Deeming Fiction Of Mandatory Deduction Of 1/3^rd For Value Of Land Held Ultra Vires – Gujarat High Court

The Hon’ble High Court of Gujarat vide its order dated 6^th May 2022 in the matter of Munjaal Manishbhai Bhatt Vs Union of India in R/Special Application No.s – 1350, 6840 of 2021 & 5052 of 2022, held that the deeming fiction of mandatory deduction of 1/3^rd of value of land while ascertaining the taxable value in view of entry 3(if) of Notification No. – 11/2017 – Central Tax (Rate) and similar notification in the State Tax along with paragraph 2 of both the notifications  is ultra vires, and the same was struck down.

The writ Applicant preferred the Writ application praying for striking down entry 3(if) of Notification 11/2017 – Central Tax (Rate) as well as the similar entry 3(if) in notification No. 11/2017 – State Tax (Rate) along with paragraph No. 2 of both the notifications being ultra-vires and the Section 7(2) of the GST Act read with Entry 5 of Schedule III to GST Act as well as the Section 9 (1) and Section 15 of the GST Act.  Further, the aforesaid entry of the both the notification was prayed to be struck down being manifestly arbitrary, grossly discriminatory and violating Article 14 as well as ultra-vires Article 246A of the Constitution of India.  It was also urged to declare the paragraph 2 of both notifications would be applicable in case wherein undivided share in land is transferred along with constructed flat without separate consideration being fixed towards sale of land as well as GST cannot be imposed on sale and purchase of land.

Facts: –

• The writ applicant is a practising Advocate in this High Court and entered into a contract with Respondent No. 4 i.e., Navratna Organisers and Developers Pvt. Ltd. for the purchase of a plot of land measuring about 1021 square metres located the Unit No. 937, “Kalhar Blues and Greens”, Bopal-Sanand Bypass Road, Ahmedabad as well as for the construction of Bungalow on the said plot by Respondent No. 4.
• That a separate consideration was agreed upon for the sale of land and construction of Bungalow on the land.
• That as per the terms of the agreement, the writ-applicant was under a bonafide belief, as the liability of all taxes including GST was on him, that he would be liable to pay GST on construction of Bungalow.
• That however the respondent No. 4 in view of entry 3(if) of Notification 11/2017 – C.T. (Rate) dated 28.06.2017 and similar entry and notification in State Tax (Rate) read with paragraph 2 of both the notifications, raised an invoice for collection of GST on 1/3^rd of the entire consideration received for sale of land and construction of bungalow, and without excluding the consideration for sale of land in computing GST. Hence, the present writ-application.

Writ-Applicant Submissions: –

• • It was submitted on the behalf of the writ-applicant that Section 9 is a charging Section. The scope of supply is defined under Section 7 and by virtue of Section 7(2), the transactions specified in Schedule III to GST Act, which includes ‘sale of land’ at entry 5, are excluded from the purview of Supply.  Thus, imposition of tax on sale of land is ultra-vires Section 7 & 9 of the GST Act.
  • That referring to the terms/clauses of the booking agreement between the writ-applicant and the developer, it was submitted that it is quite evident from the agreement that the consideration towards the land is separately fixed and agreed, and is outside the purview of GST Act.
  • Further, it was submitted that the booking agreement was entered after the land was fully developed, so no further activity to be done by the developer in respect of the said booking agreement.
  • The writ-applicant explaining the situation with an illustration submitted that ‘Total Amount’ is defined in the impugned notifications and the liability fixed by deeming fiction presuming only 1/3^rd of total consideration towards land is utra-vires the CGST Act. Moreover, the liability computed in view of the said deeming fiction is more than the liability computed as per the provisions of statute.
  • That relying on the decisions of Indian Express Newspapers (Bombay) Private Limited v. Union C/SCA/1350/2021 CAV JUDGMENT DATED: 06/05/2022 of India & Ors.; (1985) 1 SCC 641, Kerala Financial Corporation v. Commissioner of Income Tax; (1994) 4 SCC 375, Deputy Commercial Tax Officer v. Sha Sukraj Peerajee; AIR 1968 SC 67 11 and on ITW Signode India Ltd. v. Collector of Central Excise; (2004) 3 SCC 48, it was submitted that delegated legislation cannot travel beyond the scope of parent legislation.
  • Further, reference was made to the 14^th GST Council meeting to show the before the issuance of impugned notifications deliberations were made with regard to sale of Apartment/Flat and abatement of 1/3^rd value of land was thought of only with respect to sale of Apartment/Flats. However, the said entry in the notification was inserted with a wide scope as to even include sale of plots along with construction of bungalows, is arbitrary and contrary to the object sought to achieved by the deeming fiction.
  • It was submitted on the behalf of the writ-applicant that the legislative history of tax on construction is required to be looked in to, which can be divided in two parts (i) tax on goods ‘element’ and (ii) tax on ‘service’ element, of the construction contracts. The legislative history with respect to the goods element involved in the construction contracts is as under: –
    1. That Entry 54 of List II to the Constitution of India empowered the State legislatures to impose tax on sale or purchase of goods. The legislative competence of the State legislatures to impose tax on goods used in the course of execution of indivisible works contracts came up for scrutiny before the Supreme Court of India in the case of State of Madras v/s Gannon Dunkerley and Co. (Madras) Ltd. (1958) 9 STC 353 (1^st Gannon Dunkerley's case) wherein it was held that ‘The property in goods does not pass as chattel pursuant to the agreement of sale and therefore it is not sale as per the Sale of Goods Act, 1930’.
    2. The 46^th Constitutional amendment was made effective to nullify the said judgment of Hon’ble Supreme Court in Gannon Dunkerley, and the transfer of property in goods involved in the course of execution of works contract was deemed to be sales.
    3. The next issue which arose was that on what amount such tax would be imposed, the issue was settled and explained by the Supreme Court in Gannon Dunkerley and Co. v/s State of Rajasthan (1993) 1 SCC 364 (Second Gannon Dunkerley’s case), wherein it was held that that tax ‘could be imposed only on the value of goods incorporated in the works contract and that the labour expenses and profit thereon was to be excluded’.
    4. That in view of the above decision various states formulated valuation procedure for Works Contract. However, so far as State of Gujarat is concerned, Section 2(30) (c) of Gujarat Value Added Tax Act, 2003 provided for ‘taxable turnover’ to be determined after deduction of charges towards labour, service and like charges and Rule 18AA of Gujarat Value Added Tax Rules, 2006 provided the manner of determining the taxable value in Works Contract.  It was provided that actual value to be taken if value is ascertainable.
    5. That various states provided for lumpsum tax on the total value of Works Contract at the option of dealer, its validity was upheld by the Supreme Court in State of Kerala v/s Builders Association of India (1997) 2 SCC 183 as well as Mycon Construction Ltd. v/s State of Karnataka and Another (2003) 9 SCC 583.
    6. Thereafter as the question arose, it was held in Raheja Development Corporation vs State of Karnataka (2005) 5 SCC 162 – that even a tripartite agreement involving construction of flats for prospective buyer would constitute sale in the course of the execution of works contract.
    7. The above decision of Raheja was doubted and referred to larger bench, which later on was affirmed in Larsen and Toubro Ltd. v/s State of Karnataka (2014) 1 SCC 708, however it was clarified in para 110 that only after the developer enters into a contract with the flat purchaser the activity of the construction provided by the developer would be considered as works contract and the goods transferred in the said activity of construction would be chargeable to tax. Further, in para 112, it was observed that at the time or after the completion of construction, if there is no agreement between the developer and the flat purchaser for construction, the goods used could not be deemed to be sold by the builder.
    8. While conceiving the impugned Notification regrading deduction towards land, the aforesaid judgment in 1^st Larsen and Toubro Ltd was discussed however not followed and ad hoc deduction of 1/3^rd towards land was proposed.

• That relying on the observations in Larsen and Toubro Ltd. (Supra) it was submitted that exclusion of land and building has a historical perspective. Hence, the sale of land and fully constructed building is excluded from the purview of GST Act as well. Further, if the agreement is entered after the land has been fully developed, the supply of goods and services would be to the extent of construction activity only, however prior to execution of contract such activity would not be covered under Section 7 of GST Act and there is no charge of tax on the activity.
• That in view of the above, the sale of land, whether developed or not, would not be exigible to GST and the tax liability to be restricted to the construction activity only.
• That referring to the observations made in Gannon Dunkerley’s case (2^nd case), Builders Association of India & Mycon Construction Ltd., it was submitted that the impugned notification prescribed the fixed percentage of i.e., 1/3^rd without taking in to consideration the variants of contract and size of the land, thus contrary to the judgment of Supreme Court in 2^nd Gannon Dunkerley’s case.
• Thereafter referring to legislative history pertaining to service element, it was submitted: –
  1. Service tax was introduced for the first time by the Finance Act, 1994 by way of a positive list of taxable services.
  2. Section 65(105) of the Finance Act, 1994 contained a list of taxable services which were amended from time to time. Clause (zzq) and (zzh) of the said provision included construction service within the ambit of service tax.
  3. Clause (zzzza) in Section 65(105) in 2007 for ‘services in relation to execution of Works contract’.
  4. Thereafter as the question arose, the Hon’ble Supreme Court in the matter of Commissioner, Central Excise and Customs, Kerala v/s Larsen and Toubro Ltd. (2016) 1 SCC 170, held that Works Contract Service was made taxable from 2007 and prior to that only pure service contract can be taxed under construction service.
  5. That in the Finance Act, 2010 clause (zzzh) was introduced whereby ‘construction of a complex intended for sale was deemed to be service by builder to the buyer unless entire consideration was received after grant of completion certificate by the competent authority’.
  6. The imposition of tax on builder services was challenged before the Delhi High Court in Suresh Kumar Bansal v/s Union of India (2016) 92 VST 330 (Del.) wherein it was held by the Hon’ble High Court that ‘there was no mechanism for computing service tax in case of a transaction involving transfer of land and no service tax can be demanded in absence of computation mechanism. The contention of the revenue was rejected on the ground that mere abatement by way of notification could not be a substitute for statutory valuation mechanism which was absent.
  7. Later to overcome the judgment of Suresh Kumar Bansal, Rule 2A of Service Tax (Determination of Value) Rules were amended retrospectively to provide for deduction of amount charged for land and undivided share of land and for lumpsum deduction where value cannot be determined.
• It was further contended that in the judgment of Suresh Kumar Bansal, it was held that the abatement by way of notification is not sufficient and there has to be a specific provision excluding the value of land from the taxable value of works contract. Thus, the impugned notifications under GST providing for fixed percentage of deduction for land by way of abatement is against the judgment of Suresh Kumar Bansal of Delhi High Court.
• The statement of objects and reasons in the enacting the GST Act is to merge and consolidate earlier laws relating to indirect taxes. Moreover, when GST Council considered the judgment of Supreme Court in Larsen and Toubro, the legislative history of earlier law has to referred for deciding validity of the impugned notification, from which it quite evident that the tax can be imposed only on construction activity provided by the developer. Further, in view of entry 5 of schedule III, and when it has been clearly held that where actual value can be ascertained then fictional value cannot be taken into consideration, the impugned notification is against the provisions of the Statue and thus ultra-vires.
• It was contended that total value of land is deemed to be 1/3^rd of total consideration irrespective of the nature and size of land on which the construction is to be carried on.
• The deeming fiction is ex-facie discriminatory, completely arbitrary and in violation of Article 14 as the person like the writ-applicant has to pay a higher tax for construction of bungalow on only 10-20% of the land, and the similar deduction is given to a flat buyer in multi-storied building, where the major portion of agreement value is towards construction. Further, in the present case the seller and the developer are different persons.
• That strong reliance was placed on Wipro Ltd. v/s Assistant Collector of Customs and Others (2015) 14 SCC 161, wherein ‘the Rule provided for adding 1% of the FOB value of goods towards loading, unloading and handling charges even though the actual value of such charges was ascertainable, was held to be ultra-vires the provisions of Custom Act’.
• That reliance was also placed on Commissioner of Central Excise, Pondicherry v/s Acer India Ltd. (2004) 8 SCC 173, wherein it was held by the Hon’ble Court that the tax cannot be indirectly levied on software by including its value in the value of computers.
• Further, taking reference of law stated in Section 15 of GST Act, Rule 27, Rule 28, Rule 29 and rule 30,31, it was submitted that detailed valuation mechanism is available in the statute primarily based on actual consideration and such provisions cannot be ignored by simply providing an arbitrary abatement of land by way of a notification.
• That referring to the contention raised by the respondents in affidavit in reply filed, it was submitted that Section 15(5) provides for fixing of value of goods & services, and value of sale of land cannot be prescribed under Section 15(5). As per Section 2(87) ‘prescribed’ means prescribed by rules, thus prescription of value for the purpose of Section 15(5) can be done only by rules not notification.
• That strongly relying on the case of Wipro Ltd. (supra), it was submitted that an arbitrary notification, as in the present case, could not be saved simply on the ground that the government has the power to issue such notifications.
• That the respondent’s reliance on entry 5(b) of Schedule II is totally misconceived as the sole purpose of Schedule II is to provide whether a supply will be a supply of goods or supply of services. It does not provide for any deeming fiction so as to enlarge the scope of supply.
• Lastly reliance was placed on the decision of State of Rajasthan v/s Rajasthan Chemists Association (2006) 6 SCC 773, wherein it was held observed’ that tax cannot be imposed on a value unconnected with the subject of tax’, and submitted that the impugned notification is ultra-vires as it leads to a consequence whereby tax is imposed on land which is never sought to be taxed by the statute.

Submissions with respect to Special Civil Application No. 6840 of 2021 & 5052 of 2022:

• It was submitted on the behalf of the writ-applicants that the writ-applicants are developers and sought an advance ruling about the taxability under the GST Act on supply of developed land. The Advance ruling authority in its order held that the deduction for sale of land is available only to the extent of 1/3^rd of the total consideration in view of the impugned notifications.  Further the said advance ruling order was affirmed by the Appellate Authority for advance ruling.  Thus, the present writ-application challenging the validity of the impugned notification and the order of Appellate Authority for Advance ruling.
• That relying on Supreme Court decision in Mangalore Ganesh Beedi Works v/s Commissioner of Income Tax (2015) 378 ITR 640 (SC), Mohit Marketing v/s CIT Tax Appeal No. 157 of 2000 & Commissioner of Income Tax v/s Parle International Ltd. Tax Appeal No. 1905 of 2009, it was submitted that once a particular consideration was agreed for the sale of land between two parties, it was not open to the taxing authorities to re-write the terms of agreement.
• Further reliance was placed on the Supreme Court decision on Commissioner of Income Tax, Hyderabad v/s Motor and General Stores (P) Ltd. AIR 1968 SC 200 ‘wherein it was observed that if a document in question was intended to be acted upon and there was no suggestion of malafides or bad faith or fraud, then the taxing statute was required to be applied in accordance with the legal rights of the parties to the transaction.’
• It was submitted that developed land would be included within the meaning of term ‘land’ and if the impugned notification is not to be struck down as ultra-vires, same is required to be read down as inapplicable where the value of land is ascertainable separately.
• At last, it was argued that as the Appellate orders of Advance Ruling, which held that 1/3^rd of deduction would be available in view of the impugned notification, were also liable to be set aside and quashed. 

Submissions on the behalf of Respondents: –

• It was submitted on the behalf of the respondents that the Article 246A (1) of the Constitution empowers the Parliament and the Legislature of every state to make laws in respect of the Goods and Service Tax to be imposed by State or Central Government. Section 9 provides for levy of GST on supply of goods and services. As per Article 279A (4), the GST Council shall make recommendations to the Union and the States on the issue related to GST. Section 9(1) provides that GST will be levied on all intra-State supplies of goods and services, on the value determined under Section 15.  Thus, the levy of CGST shall be on the value as determined under Section 15.  Section 15(5) of the CGST Act, 2017 provides that notwithstanding anything contained in sub- section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.
• That the GST Council in the 34^th meeting also agreed to apply tax at new rate to be applicable to new projects or ongoing projects. Thereafter, notification 3/2019 Central Tax (Rate) dated 29.03.2019 was issued on the recommendation of the GST Council, which provided for deemed valuation of land as provided in paragraph 2 of the impugned notification. Thus, the contention that determination of value of the supply by subordinate legislation, when the value of land and cost of construction is separately ascertainable, is ultra-vires Section 15 of the CGST Act does not hold ground. Further, the contention that deduction of deemed value of land is beyond the scope of delegation under Section 9 (1) of the CGST Act has no legal basis at all.
• That reliance was placed on the Supreme Court decision in Union of India v. Nitdip Textile Processors Pvt. Ltd. (2012) 1 SCC 226, wherein ‘it is observed that the legislature enjoys very wide latitude in classification for taxation’. Reference was also made to Anant Mills Co. Ltd. vs. State of Gujarat & Ors., (1975) 2 SCC 175.
• That the Government is empowered to decide the rate in public interest on the basis of recommendations from GST Council and the GST Council is well within its power to recommend such reduction.
• Thereafter relying on the judgments of Union of India (UOI) and Ors. Vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407, 2021 [52] G.S.T.L. 513, Spences Hotel Pvt. Ltd. and Ors. Vs. State of West Bengal and Ors. (1991) 2 SCC 154, Khyerbari Tea Co. Ltd. and Ors. Vs.The State of Assam AIR 1964 SC 925, it was submitted that the impugned Notification is not ultra-vires Section 7(2), Section 9 (1), Section 15 of CGST Act and Article 14 and Article 246A.
• That taking reference of Para 5(b) of Schedule – II, it was submitted that in case of a transaction that involves construction of a building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, wherein the completion certificate with respect to such constructions has not been received, such transactions shall be treated as services under Paragraph 5(b) of Schedule II and therefore, shall be taxed as per the aforestated Notifications.
• It was contended that the transaction in the present case comprises of land, construction of Bungalow and the development of various amenities, facilities and common area. None of these components of the transaction can be separated and are integral part of the transaction.
• Taking reference of the Supreme Court decision in Narne Construction P. Ltd. and Ors. Vs. Union of India (UOI) and Ors. (2012) 5 SCC 359, it was submitted that the transaction in the present case is for sale of a developed piece of land and not of a plain land and therefore, it is subject to many conditions, limitations, prohibitions and restrictions unlike a transaction of sale of land.
• The present transaction is one of development and construction of a building, civil structure or part thereof, intended to be sold to the writ applicant and therefore, the present transaction falls squarely under Paragraph 5(b) of Schedule II not under Schedule III.
• Further explaining the formula in paragraph 2 of the notifications for ascertaining the value of land, submitted that deeming fiction in the notifications was recommended by the GST Council to consider the land portion in supply, apart from construction and other development services. Further, the consideration as provided in the booking agreement, entered between the parties, with respect to land and construction activity might not reflect the actual value of land involved in the transaction.
• That as per the booking agreement with developer, it’s not only land but a developed land with all facilities, amenities and common area as part of the plotting scheme. Hence, land includes these developments also and the value of such development cannot be ascertained as the same are to be enjoyed with all the occupants of the scheme.
• That if the contention of the writ-applicants is accepted it may lead to absurd results as the buyer and developer may mutually decide that 99% of the total consideration is towards value of land and rest is for construction. This may lead huge losses to public exchequer.
• It was argued that in equities cannot render a provision susceptible to challenge to its legality/constitutionality. Further, relying on the decision of Supreme Court in Union of India & Ors. vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407, it was submitted that the Hon’ble Supreme Court after referring to its earlier decisions, held ‘that the formula is to evolved/read down by the Courts only if it leads to absurd results or is unworkable’.
• That in respect of advance ruling orders, it was argued that the writ-application under Article 226 of the Constitution of India in not maintainable against such orders.

Held: –

• The Hon’ble High Court after considering the submissions from the both sides, facts of the case and law applicable, took note of law stated in Section 9, Section 7, Schedule – II & Schedule – III of CGST Act.
• That after perusal of the above sections and schedules, it was observed that supply includes all form of supply made or agreed to be made for a consideration by a person in course or furtherance of business. Further, the activities falling under Schedule II would be considered as supply of service or goods and the activities falling under Schedule III would not be considered as supply of goods or services.
• Further taking note of entry 5(b) of Schedule II which states ‘construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier’ and entry 6 as well as entry 5 of Schedule III which states ‘Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building’, it was observed that it is not in dispute that the sale of land and building is not subject to GST, however exclusion is subject to entry 5(b) of Schedule II, which provides that the transaction pertaining to sale of land is taxable as construction services unless the consideration is received after the grant of completion certificate or occupation whichever is earlier.
• The Hon’ble High Court after the perusal of entry 3(if) and paragraph 2 of the impugned notifications observed that in case of construction services involving transfer of land, the deduction of such transfer of land or undivided share will be given to the extent of 1/3^rd of the total consideration charged. 

What sought to be taxed by the Parliament and State Legislatures?

• Taking reference of legislative history relied upon by the writ-applicants, it was observed that the controversy with respect to taxability of construction contracts was first raised before the Hon’ble Supreme Court in the 1^st Gannon Dunkerleys, wherein ‘it was held that wherein it was held that the State legislatures do not have the legislative competence to impose sales tax on indivisible works contracts since they did not involve sale of goods as understood under the Sales of Goods Act, 1930’.
• Further, relying on the observation of the Supreme Court in the said judgment it was found that in a building construction contract the contract is for getting the building constructed not for sale of goods used in the course of construction and the property in goods would pass to the buyer through theory of accretion.
• It was found based on the observations of Supreme Court that when the goods are embedded into the earth pursuant to the construction contract, such contract could not be said to be for sale of goods.
• That from the 46^th Constitutional amendment, the state legislature was granted the powers to impose tax on the property in goods involved in the Works Contract. Then, the question arose regarding determination of value of goods in the indivisible works contract, which was answered in the 2^nd Gannon Dunkerley’s case wherein it was held that value of goods can be determined by excluding the value of labour and profit element.  However, these contracts were only purely construction contract not development agreements which involve sale of land also.
• The decision of the Supreme Court in Raheja Development Corporation wherein it was held that, the tripartite agreements would also be considered as works contract and would involve deemed sale of goods, was doubted and referred to larger bench.
• The Larger bench in the 1^st Larsen and Toubro also held that even the tripartite agreement between the buyer, developer and owner for construction of flats at the behest of buyer, thus it involved taxable deemed sale of goods. It was further held that the construction which was undertaken after agreement with the purchaser was held to involve works contract.
• That when the impugned notifications were discussed and finalised by the GST Council, the decision of the Supreme Court in 1^st Larsen and Toubro Ltd. (Supar) was specifically referred in 14^th GST Council meeting. Thus, the base of levy is not changed under CGST Act. The construction which is carried on by a developer as per the terms of the contract with buyer, which was earlier taxable under VAT/Service tax is now sought to be taxed under the CGST Act and therefore the deduction is given for sale of land.
• That as Section 7 of CGST Act, includes supply of goods and service made or agreed to be made for a consideration, implies that supply would be initiated only after the agreement between the supplier and the receiver is entered. The similar ratio has been laid down by Supreme Court in 1^st Larsen and Toubro Ltd. that there cannot be a sale in respect of construction undertaken prior to agreement with buyer.
• Thus, from the legislative history it is quite evident that there is no intention to impose tax on supply of land in any form and for this reason only it has been provided in Schedule III of CGST Act.

Relevance of Developed vis-à-vis Undeveloped land: –

• The Hon’ble Court rejecting the contention of the revenue, found that if Schedule III provides for ‘sale of land’ then it can be land in any form, so even in the case of tripartite agreement for sale of land and building, the imposition of tax would be on construction activity only.
• That if the agreement is entered after the land is already developed by the developer, then such development activity was not undertaken for the prospective buyer, therefore GST cannot be imposed on the developed land and only construction activity can be taxed as supply.
• The fact that the land is not a plain parcel of land but a developed land cannot be a ground for imposing tax on the sale of such land. Thus “sale of land” under Schedule III to the GST Acts covers sale of developed land even as per the impugned notification. 

Measure of Tax: –

• Taking note of Section 15, it was observed that the ordinarily the value of supply of goods and services should be the actual price paid or payable, however sub section (2) & (3) provide for certain inclusions and exclusions from the value of supply.
• That in the case of Writ-applicant Special Civil Application 1350 of 2021, as per the booking agreement consideration for sale of land and construction of bungalow has been specifically mentioned. Thus, the fixed deduction as per the impugned notification would not be applicable in the present case when the statutory provisions provide for valuation in accordance with the actual price paid or payable.  Deeming Fiction can be applied only where actual price is not ascertainable.
• The above proposition is squarely covered by the decision of Supreme Court in the 2^nd Gannon Dunkerley’s case wherein it was held that ‘if actual value of labour was available then the same was to be deducted and if in case actual value was not ascertainable deeming fiction could be applied’.
• Further, in 1^st Larsen and Toubro case (supra), one of the points to be considered before the Supreme Court was whether a rule in the Maharashtra Value Added Tax Rules capping the value of land at 70% of the agreement value was permissible or not. It was held by the hon’ble Supreme Court that Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1-A) has to be read in the manner that meets this criterion and we read down Rule 58(1-A) accordingly.
• Further reference was also made to the judgment of the Supreme Court in the matter of Wipro Ltd. (Supra)
• The Hon’ble Court with the all above findings held that deeming fiction of 1/3^rd of deduction of total consideration for value of land where actual value of land is ascertainable is clearly contrary to the provisions and scheme of CGST and therefore ultra-vires the statutory provisions.

Arbitrariness of the Deeming Fiction by the Impugned Notification: –

• That apart from being contrary to provisions the impugned notifications are also arbitrary as the deeming fiction is uniformly applied irrespective of the size of the plot of land and construction on it.
• There is no distinction between a flat and bungalow as far as deduction provided in the deeming fiction is concerned. The deduction as per the deeming fiction has been applied without any regard to the size of land and the area constructed on such land.
• In 14^th GST Council meeting the discussion was in respect of flats while the ultimate notification was issued and made applicable even to other transactions such as sale of land with construction of bungalow.
• Such deeming fiction which leads to arbitrary and discriminatory consequences could be clearly said to be violative of Article 14 of the Constitution of India which guarantees equality to all and also frowns upon arbitrariness in law. 

Arbitrary Deeming Fiction has led to measure of Tax having no nexus with Charge: –

• The Hon’ble Court referring the decision of Hon’ble Supreme Court in Govind Saran Ganga Saran v. CST [1985 Supp SCC 205 : 1985 SCC (Tax) 447 : AIR 1985 SC 1041] held that the arbitrary deeming fiction by way of delegated legislation has led to a situation whereby the measure of tax imposed has no nexus with the charge of tax on supply of construction service.

Section 15 (5) does not further the case of the Respondents: –

• It was noticed by the Hon’ble Court that it was the case of the respondents that the impugned notification is issued in exercise of powers under Section 15(5) of the CGST Act. In this regard it is to be noted that in Section 2(87) – prescribed” means prescribed by rules made under this Act on the recommendations of the Council;”. Thus, the prescription under Section 15 (5) has to be by way of rules not notification.
• Taking reference of judgment of Supreme Court in Wipro Ltd. (supra), it was held that where a delegated legislation is challenged as being ultra-vires and in violation of Article 14 of the Constitution of India, the same cannot be defended merely on the ground that the Government had competence to issue such delegated piece of legislation. 

What if the Supplier Artificially Inflates the price of land thereby Deflating the value of Construction Service? –

• The Hon’ble Court rejecting the contention of the revenue, i.e., that the parties may artificially fix a higher value for land so as to reduce tax the liability under the GST Acts, held that value as mentioned in the agreement are not challenged in the affidavit in reply therefore such contention is not applicable.
• That the possibility of obtaining indirect consideration cannot be ruled out for any supply transaction in view of Section 15(4) which states ‘Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.”
• It was held that the revenue was not remediless even in case where there is a doubt about the correctness of value assigned in the contracts toward construction. The resort can be made to valuation rules – Rule 27, Rule 28, Rule 29, Rule 30, Rule 31 for ascertaining the value of construction.
• When such detailed statutory mechanism for determination of value is available then the impugned deeming fiction cannot be justified on the basis that it is meant to curb avoidance of tax when in fact such fiction is leading to arbitrary consequences.

Already similar mechanism existed under Service Tax Law which is not required to be deviated from: –

• When in view of judgment of Delhi High Court in Suresh Kumar Bansal (Supra) Deduction at fixed percentage was made applicable only where the actual value was not ascertainable. When such workable mechanism for deduction of land was already in force under the service tax regime, the same ought to have been continued. Instead, the Government has chosen to fix a standard rate of deduction without any regard to different possible factual scenarios which is completely arbitrary and violating Article 14 of the Constitution of India.

Entry 5(b) of Schedule II not relevant for determining validity of Impugned Notification: –

• That originally clause (d) of Section 7(1) includes transaction enlisted in Schedule II of CGST Act however such clause was deleted retrospectively and a new clause (1A) was inserted which provides that if a transaction qualifies as supply, then it would be treated as supply of goods or services in accordance with Schedule II. The Parliament clarified that Schedule II to GST is not meant for expanding the scope of supply but only to clarify that a particular transaction qualifies as supply or not. Thus entry 5(b) of Schedule II is not relevant for deciding the issue in the matter
• Further it was held that the judgments of VKC Footsteps Pvt. Ltd. and Narne Construction Ltd. are completely misplaced and are not applicable to the facts of the present case.

Conclusion: –

• With the above findings it was held by the Hon’ble Court that the impugned Paragraph 2 of the Notification No. 11/2017-Central Tax (Rate) dated 28.6.2017 and identical notification under the Gujarat Goods and Services Tax Act, 2017 which provide for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land is ultra-vires the provisions as well as the scheme of the GST Acts and in violation of Article 14 of the Constitution of India.
• The mandatory deduction as per paragraph 2 will not be mandatory in nature and can be permitted at the option of the taxable person where actual value of land is not ascertainable.
• That in Special Civil Application No. 1350 of 2021 the writ-applicant has deposited the amount of GST charged by the supplier i.e. Respondent No. 4. That amount is to be refunded to the writ-applicant with interest at the rate of 6% p.a. as the burden of tax has been borne by the writ-applicant.
• In other two writ applications numbered Special Civil Application No. 6840 of 2021 & 5052 of 2022, since the advance ruling appellate orders are based on the impugned notification providing for mandatory deeming fiction for deduction of value of land, the said orders are hereby quashed and set aside.