Deduction of 1/3rd of total consideration towards the value of land: Whether valid?

In Munjaal Manishbhai Bhatt v. Union of India (2022) 37 J.K.Jain’s GST & VR 397 (Guj), the High Court read down para 2 of notification 11/2017-CT(R) dated 28.6.2017 on the ground that such mandatory deduction in the value of Land can not be prescribed by the issuance of notification since GST Act does not permit the prescription to fix a deemed value for supplies u/s 2(87), by notification;

HC helds mandatory fixed rate deduction of 1/3rd of consideration towards value of land in GST as ultra virus

Para 108 & 109 of the judgment are reproduced as under;

108. It is the case of the Respondents that the impugned notification providing for a deeming fiction is issued in exercise of powers u/s 15(5) of the CGST Act. At the outset it is required to be noted that the term “prescribed” is defined u/s 2(87) of the CGST Act as under:

“2(87) “prescribed” means prescribed by rules made under this Act on the recommendations of the Council;”

109. Thus, the prescription u/s 15(5) has to be by rules and not by notification. Be that as it may, wherever a delegated legislation is challenged as being ultra-vires the provisions of the CGST Act as well as violating Article 14 of the Constitution of India, the same cannot be defended merely on the ground that the Govt. had competence to issue such delegated piece of legislation. Even if it is presumed that the Govt. had the competence to fix a deemed value for supplies, if the deeming fiction is found to be arbitrary and contrary to the scheme of the statute, then it can be definitely held to be ultra-vires. We are fortified in our view by the judgment of the Apex Court in the case of Wipro Ltd. (supra) wherein it was observed as under:

“34. We find that the High Court, instead of examining the matter from the aforesaid angle, has simply gone by the powers of the rule-making authority to make rules. No doubt, rule-making authority has the power to make rules but such power has to be exercised by making the rules which are consistent with the scheme of the Act and not repugnant to the main provisions of the statute itself. Such a provision would be valid and 1% FOB value in determining handling charges, etc. could be justified only in those cases where actual cost is not ascertainable. The High Court missed the point that Garden Silk Mills Ltd. case [Garden Silk Mills Ltd. v. Union of India, AIR (2000) SC 33 was decided by this Court in the scenario where actual cost was not ascertainable. That is why we remark that the first amendment to the proviso to Rule 9(2) which was incorporated vide notification dated 19.12.1989 might be justified. However, the impugned provision clearly fails the test.”

What if the supplier artificially inflates the price of land thereby deflating the value of construction service?

Supreme court decision on issuance of notification u/s 15.─However in view of the recent Supreme court decision in the case of Union of India v. Mohit Minerals Pvt. Ltd. (2022) 37 J.K.Jain’s GST & VR 441, the Hon’ble Supreme court permitted issuance of notification on the ground of “

“unduly restrictive interpretation of S.2(87)”

Para 94 of the judgment is reproduced as under;

“94. The respondents have urged that the determination of the value of supply has to be specified only through rules, and not by notification. However, this would be an unduly restrictive interpretation. Parliament has provided the basic framework and delegated legislation provides necessary supplements to create a workable mechanism. Rule 31 of the CGST Rules, 2017 specifically provides for a residual power to determine valuation in specific cases, using reasonable means that are consistent with the principles of S.15, CGST Act. This is where the value of the supply of goods cannot be determined in accordance with Rules 27 to 30 of the CGST Rules 2017. Thus, the impugned notification 8/2017 dated 28.6.2017 cannot be struck down for excessive delegation when it prescribes 10% of the CIF value as the mechanism for imposing tax on a reverse charge basis.”

Analysis & our Comments.─Inspite of clear language u/s 2(87), GST Act, the Hon’ble Supreme court has upheld the validity of notification issued for determination of value u/s 15, GST Act, 2017 to create a workable mechanism under delegated legislation, As such, the case of Munjaal Manishbhai Bhatt v. Union of India (2022) 37 J.K.Jain’s GST & VR 397 (Guj) does not lay down the correct ratio decidendi on the subject matter.

Read my article in the magazine (2022) 37 J.K.Jain’s GST & VR page R-63, titled;

“Deduction of 1/3rd of total consideration towards the value of land in the supply of Flats─Validity of Gujarat High Court case”

CA Om Prakash Jain s/o J.K.Jain, Jaipur

Tel:9414300730