Rule 42 reversal on flat sale considering 1/3 value as sale of land

[Suresh Yadav]

Builder sold flat to buyers and paid GST accordingly. As 1/3 of value of supply is considered as value of land as per Notification 11/2017-CGST-rate.

Now Department asks ITC reversal as per Rule 42 for this 1/3 value of land as considering as exempt supply as per Section 17(3)(explanation).

Is there any remedy of this??

[Sadanand Bulbule]

The Department's attempt to trigger Rule 42 reversal by treating the statutory 1/3rd land abatement as an "exempt supply" is a jurisdictional error that confuses a valuation measure with a taxable event. Under the Govind Saran mandate (1985 (4) TMI 65) , the 1/3rd deduction is a legal fiction used solely to determine the "Measure" of the taxable construction service, not to vivisect an indivisible composite supply into a separate sale of land.

Since the "Consideration" is paid in respect of a taxable residential unit and all inputs are physically consumed to create that unit-not the earth beneath it-there is no "dual use" of inputs. Judicially, following the logic in Munjaal Manishbhai Bhatt (Gujarat HC) ( 2022 (5) TMI 397), the land component is incidental to the taxable supply of construction; thus, a valuation mechanism cannot be used to manufacture an "exempt supply" reality where none exists.

You may effectively defend on this legal position.

[KASTURI SETHI]

I support the views of Sh.Sadanand Bulbule, Sir.

As per the status shown in CENTAX, the Gujarat High Court judgement dated 6.5.2022 has not been challenged by the department.

AI Summary

Land value abatement cannot be recharacterised as exempt supply to force ITC reversal under valuation rules. The statutory land value abatement for residential flat sales is a valuation device to determine the taxable measure of construction service and does not create a separate exempt supply. Treating the notional land component as an independent exempt transaction to trigger Input Tax Credit reversal mischaracterises a valuation mechanism as a taxable event and there is no dual use of inputs justifying proportionate reversal.