Munjaal Manishbhai Bhatt vs Union Of India on 6 May, 2022

1. Outcome

The Gujarat High Court:
* Declared Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 (and identical State Tax notifications), which mandates a fixed 1/3rd deduction for land value in construction contracts, as ultra-vires the provisions and scheme of the GST Acts, and violative of Article 14 of the Constitution of India due to its discriminatory and arbitrary nature.
* Read down the impugned Paragraph 2 to be optional for the taxable person, applicable only in cases where the actual value of land or undivided share in land is not ascertainable.
* Directed the GST authority to refund the excess tax collected from the lead writ applicant (Munjaal Manishbhai Bhatt) based on the actual construction value stipulated in his agreement, along with 6% statutory interest, within 12 weeks.
* Quashed and set aside the Advance Ruling Appellate Orders challenged by other writ applicants, as they were based on the impugned mandatory notification.

2. Core Issue

The core issue was the legality and constitutionality of Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) and similar State Tax notifications. Specifically, whether the mandatory deeming fiction of deducting exactly one-third of the total contract value as the value of land for GST calculation in construction service contracts is valid when the actual value of land and construction services can be separately ascertained, or if it violates the GST Acts and Article 14 of the Constitution.

3. Key Facts

• The lead writ applicant, Munjaal Manishbhai Bhatt, a practicing advocate, entered into an agreement with a developer (Respondent No. 4) for the purchase of a plot of land and the construction of a bungalow on it.
• The agreement explicitly provided separate and distinct considerations for (i) the sale of land and (ii) the construction of the bungalow.
• The developer, relying on Entry 3(if) and Paragraph 2 of Notification No. 11/2017-Central Tax (Rate), demanded GST at 18% (9% CGST + 9% SGST) on the total consideration after deducting only 1/3rd of the total value as the deemed value of land.
• The petitioner contended that the entire consideration attributable to land should be excluded from GST, as land is not a "supply" under GST law. The 1/3rd deduction mechanism was challenged.
• In the petitioner's case, the plot was 1021 sq m, while the built-up area was only 160 sq m, indicating that the construction portion was significantly smaller than the land portion.
• Other petitioners challenged advance rulings that upheld the mandatory 1/3rd deduction for developed land.

4. Arguments (Taxpayer vs Revenue)

Taxpayer's Arguments:
* Ultra-vires the GST Acts: Sale of land is explicitly excluded from "supply" under Section 7(2) read with Entry 5 of Schedule III to the GST Acts. Imposing GST on any portion of land value through a notification is beyond the scope of the parent Act.
* Violation of Section 15: Section 15(1) mandates that the transaction value (actual price paid/payable) is the value for supply. When separate, ascertainable values for land and construction exist, a fixed 1/3rd deemed deduction overrides this statutory principle.
* Arbitrary & Discriminatory (Article 14): The uniform 1/3rd deduction is arbitrary as it does not differentiate based on the actual proportion of land value, plot size, or type of construction (e.g., bungalow on a large plot vs. a flat with an undivided share in land). This leads to unequal treatment and disproportionate tax burdens.
* Legislative History: Pre-GST laws (VAT/Service Tax) allowed deduction of actual land/labour value where ascertainable, with fixed percentages only for situations where actual value was not available, and such percentages had to be approximate to actual values. The GST notification deviates from this established legal position.
* Delegated Legislation: A notification (delegated legislation) cannot travel beyond the scope of the parent Act or introduce arbitrary provisions.
* Developed vs. Undeveloped Land: "Sale of land" in Schedule III encompasses developed land. If land development occurred prior to the agreement with the buyer, it is not a "supply" to that buyer and cannot be taxed.
* Adequate Valuation Rules: The GST Rules (e.g., Rules 30, 31) provide mechanisms for valuation when actual value is not ascertainable or if tax avoidance is suspected, rendering the fixed 1/3rd deduction unnecessary.
* Section 15(5) is for Rules, not Notifications: The term "prescribed" in Section 15(5) (governing special valuation methods) refers to rules made under the Act, not notifications.

Revenue's Arguments:
* Constitutional Mandate: Article 246A(1) and Section 9(1) of the CGST Act empower the Government to levy GST on supply at rates notified based on GST Council recommendations.
* Express Power under Section 15(5): Section 15(5) allows the Government, on Council's recommendation, to notify the manner of determining the value of "such supplies," overriding Section 15(1). The 1/3rd deduction is a valid exercise of this power.
* Interpretation of Schedules: Construction of a building for sale where consideration is received before the completion certificate is a "supply of service" under Entry 5(b) of Schedule II. The land element cannot be fully excluded in such composite supplies.
* Nature of Transaction: The transaction involves developed land, construction, and common amenities, making it a composite supply, not a mere sale of plain land. The value of development cannot be separated.
* Preventing Tax Avoidance: Allowing parties to declare their own land value could lead to artificial inflation of land prices in agreements to evade GST on construction, similar to how minimum value (jantri) is used for stamp duty.
* Legislative Wisdom: The legislature enjoys wide latitude in taxation, and potential inequities arising from a formula do not automatically invalidate it (citing VKC Footsteps India Pvt. Ltd.).
* Precedent: Cited Narne Construction P. Ltd. v. Union of India to argue that sale of developed plots involves a service element.

5. Court’s Reasoning

• Legislative Intent and Scope of "Supply": The Court extensively reviewed the legislative history of works contracts taxation, from the Gannon Dunkerley cases (I & II) to the 46th Constitutional Amendment and the Larsen and Toubro judgment (I). It noted that GST law, like its predecessors, intends to tax the "construction activity" undertaken for a recipient, not the land itself. Section 7 of the CGST Act defines "supply" as made or agreed to be made for consideration. This aligns with Larsen and Toubro which clarified that construction becomes a works contract only from the stage a developer contracts with a purchaser.
• Developed Land: The Court rejected the Revenue's distinction between developed and undeveloped land for GST liability. If the land was already developed before the agreement with the buyer, that development was not a "supply" rendered to that buyer, and therefore not taxable from the buyer's perspective. The exclusion of "sale of land" in Schedule III applies to land in any form.
• Violation of Section 15(1) & (4): The fundamental principle of Section 15(1) is valuation based on the "price actually paid or payable." When actual, separate values for land and construction are ascertainable (as acknowledged in the petitioner's agreement), this statutory method must be followed. Deeming fictions, as per the 2nd Gannon Dunkerley case, are permissible only when actual values are unascertainable and must closely approximate actual values. The mandatory 1/3rd deduction overrides this statutory mandate without justification.
• Arbitrariness and Article 14: The Court found the fixed 1/3rd deduction grossly arbitrary. It fails to account for vast differences in actual land value, plot size, or type of construction (e.g., small bungalow on a large plot vs. a flat). This leads to highly disparate and unfair tax burdens for essentially the same "construction service." The Court noted that even the GST Council minutes (14th meeting) indicated that the 1/3rd deduction was conceptualized primarily for flats, where determining undivided land share is complex, but was then arbitrarily extended universally. This uniform application, despite clear factual variations and ascertainable actual values, is discriminatory and violates Article 14, citing Wipro Ltd. on arbitrary valuation rules.
• Nexus with Charge: The mandatory 1/3rd deduction, by effectively taxing a portion of the land value even when ascertainable, distorts the "measure of tax" and disconnects it from the "subject matter of tax" (construction service), which is contrary to constitutional principles (citing State of Rajasthan v. Rajasthan Chemists Association).
• Section 15(5) Interpretation: The Court clarified that "prescribed" in Section 15(5) (for determining value of certain supplies) refers to rules made under the Act (as per Section 2(87)), not notifications. Even if the power existed to notify, such delegated legislation must be consistent with the Act's scheme and not arbitrary.
• Tax Avoidance: The Court dismissed the Revenue's concern about tax avoidance, stating that the Act provides for detailed valuation rules (Rules 27-31 of CGST Rules), including cost-plus and residual methods, to address situations where declared values are doubtful or indirect consideration is involved. This statutory mechanism is sufficient.
• Precedents Distinguished: The Court distinguished VKC Footsteps because that case found the rule to be consistent with the parent Act, unlike the impugned notification. Narne Construction was held irrelevant as it dealt with the Consumer Protection Act, not tax law, and its facts differed.
• Reading Down: Given the ultra-vires nature, the Court opted to "read down" Paragraph 2, making the 1/3rd deduction optional, applicable only when the actual value of land or undivided share cannot be ascertained, thereby preserving its utility in specific contexts while upholding the statutory scheme.

6. Statutory References

• Constitution of India: Articles 14, 226, 246A, 265, 279A(4), 366(29A)(b)
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Sections: 2(87), 7(1), 7(1A), 7(2), 9(1), 11(1), 15(1), 15(4), 15(5), 16(1), 54(3), 148, 119
  • Schedules: Schedule II (Para 5(b)), Schedule III (Entry 5)
• Gujarat Goods and Services Tax Act, 2017 (GGST Act)
• Notifications:
  • Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 (Entry 3(if), Paragraph 2)
  • Notification No. 3/2019-Central Tax (Rate) dated 29.03.2019
• Central Goods and Services Tax Rules, 2017 (CGST Rules): Rules 27, 28, 29, 30, 31, 89(5)
• Finance Act, 1994: Section 65(105) (clauses zzq, zzh, zzzza), Finance Act, 2007, Finance Act, 2010
• Service Tax (Determination of Value) Rules, 2006: Rule 2A
• Gujarat Value Added Tax Act, 2003: Section 2(30)(c)
• Gujarat Value Added Tax Rules, 2006: Rule 18AA
• Sale of Goods Act, 1930
• Customs Act, 1961
• Land Acquisition Act, 1894: Section 3(a)

7. Precedents Cited

• Indian Express Newspapers (Bombay) Private Limited v. Union of India & Ors. (1985) 1 SCC 641
• Kerala Financial Corporation v. Commissioner of Income Tax (1994) 4 SCC 375
• ITW Signode India Ltd. v. Collector of Central Excise (2004) 3 SCC 48
• Deputy Commercial Tax Officer v. Sha Sukraj Peerajee AIR 1968 SC 67
• State of Madras v/s Gannon Dunkerley and Co. (Madras) Ltd. (1958) 9 STC 353
• Gannon Dunkerley and Co. v/s State of Rajasthan (1993) 1 SCC 364
• State of Kerala v/s Builders Association of India (1997) 2 SCC 183
• Mycon Construction Ltd. v/s State of Karnataka and Another (2003) 9 SCC 583
• K. Raheja Development Corporation vs State of Karnataka (2005) 5 SCC 162
• Larsen and Toubro Ltd. v/s State of Karnataka (2014) 1 SCC 708
• Commissioner, Central Excise and Customs, Kerala v/s Larsen and Toubro Ltd. (2016) 1 SCC 170
• Suresh Kumar Bansal v/s Union of India (2016) 92 VST 330 (Del.)
• Wipro Ltd. v/s Assistant Collector of Customs and Others (2015) 14 SCC 161
• Commissioner of Central Excise, Pondicherry v/s Acer India Ltd. (2004) 8 SCC 173
• Commissioner of Central Excise, Indore v/s Grasim Industries Ltd. (2018) 7 SCC 233
• State of Rajasthan v/s Rajasthan Chemists Association (2006) 6 SCC 773
• 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 (Gujarat High Court)
• Commissioner of Income Tax v/s Parle International Ltd. Tax Appeal No. 1905 of 2009 (Gujarat High Court)
• Commissioner of Income Tax, Hyderabad v/s Motor and General Stores (P) Ltd. AIR 1968 SC 200
• Arun Kumar and Others v/s Union of India and Others (2007) 1 SCC 732
• Union of India v. Nitdip Textile Processors Pvt. Ltd. (2012) 1 SCC 226
• Anant Mills Co. Ltd. vs. State of Gujarat & Ors. (1975) 2 SCC 175
• Union of India (UOI) and Ors. Vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407
• 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
• Narne Construction P. Ltd. and Ors. Vs. Union of India (UOI) and Ors. (2012) 5 SCC 359
• Govind Saran Ganga Saran v/s CST [1985 Supp SCC 205]
• Union of India v. Bombay Tyre International Ltd. [(1984) 1 SCC 467]
• Maharashtra Chamber of Housing Industry v. State of Maharashtra (2012) 4 Bom LR 2152
• Garden Silk Mills Ltd. v. Union of India (1999) 8 SCC 744
• Mafatlal Industries Ltd. v/s Union of India (1997) 5 SCC 536
• Tripp v. Armitage [(1839) 4 M & W 687]
• Appleby v. Myres [(1867) LR 2 CP 651]
• Thakoor Chunder Poramanick v. Ramdhone Bhuttacharjee [(1866) 6 WR 228]
• Beni Ram v. Kundan Lall [(1899) 26 IA 58]
• Narayan Das Khettry v. Jatindranath [(1927) LR 54 IA 218]