Suresh Kumar Bansal: service tax on under-construction flats without a valuation rule

The facts in brief

Suresh Kumar Bansal and Anuj Goyal were individual purchasers of flats in the Sethi Group's "Max Royal" residential project at Sector 76, Noida, Uttar Pradesh. The builder-buyer agreements were composite contracts integrating three components: the sale of an undivided share in the land, the supply of building materials (cement, steel, fittings), and the construction labour. The builder, M/s Sethi Buildwell Pvt Ltd, had collected service tax from the purchasers as part of the instalment payments — pursuant to Section 65(105)(zzzh) of the Finance Act 1994, the entry for "construction of complex" service, read with the explanation introduced by the Finance Act 2010.

The 2010 explanation deemed any amount received from a prospective buyer before the grant of the completion certificate to be consideration for "service" provided by the builder. Notification No. 26/2012-ST dated 20 June 2012 granted an abatement — initially 75 per cent, later 70 per cent — leaving 25 to 30 per cent of the total consideration as the taxable value of the construction service.

The petitioners challenged the levy. Their case rested on a chain of contentions. First, the transaction was, in substance, a sale of immovable property — falling within Entry 49 of List II (tax on lands and buildings) and beyond Parliament's competence to tax as a service. Second, even if a service aspect could be carved out under the aspect doctrine, neither Section 67 of the Finance Act 1994 nor the Service Tax (Determination of Value) Rules 2006 supplied a machinery to dissect the service component from the embedded land and goods components. Third, Rule 2A of the 2006 Rules applied only to "works contracts" within the dedicated taxable category under Section 65(105)(zzzza) — it did not extend to construction-of-complex contracts that included the sale of an undivided share in land. Fourth, the 25/30 per cent deeming via the abatement notification could not cure the structural valuation gap, because notifications can grant exemption but cannot invent a measure of charge.

The Union defended the levy on the strength of Parliament's competence under Entry 97 of List I (residuary) read with the aspect doctrine, and on the workability of Notification No. 26/2012-ST as the practical mechanism for valuing the service aspect.

The constitutional question

The lead question was whether Section 65(105)(zzzh), as applied to under-construction flats sold under composite builder-buyer agreements that included the sale of an undivided share in land, could be sustained as a valid levy when the parent statute and its rules contained no machinery to ascertain the value of the service component.

The secondary question was whether the abatement notification — Notification No. 26/2012-ST — could fill the machinery gap by deeming a fixed fraction of the total consideration to represent the service value. A third question concerned preferential-location charges — sums paid for floor preference, park-view, or corner-unit positioning — which lacked any embedded land or goods component and were therefore arguably pure service.

What the Court held

Parliamentary competence is intact — the aspect doctrine survives

The Division Bench (Bakhru J. delivering judgment for the Bench) upheld parliamentary competence to tax the service aspect of a composite construction transaction. The aspect doctrine, traced through Federation of Hotel & Restaurant Association v. Union of India (1989) 3 SCC 634 and applied to construction services in Larsen & Toubro Ltd v. State of Karnataka (2014) 1 SCC 708, permitted Parliament under Entry 97 of List I to tax the service element of a transaction whose goods-and-land elements were taxable separately under List II.

Preferential-location charges are valid

Preferential-location charges — paid for floor preference or view — are pure service. They contain no embedded land or goods component. Service tax on these charges was valid and was upheld.

The machinery failure is fatal

The decisive holding was on machinery. Neither the Finance Act 1994 nor the Service Tax (Determination of Value) Rules 2006 contained any machinery to ascertain the value of the service component in a composite contract for construction of a complex where the consideration included the value of land. Rule 2A of the 2006 Rules was, by its terms, restricted to "works contracts" within Section 65(105)(zzzza); it did not extend to Section 65(105)(zzzh).

Notifications cannot supply machinery

The 75/70 per cent abatement under Notification No. 26/2012-ST was an executive abatement. It could not substitute for a statutory measure of charge. The bench held that abatement which bundles together land, materials and services into an arbitrary inverse fraction is constitutionally impermissible. Applying Govind Saran Ganga Saran v. Commissioner of Sales Tax 1985 Supp SCC 205 — the foundational machinery-provision authority — the bench held that where the charge of a tax fails for absence of a valid machinery, the levy itself fails. An abatement notification can reduce the taxable value within a valid framework; it cannot create the framework where none exists.

Refund directed

Service tax collected from the petitioners on the construction-of-complex aspect of their agreements was directed to be refunded with interest at 6 per cent per annum from the date of deposit till the date of refund. The levy on preferential-location charges was retained.

The doctrinal architecture

Suresh Kumar Bansal assembles four doctrinal threads into a single coherent holding. The first is the machinery-provision discipline of Govind Saran: a fiscal levy with a defective machinery is not merely difficult to administer; it is constitutionally void. The principle had a long history in sales-tax jurisprudence but the Bansal judgment relocates it firmly within service-tax law.

The second is the aspect doctrine as the foundation for parliamentary competence over composite transactions. The bench did not strike down Section 65(105)(zzzh) itself — it confined the holding to the specific class of contracts where the consideration included the value of land. Parliament's power to tax the service aspect was preserved, subject to the discipline of supplying a workable measure.

The third is the composite-contract methodology that runs from Gannon Dunkerley v. State of Rajasthan (1993) 1 SCC 364 through Larsen & Toubro (2014). Composite contracts must be dissected by reference to a statutory rule that excludes the value of components Parliament is not constitutionally permitted to tax — land under List II, goods that have been brought to charge separately. Where the statute provides no such rule, the dissection cannot be performed by judicial estimate or executive abatement.

The fourth is the limits of executive notification. Abatement notifications are a familiar tool of the indirect-tax administration. They are valid as instruments of exemption — reducing the taxable value within a framework Parliament has established. They are invalid as substitutes for the framework itself. A notification that fixes the taxable value of a composite contract at 25 per cent of the consideration, where the statute does not specify how to identify the service component, is performing the legislative function the statute failed to perform.

What the judgment did not decide

The bench did not strike down Section 65(105)(zzzh) itself — it held only that the section could not be applied to land-embedded composite contracts in the absence of statutory machinery. It did not examine commercial construction under Section 65(105)(zzq) on the same footing, though the logic of the holding plainly applies to identical machinery deficiencies in the commercial-construction category.

The judgment did not decide whether the explanation introduced by Finance Act 2010 was constitutionally valid in its broader operation — holding only that the explanation operated within parliamentary competence. It did not examine the retrospective effect on builders who had collected service tax from purchasers across the country — practical refund was confined to the petitioners before the court. It did not examine the input-credit consequences for builders, whose CENVAT credit chains were structured around the assumption of a valid output levy.

The judgment did not pre-judge the GST treatment of real-estate transactions — it was delivered on 3 June 2016, about ten days before the GST Council's first substantive rate-fitment meeting and more than a year before GST commenced on 1 July 2017. And it did not decide whether refund of tax already paid out of the builder's cum-tax price would generate an unjust-enrichment claim under Section 11B of the Central Excise Act read with Section 83 of the Finance Act — the Article 265 path was treated as sufficient for the limited refund directed.

After the judgment

The Government responded through subordinate legislation. The Service Tax (Determination of Value) Amendment Rules 2017, notified via Notification 24/2017-ST dated 13 April 2017, recast Rule 2A with a specific 25/30 per cent machinery for residential-complex contracts including land — a delegated-legislation cure designed to override Bansal prospectively. The amendment was overtaken almost immediately by the GST transition on 1 July 2017, but it stands as Parliament's acknowledgement that Bansal's machinery critique was substantively correct and required a statutory cure.

Under GST, real estate occupies a layered carve-out. Schedule III"supply". Under-construction sale remains a supply, taxable at concessional rates under Notification No. 11/2017-CTR as amended — 5 per cent for affordable housing, 1 per cent for other categories, both without input tax credit. The valuation problem that Bansal exposed — embedded land value distorting the service-tax measure — was structurally resolved under GST through a one-third deduction for land built into the rate notification itself.

Doctrinally, Bansal is cited for three propositions across subsequent litigation. First, the machinery-provision discipline has been revived in numerous service-tax refund litigations between 2016 and 2019, settled in their broader transitional dimension by the Filco Trade Centre line. Second, the limits-of-executive-notification principle is recurrently invoked wherever the executive seeks to fix taxable values through delegated instruments not anchored to statutory rules. Third, the judgment forms a doctrinal bridge to Safari Retreats Pvt Ltd v. Union of India (2024) — the Supreme Court ruling on the input-tax-credit treatment of commercial buildings constructed for leasing — where the "plant or machinery" interpretation rests on the same anti-formalist instincts about real-estate transactions that Bansal embodied.

Refund claims under Bansal continued through 2017 to 2020 in service-tax tribunals. CESTAT consistently applied the ratio in favour of purchasers whose contracts fell within the relevant period and category. The reasoning has occasionally been extended by analogy to other composite-contract surfaces where the executive has attempted to supply a machinery the statute did not provide — though the Supreme Court's strict reading of the Govind Saran principle continues to define the outer boundary of that extension.

Related on Valkya

• State of Madras v. Gannon Dunkerley (1958): the foundational sale-of-goods boundary
• Gannon Dunkerley v. Rajasthan (1993): the post-46th-Amendment value-extraction methodology
• BSNL v. Union of India: composite transactions and the aspect doctrine
• Mohit Minerals v. Union of India: ocean freight IGST and the federalism observation

Sources

1. SCC OnLine — case page and adjacent print citations: https://www.scconline.com/
2. LiveLaw — Suresh Kumar Bansal coverage and judgment text link: https://www.livelaw.in/no-service-tax-buying-flats-preferential-location-charges-taxable-delhi-hc-read-judgment/
3. Taxsutra — Bansal case digest and post-judgment refund commentary: https://www.taxsutra.com/
4. Bar and Bench — machinery-provision analysis and GST transition note: https://www.barandbench.com/
5. BCAJ (Bombay Chartered Accountants' Journal) — 2016-TIOL-1077-HC-DEL-ST analysis: https://bcajonline.org/journal/2016-tiol-1077-hc-del-st-suresh-kumar-bansal-vs-union-of-india-ors/