No service tax for under-construction flats, rules Delhi High Court

The Delhi High Court has come out with a crucial judgment that home buyers cannot be subjected for service tax on payments towards buying under construction properties in a housing project from builders/promoters/developers, where the total value of the apartment includes the land value. However, service tax can be levied for PLC (Preferential Location Charges) charged by builders to buyers.

under construction buildingThe home buyers, who have already paid service tax for under-construction flats, will be refunded the amount after adding 6 % interest rate by the revenue department. The court was adjudicating the petitions filed by several builders who have entered into separate agreements with a developer to buy flats in a residential project in Noida.

The petitioners moved court against levying service tax under Finance Act 1994 and imposing service tax on PLC. Post to the amendment introduced by Finance Act of 2010, the revenue department has been charging service tax on home buyers. Service tax is imposed on 25 % of the total value of the apartment. 75 % abatement is allowed for home buyers.

The court agreed to the petitioner’s contention that no service tax could be imposed under the section 66 of the Act with Section 65 (105) (zzzh) of the Act in respect of composite contracts. However, the bench observed that they didn’t find any merit in the contention that there is no element of service involved in the PLC imposed by the developer.

Analysts opinioned that the judgment is likely to be challenged in Supreme Court as builders might escalate the project cost to add the service tax component.

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