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.

[Vijay kumar]

In my view, by definition, exempt supply is not attracted in this case in as much as the 1/3rd value is neither attracting NIL rate under 11/2017-CTR nor exempt by Nofn.12/2017-CTR. Accordingly, the question of Rule 42 reversal does not arise.

Sn.2(47) "exempt supply" means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

[Shilpi Jain]

The 1/3rd deduction is merely a valuation provision and does not make the sale of unit an exempt supply. Also if we consider the department is right in demanding, construction expenses cannot be regarded as a common expense requiring reversal. At the most only common expenses can be considered.

If the amount involved is huge, it is worth contesting.

AI Summary

Land abatement does not convert supply into exempt status; ITC reversal on that basis can be contested.
The statutory land abatement is a valuation mechanism that reduces the taxable base for a residential unit and does not create a separate exempt supply; therefore, treating that abatement as a basis for exempt supply and invoking Rule 42 to reverse input tax credit mischaracterises the legal fiction and is contestable, with only genuinely common expenses being potentially allocable.