as well as Entry 3(if) of Notification No. 11/2017 - State Tax (Rate) along with paragraph no. 2 of both the notifications as being manifestly arbitrary, grossly discriminatory and violating Article 14 of the Constitution of India as well as ultra-vires Article 246A of the Constitution of India; C. Without prejudice to the above and in the alternative this Hon'ble Court may be pleased to declare that impugned paragraph no. 2 of Notification No. 11/2017-Central Tax (Rate) and Notification No. 11/2017 - State Tax (Rate) is applicable only qua sale of flats/building units wherein undivided share in land is transferred a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4 The respondent No.4 however, relying upon the impugned entry no. 3(if) of the Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017 read with para 2 of the said notification informed the writ applicant that he would be liable to pay tax at the rate of 9% CGST + 9% SGST under the GST Acts on the entire consideration payable for land as well as construction of bungalow after deducting 1/3rd of the value towards the land in accordance with the impugned paragraph 2 of the said notification. The respondent No.4 raised an invoice on the writ applicant to collect such tax from the writ applicant. 4.5 Thus it appears that, because of the impugned notification, the entire consideration towards the sale of land has not been excluded for the purpose of computing tax liability under the GST Acts. 1/3rd of the total consideration has been deemed to be land value as per paragraph 2 of the impugned notification. 5. In such circumstances referred to above, the writ applicant is here before this Court with the present writ application. * SUBMISSIONS ON BEHALF OF THE WRIT APPLICANT: 6. Mr. M. R. Bhatt, the learned Senior Counsel appearing on behalf of the writ applicant submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res the provisions of the GST Acts. 9. Mr. Bhatt gave the following illustrations to demonstrate how the impugned notification could be said to be ultra-vires the provisions of the GST Acts: "If the consideration for sale of land is Rs.85/- and for construction is Rs.15/- (approximately as in the present case); As per the provisions of the Act On Rs.85/- GST would not be applicable and on the consideration for construction of Rs.15/-, 18% GST would come to Rs.2.70/-. As per Notification Rs.85 + Rs.15 = Rs.100 Less Rs.33 (1/3rd treated as deemed value of land) = Rs.67 GST @ 18% = Rs.12.06." It was argued out that the tax liability by virtue of deeming fiction by way of delegated legislation far exceeds the tax liability as computed in accordance with the provisions of the statute which is otherwise impermissible. 10. It was submitted that it is a settled legal position that a delegated legislation cannot travel beyond the scope of the parent legislation. Strong reliance was placed in this regard on the following decisions of the Supreme Court: 1. Indian Express Newspapers (Bombay) Private Limited v. Union of India & Ors.; (1985) 1 SCC 641 2. Kerala Financial Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndivisible works contracts came up for scrutiny before the Supreme Court of India in the case of State of Madras v/s Gannon Dunkerley and Co. (Madras) Ltd. (1958) 9 STC 353 (herein after referred to as "the 1st Gannon Dunkerley's case"). The Supreme Court observed that in case of building construction contract the property in goods passes to the buyer by the theory of accretion as and when the goods are embedded into the earth. The property in goods does not pass as chattel pursuant to the agreement of sale and therefore it is not sale as per the Sale of Goods Act, 1930. Thus it was held that the State legislatures did not have the competence to impose sales tax on the goods element of a construction contract. (b) The 46th Constitutional Amendment was effected to overcome the judgement of the Supreme Court in the case of Gannon Dunkerley and Co. (supra). Article 366(29A) of the Constitution was introduced whereby the transfer of property in goods (whether as goods or in some other form) involved in the course of execution of works contract was deemed to be sales. Thus the State legislatures were conferred with the power to impose tax on the goods element of a works contract. (c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o whether even a tripartite agreement between the landowner, developer and prospective buyer would constitute a works contract even though property in such agreement would subsequently pass by way of a registered sale deed. The Supreme Court held in the case of K. Raheja Development Corporation vs State of Karnataka (2005) 5 SCC 162 that even a tripartite agreement involving construction of flats for prospective buyer would constitute sale in the course of the execution of works contract. (g) The correctness of the decision of the Supreme Court in the case of K. Raheja Development Corporation (supra) was doubted and referred to a larger bench. The larger bench in the case of Larsen and Toubro Ltd. v/s State of Karnataka (2014) 1 SCC 708 (herein after referred to as "the 1st Larsen and Toubro case") affirmed the view taken in the case of K. Raheja Development Corporation (supra). It was however clarified in para 110 of the judgement that the activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser and that the value addition made to the goods transferred after the agreement is ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buyer. For something done by the developer prior to execution of contract with prospective buyer, such activity is not a supply at all as defined under Section 7 of the GST Acts and thus there is no charge of tax on such activity. 16. According to Mr. Sheth, a collective reading of the provisions would indicate, that the sale of any land, whether developed or not, would not be exigible to tax under the GST Acts and the tax liability has to be restricted to construction undertaken pursuant to the contract with the prospective buyer. If that be so, then deduction of entire consideration charged towards land has to be granted and the same cannot be restricted to only 1/3rd of the total value as is sought to be done by the impugned notification. 17. Mr. Sheth further argued that it was held by the Supreme Court in the 2nd Gannon Dunkerley's case (supra) that tax is to be imposed on the actual taxable value of the works contract and the Government could prescribe fixed percentage only for cases where actual value was not ascertainable. It was further observed by the Supreme Court that even the fixed percentage was to be prescribed depending on the type of works contract and that it s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificate by the competent authority. (f) Such explanation and imposition of service tax on service by a builder was challenged before the Delhi High Court inter-alia on the ground that there was no mechanism for computing service tax in case of a transaction involving transfer of land. Such contention was accepted by the Delhi High Court in the case of Suresh Kumar Bansal v/s Union of India (2016) 92 VST 330 (Del.) wherein it was held that the valuation rules did not provide any mechanism for deriving value of services in case the transaction involved sale of land. It was therefore held that no service tax could be demanded in the absence of any computation mechanism. The argument of the revenue that there was an abatement notification to take care of deduction for land was rejected on the ground that mere abatement by way of notification could not be a substitute for statutory valuation mechanism which was absent. (g) To overcome the judgement of the Delhi High Court in the case of Suresh Kumar Bansal (supra), the Service Tax (Determination of Value) Rules, 2006 were retrospectively amended. Clause (i) of Rule 2A of such rules expressly provided for deduction of amount charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive of the nature of the structure to be constructed on the land. In the case of the writ applicant the construction portion is only about 15-20% of the total agreement which is coterminous with the extent of construction to be made on the land. While the plot size is 1021 sq mts, the built up area is only 160 sq mts. Even then as per the notification the value of land is deemed to be 1/3rd of the total agreement value. 22. It was urged that the deeming fiction is ex-facie discriminatory in as much as persons like the writ applicant who are getting a bungalow constructed on the 10-20% of the land get the same deduction as a buyer of a flat unit in a multistoried building who merely gets an undivided share in the land and the major portion of the agreement value is towards construction cost. Further, as a result of the impugned entry, there is higher taxability in cases such as that of the writ applicant where construction is to be done by the same person who is the seller of land vis-à-vis cases where sale of land and construction is by separate individuals. It was pointed out that in the present case the seller and the developer are different persons. It was therefore ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit margin to cost of production/manufacture/procurement. Rule 31 of the GST Rules, which is the residuary rule, provide for valuation using reasonable means which have to be consistent with the provisions of Section 15 as well as the valuation rules. Thus, detailed valuation mechanism is available in the statute which is primarily based on actual consideration and such provisions cannot be ignored by simply providing adhoc and arbitrary abatement for land by way of a notification. 26. It was further submitted that strong reliance is being placed on the affidavit in reply filed by the respondents on Section 15(5) of the GST Acts. However, according to the learned counsel for the writ applicant, such provision empowers fixing of value of supply of goods or services. The sale of land being neither supply of goods nor services, its value cannot be prescribed under Section 15(5). Moreover, Section 15 (5) provides that the value of deemed supplies shall be determined in such manner as may be "prescribed". The term "Prescribed" is defined under Section 2 (87) as follows: "2 (87) "prescribed" means prescribed by rules made under this Act on the recommendations of the Council;" It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the statute. It was therefore contended that the impugned notification is ultra-vires the provisions of the GST Acts as well as arbitrary and violating Article 14 of the Constitution of India. * SPECIAL CIVIL APPLICATION NO. 6840 OF 2021 AND SPECIAL CIVIL APPLICATION NO. 5052 OF 2022 30. Mr. Tushar Hemani, the learned Senior Counsel assisted by Mr. Avinash Poddar, the learned advocate for the writ applicants submitted that the writ applicants are developers who have sold/intending to sell developed parcels of land. The advance ruling applications were filed seeking a ruling on the question whether there was any tax liability under the GST Acts on supply of developed land. The advance ruling authority held that the deduction for sale of land was admissible only to the extent of 1/3rd of the total consideration on the basis of the impugned notification. Such ruling has been affirmed by the appellate authority for advance ruling. Hence, the validity of the notification as well as the advance ruling appellate order have been challenged by filing the writ applications before this Court. 31. It was argued by Mr. Hemani that once a particular consideration was agreed for the sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India and Others (2007) 1 SCC 732. 35. In the last it was contended that since the advance ruling appellate order took the view that only 1/3rd deduction was available in respect of developed land because of the impugned notification, such orders were also required to be quashed and set aside. * SUBMISSIONS OF THE RESPONDENTS 36. Mr. Devang Vyas, the learned Additional Solicitor General of India assisted by Mr. Priyank Lodha, the learned Senior Standing Counsel, on the other hand, has vehemently opposed the writ applications. 37. Mr. Vyas pointed out that the writ applicant has filed the captioned petition, inter-alia, challenging the vires of entry 3 (if) of the Notification No. 11/2017 along with paragraph No. 2 read with Notification No. 3/2019 Central Tax (Rate) dated 29/3/2019 ("said Notifications"). The said notifications were issued under sub-sections (1), (3) and (4) of section 9, sub-section (1) of section 11, sub-section (5) of section 15, sub- section (1) of section 16 and section 148 of the Central Goods and Services Tax Act, 2017, wherein entry 3 (if) is with respect to the construction of a complex, building, civil structure or a part thereof for which the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ST Council. In pursuance of the above provisions, on recommendation of the Council, deemed value of land has been ascertained to be one third of the total amount charged for such supply. Thus, the contention that determination of value of the supply by subordinate legislation, even though, actual price paid / payable in respect of the construction service is available, is ultra vires Section 15 of the CGST act does not hold ground. Also, contention that deemed value of land to be deducted for the purpose of arriving at the value of the construction service is beyond the scope of delegation under Section 9(1) of the CGST Act, 2017 has no legal basis at all. 41. Reliance was placed by the learned Additional Solicitor General on the decision of the Apex Court in the case of Union of India v. Nitdip Textile Processors Pvt. Ltd. (2012) 1 SCC 226, wherein it is observed that the legislature enjoys very wide latitude in classification for taxation. Further, it was observed that the State is allowed to pick and choose districts, objects, persons, methods and even rates for taxation, if it does so reasonably. In general, larger discretion is given to the legislature in taxing statutes than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng (wherein entire consideration has been received after completion certificate is issued to such building), then such transaction shall be treated neither as supply of goods nor services under Schedule III and hence, the same would not be amenable to any tax under GST. However, in case of a transaction that involves construction of a building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, wherein the completion certificate with respect to such constructions has not been received, such transactions shall be treated as services under Paragraph 5(b) of Schedule II and therefore, shall be taxed as per the aforestated Notifications. 45. Mr. Devang Vyas further contended in so far as the facts are concerned the writ applicant has entered into a booking agreement with the developer i.e. the respondent No. 4 dated 29th September 2020 whereby the writ applicant agreed to purchase the residential plot together with a bungalow / apartment thereon in the scheme called as the "Kalhaar Blues and Greens", subject to the various terms, conditions, covenants, prohibitions, restrictions and limitations as more specifically provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Schedule III. The present transaction is one of development and construction of a building, civil structure or part thereof, intended to be sold to the writ applicant and therefore, the present transaction falls squarely under Paragraph 5(b) of Schedule II. 50. Mr. Devang Vyas further contended that the impugned Notification has been issued in exercise of the powers conferred by subsections (1), (3) and (4) of section 9, sub-section (1) of section 11, subsection (5) of section 15, sub-section (1) of section 16 and section 148 reply, wherein Serial No. 3 - notifies the rate of tax on the intrastate supply of services with respect to construction services. 51. It was submitted that the present transaction with respect to the sale and purchase of a developed / developing plot shall fall under the Entry 5(b) of the Schedule II and therefore, the said Notifications shall be applicable with respect to the rate of tax to be charged on such services. 52. It was submitted that Paragraph 2 of the said Notification stipulates the formula in order to arrive at the value of the supply. Paragraph 2 therein stipulates that the value of supply shall be equivalent to the total amount char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecide that 99% of the total consideration would be the value of land and the balance would be construction. This may lead to huge losses to the public exchequer and against the basic concept of tax. Even in the realm of Stamp Duty, the duty is applicable on the value of transaction, however, such value is not left to the parties to be decided, a minimum value is taken as deemed value of the transaction (jantri value) and in cases wherein the transaction value is less than the Jantri value then the jantri value is taken as deemed transaction value and the stamp duty is paid accordingly. Similarly, the value of developed land cannot be left to be decided / declared by the parties to the transaction. 56. It was further argued that the inequities cannot render a provision susceptible to challenge to its legality / constitutionality. Reliance was placed on the judgement of the Supreme Court in the case of Union of India & Ors. vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407. It was contended that the Supreme Court, after referring to many of its earlier decisions, has held that a formula is to be evolved / read down by the Courts only if it leads to absurd results or is unworkable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and shall be paid by the taxable person." 61. Thus the charge of tax is on the "supply" of goods or services. The scope of "supply" is defined under Section 7(1) of the CGST Act as under: "7. (1) For the purposes of this Act, the expression "supply" includes- (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (aa) the activities or transactions, by a person other than an individual, to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration. Explanation. - For the purpose of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgement, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another; (b) import of services for a consideration whether or not in the course or furtheranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, from any of the following, namely:- (i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or (ii) a chartered engineer registered with the Institution of Engineers(India); or (iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority; (2) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure; 6. Composite supply The following composite supplies shall be treated as a supply of services, namely:- (a) works contract as defined in clause (119) of section 2; and xxxx" 66. The relevant extract of Schedule III to the GST Acts reads thus: "SCHEDULE III [See section 7] ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES xxxx 5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. 67. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation shall apply for valuation of this service. Paragraph 2 of the notification which is the epicentre of the entire controversy and the validity of which is under challenge reads as under: "2. In case of supply of service specified in column (3), in item (i), (ia), (ib), (ic), (id), (ie) and (if) against serial number 3 of the Table above, involving transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply. Explanation. -For the purposes of this paragraph and paragraph 2A below, "total amount" means the sum total of,(a) consideration charged for aforesaid service; and (b) amount charged for transfer of land or undivided share of land, as the case may be including by way of lease or sublease.". 70. It is thus provided by way of notification that in so far as the construction services involving transfer of land or undivided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bankrupt, and the dispute was between his assignees in bankruptcy, and the trustees as regards title to certain wooden sashframes which had been approved on behalf of the trustees but had not yet been fitted in the building. The trustees claimed them on the ground that property therein had passed to them when once they had approved the same. In negativing this contention. Lord Abinger, C.B., observed: "... this is not a contract for the sale and purchase of goods as movable chattels; it is a contract to make up materials, and to fix them; and until they are fixed, by the nature of the contract, the property will not pass." Parke, B., observed: "... but in this case, there is no contract at all with respect to these particular chattels - it is merely parcel of a larger contract. The contract is, that the bankrupt shall build a house; that he shall make, amongst other things, window-frames for the house, and fix them in the house, subject to the approbation of a surveyor; and it was never intended by this contract, that the articles so to be fixed should become the property of the defendants, until they were fixed to the freehold." 76. Thus, in a building construction contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is allowed to remain for the benefit of the owner of the soil, - the option of taking the building, or allowing the removal of the material, remaining with the owner of the land in those cases in which the building is not taken down by the builder during the continuance of any estate he may possess." The statement of the law was quoted with approval by the Privy Council in Beni Ram v. Kundan Lall [(1899) 26 IA 58] and in Narayan Das Khettry v. Jatindranath[(1927) LR 54 IA 218]. But these decisions are concerned with rights of persons who, not being trespassers, bona fide put up constructions on lands belonging to others, and as to such persons the authorities lay down that the maxim recognised in English law, quicquid plantatur solo, solo cedit has no application, and that they have the right to remove the superstructures, and that the owner of the land should pay compensation if he elects to retain them. That exception does not apply to buildings which are constructed in execution of a works contract, and the law with reference to them is that the title to the same passes to the owner of the land as an accretion thereto. Accordingly, there can be no question of title to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments involving transfer of land are concerned, it was held by the Supreme Court in the case of K. Raheja Development Corporation (supra) that even such agreements would constitute works contracts and they would involve deemed sales of goods. The correctness of such decision was doubted and it was referred to a larger bench. Larger bench of the Supreme Court in its decision in the 1st Larsen and Toubro case (supra) observed as under: "88. The question is: whether taxing sale of goods in an agreement for sale of flat which is to be constructed by the developer/promoter is permissible under the Constitution? When the agreement between the promoter/developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is obvious that such transaction involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed. We, therefore, think that there is no reason why such activity of construction is not covered by the term "works contract". After all, the term "works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works. Such activity of cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entered into with the flat purchaser can only be made chargeable to tax by the State Government." 83. Hence only the construction which was undertaken after agreement with the purchaser was held to involve works contract. The argument of the State that even construction prior to agreement which was ultimately intended for sale would be taxable was specifically rejected as under: "112. The submission of Mr K.N. Bhat that the view in Raheja Development [K. Raheja Development Corpn. v. State of Karnataka, (2005) 5 SCC 162] that when a completed building is sold, there is no works contract and, therefore, no liability to tax is not correct statement of law, does not appeal to us. If at the time of construction and until the construction was completed, there was no contract for construction of the building with the flat purchaser, the goods used in the construction cannot be deemed to have been sold by the builder since at that time there is no purchaser. That the building is intended for sale ultimately after construction does not make any difference." 84. When the impugned notifications came to be conceptualized by the Goods and Services Tax Council, the decision of the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tement should be given as per ready reckoner of the land value or on the basis of the stamp duty value. He also referred to the Supreme Court Judgment in the case of M/s Larsen & Tourbro Limited, decided in September 26, (para 115) which was as follow: "It may, however be clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government. In view of this, he made the following proposal for abatement for the part transfer of property in goods or services used in construction, before the contract between buyer and the developer came into existence. Sr.No. Stage during which the developer enters into a contract with the purchaser. Rate of Abatement a) Before issue of the Commencement Certificate. NIL 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 fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise "supply" under Section 7 of the CGST Act includes supply of goods or services made or agreed to be made for a consideration. Thus the factum of supply would be initiated only once the agreement is entered into between the supplier and recipient and such agreement is for consideration. This is in consonance with the observation of the Supreme Court in the case of the 1st Larsen and Toubro Ltd. (supra) that there cannot be a sale in respect of construction undertaken prior to agreement with the buyer. 87. Thus the legislative intent is to impose tax on construction activity undertaken by a supplier at the behest of or pursuant to contract with the recipient. There is no intention to impose tax on supply of land in any form and 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-À-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 Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be decided. In other words when the tax is imposable under the charging section on the supply of construction service to the recipient, the question is whether for determining the quantum of such tax, a flat deduction can be stipulated by delegated legislation? 93. In this regard Section 15(1) of the CGST Act which deals with valuation needs to be referred to. The said section reads thus: "15(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply." 94. Thus, ordinarily 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for labour and services by fixing a particular percentage of the value of the works contract and to allow deduction of the amount thus determined from the value of the works contract for the purpose of determining the value of the goods involved in the execution of the works contract. It must, however, be ensured that the amount deductible under the formula that is prescribed for deduction towards charges for labour and services does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract. Since the expenses for labour and services would depend on the nature of the works contract and would not 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that deduction towards the cost of land under the sub-rule shall not exceed 70% of the agreement value. The petitioners have not brought on the record any material to indicate that the proviso to sub-rule (1-A) of Rule 58 is arbitrary. Rule 58(1-A) provides for the measure of the tax. The measure of the tax, as held by the Supreme Court in its decision in Union of India v. Bombay Tyre International Ltd. [(1984) 1 SCC 467 : 1984 SCC (Tax) 17], must be distinguished from the charge of tax and the incidence of tax. The legislature was acting within the field of its legislative powers in devising a measure for the tax by excluding the cost of the land." 118. The value of the goods 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 man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the first illustration is double the taxable value in the second illustration because of the fact that the deduction rate is uniform irrespective of the size of the plot. 103. Moreover there is no distinction made even between a flat and bungalow. While a flat would have number of floors and the transfer would only be undivided share in land, the same deduction which is available on supply of flats is made available on supply of bungalows without any regard to the vast different factual aspects. 104. In fact if the 14th GST Council meeting minutes which led to the insertion of the impugned Notification is perused, it becomes clear that the deduction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Section 15(5) of the CGST Act which reads as under: "15(5) Notwithstanding anything contained in sub-section (1) or subsection (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed." 108. It is the case of the Respondents that the impugned notification providing for a deeming fiction is issued in exercise of powers under Section 15(5) of the CGST Act. At the outset it is required to be noted that the term "prescribed" is defined under Section 2(87) of the CGST Act as under: "2(87) "prescribed" means 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration has been indirectly received, then Section 15(4) of the CGST Act will apply which reads thus: "15(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed." 113. Therefore, even in a case where the value of supply of goods or services or both cannot be determined under sub-section (1), then the same can be determined in the prescribed manner. The valuation rules framed pursuant to Section 15(4) are contained in the Rules 27 to 31 of the CGST Rules. Rule 27 deals with 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment has chosen to fix a standard rate of deduction without any regard to different possible factual scenarios which is completely arbitrary and violating Article 14 of the Constitution of India. * ENTRY NO. 5(b) OF SCHEDULE II NOT RELEVANT FOR DETERMINING VALIDITY OF IMPUGNED NOTIFICATION : 118. Considerable emphasis was laid by Mr. Vyas on Entry 5(b) of Schedule II to the GST Acts. At the outset it is required to be noted that while originally clause (d) of Section 7(1) included transactions enlisted in Schedule II to the GST Acts within the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.6.2017 and identical notification under the Gujarat Goods and Services Tax Act, 2017, which provide for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land is ultra-vires the provisions as well as the scheme of the GST Acts. Application of such mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India. 123. While we so conclude, the question is whether the impugned paragraph 2 needs to be struck down or 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 mandato ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
