2022 (5) TMI 397 - HC - GST

Gujarat HC strikes down GST notification requiring mandatory one-third land value deduction in construction contracts as unconstitutional

Gujarat HC declared Entry 3(if) of Notification No. 11/2017-Central Tax (Rate) and corresponding State Tax notification ultra-vires the GST Acts and ... Validity of deeming fiction of one-third deduction for land value in valuation notification - Interpretation of value of supply under Section 15(1) and limitation of delegated deeming to cases where actual value is not ascertainable - Arbitrariness and discrimination violating Article 14 of the Constitution - Measure of tax must have nexus with the taxable event/charge - Refund to recipient who has borne tax under Section 54 principles Validity of deeming fiction of one-third deduction for land value in valuation notification - Interpretation of value of supply under Section 15(1) and limitation of delegated deeming to cases where actual value is not ascertainable - Impugned paragraph 2 of Notification No. 11/2017-Central Tax (Rate) prescribing a mandatory deeming fiction that one third of the total amount charged shall be treated as value of land is ultra-vires the scheme of the CGST Act and is not sustainable where actual value of land or construction value is ascertainable. - HELD THAT: - The Court held that Section 15(1) mandates valuation on the transaction value (actual price paid or payable) and that a deeming fiction may be resorted to only where actual value is not ascertainable. Reliance on precedents (including the 2nd Gannon Dunkerley and Larsen & Toubro decisions) shows that statutory or rule making measures fixing presumptive percentages are permissible only as a fallback when books or actual values are not available and must approximate actual value. A uniform mandatory deduction of one third irrespective of whether the agreement records separate and ascertainable values is therefore contrary to the statutory valuation scheme and Wipro type precedents and is ultra vires to that extent. [Paras 96, 97, 98, 100, 122] Paragraph 2 insofar as it makes the one third deduction mandatory is ultra vires; the deeming fiction cannot be compulsorily applied where actual value is ascertainable. Arbitrariness and discrimination violating Article 14 of the Constitution - Measure of tax must have nexus with the taxable event/charge - The uniform mandatory one third deeming fiction is arbitrary, discriminatory and causes the measure of tax to lose nexus with the taxable event, thereby violating Article 14. - HELD THAT: - The Court observed that applying a flat one third deduction across divergent factual matrices (e.g., flats vs bungalows; varying plot sizes and relative construction value) produces manifestly unequal and arbitrary outcomes. Illustrations demonstrate that identical taxable construction activity may attract widely different tax measures solely by reference to a uniform percentage, severing the required nexus between the measure and the charge. The GST Council minutes show the deduction was conceived mainly for flats, yet the notification applies it generally, reinforcing arbitrariness. [Paras 102, 103, 104, 105, 106] The deeming fiction in paragraph 2 is arbitrary and discriminatory and therefore violative of Article 14. Interpretation of value of supply under Section 15(1) and limitation of delegated deeming to cases where actual value is not ascertainable - Refund to recipient who has borne tax under Section 54 principles - Paragraph 2 of the notification is read down to make the one third deeming fiction optional - available only where actual value of land or undivided share of land is not ascertainable; the writ applicant (SCA No.1350/2021) whose agreement records land value is entitled to refund of excess tax paid, with interest; advance ruling appellate orders based on the mandatory deeming fiction are set aside. - HELD THAT: - Rather than striking down the notification in toto, the Court read down paragraph 2 to permit the one third fiction only at the option of the taxable person when actual value is not ascertainable or where valuation rules cannot produce the correct value. Where the contract records separate, ascertainable values for land and construction, valuation must follow actual transaction value and statutory valuation rules (including Rules 27-31) or Section 15(4) procedures. Consequent upon this reading down, the writ applicant who paid tax under protest and where land value in the agreement is unchallenged is entitled to a refund of excess tax calculated on actual construction value, with statutory interest; the Court directed completion of refund within 12 weeks. The advance ruling appellate orders founded on the mandatory fiction were quashed and set aside, and maintainability objections were overruled as the challenge was incidental to the notification. [Paras 123, 124, 125, 126, 127] Paragraph 2 is read down to be optional where actual value is not ascertainable; refund directed to the writ applicant of SCA No.1350/2021 with interest and advance ruling appellate orders (SCA Nos.6840/2021 and 5052/2022) quashed and set aside. Final Conclusion: The Court declared the mandatory character of the one third deeming fiction in paragraph 2 of Notification No.11/2017 (and its State counterpart) to be ultra vires the CGST Act and violative of Article 14; paragraph 2 is read down so that the one third deeming is available only as an optional fallback where actual value of land or undivided share is not ascertainable. The writ applicant in SCA No.1350/2021 is entitled to refund of excess tax paid (with interest) calculated on actual construction value; advance ruling appellate orders based on the mandatory deeming fiction are set aside. Issues Involved:1. Validity of Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) regarding fixed deduction of 1/3rd for land value.2. Whether the deeming fiction of 1/3rd deduction is ultra-vires the provisions of the GST Acts.3. Whether the deeming fiction violates Article 14 of the Constitution of India.4. Relevance of developed versus undeveloped land for GST purposes.5. Measure of tax and its nexus with the charge of tax.6. Application of Section 15(5) of the GST Acts.7. Potential artificial inflation of land value to reduce tax liability.8. Validity of advance ruling appellate orders based on the impugned notification.Detailed Analysis:1. Validity of Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) regarding fixed deduction of 1/3rd for land value:The court examined whether the mandatory fixed deduction of 1/3rd for land value stipulated in Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) is valid. The court found that the deeming fiction of 1/3rd deduction is arbitrary and does not align with the actual value of land in many cases, leading to discriminatory consequences.2. Whether the deeming fiction of 1/3rd deduction is ultra-vires the provisions of the GST Acts:The court held that the mandatory application of the 1/3rd deduction is contrary to the statutory provisions of the GST Acts. Section 15(1) of the GST Acts requires the value of supply to be the transaction value, i.e., the actual price paid or payable. The court emphasized that deeming fiction should only apply where the actual value is not ascertainable.3. Whether the deeming fiction violates Article 14 of the Constitution of India:The court found that the deeming fiction of 1/3rd deduction is discriminatory and arbitrary, thus violating Article 14 of the Constitution of India. The court provided illustrations showing how the same construction on different plot sizes leads to different taxable values, which is irrational and discriminatory.4. Relevance of developed versus undeveloped land for GST purposes:The court clarified that the sale of land, whether developed or undeveloped, should not be subject to GST. The court emphasized that the GST should only apply to the construction service supplied by the developer at the behest of the buyer. The court rejected the argument that developed land should be treated differently for GST purposes.5. Measure of tax and its nexus with the charge of tax:The court reiterated that the measure of tax should have a nexus with the charge of tax. The arbitrary deeming fiction of 1/3rd deduction leads to a measure of tax that does not align with the actual supply of construction services, thus lacking the required nexus.6. Application of Section 15(5) of the GST Acts:The court noted that Section 15(5) allows the government to determine the value of certain supplies in a prescribed manner. However, the term 'prescribed' means prescribed by rules, not by notification. The court held that even if the government had the competence to issue the notification, the deeming fiction must still align with the statutory provisions and not be arbitrary.7. Potential artificial inflation of land value to reduce tax liability:The court acknowledged the concern that parties might artificially inflate land value to reduce GST liability. However, the court pointed out that the GST Acts already provide mechanisms to address such situations through Section 15(4) and the valuation rules (Rules 27-31 of the CGST Rules).8. Validity of advance ruling appellate orders based on the impugned notification:The court quashed the advance ruling appellate orders that were based on the impugned notification. The court overruled the objection regarding the maintainability of writ applications against these orders, considering the challenge to the notification itself.Conclusion:The court declared Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) ultra-vires the provisions of the GST Acts and violative of Article 14 of the Constitution of India. The court read down the impugned paragraph to make the 1/3rd deduction optional, applicable only when the actual value of land is not ascertainable. The court directed the refund of excess tax collected under the GST Acts to the writ applicant, along with statutory interest. The advance ruling appellate orders based on the impugned notification were quashed.