In S.T.R.P. No. 47 of 2022 -KAR HC- Prime location charges/Floor rise charges not part of construction cost, no KVAT liability for M/s. Smart Value Homes: Karnataka High Court
Justice P.S. Dinesh Kumar & Justice T.G. Shivashankare Gowda [23-08-2023]

Read Order: M/s. Smart Value Homes V. Joint Commissioner and Others

Chahat Varma

New Delhi, October 10, 2023: The Karnataka High Court has ruled in favour of M/s. Smart Value Homes (assessee), stating that Prime Location Charges (PLC) and Floor Rise Charges (FRC) should not be considered as part of the construction cost, and therefore, the assessee was not obligated to pay Karnataka Value Added Tax (KVAT) on these charges.

The present revision petition revolved around the Karnataka Appellate Tribunal's denial of the petitioner's request for a deduction/exemption related to Prime Location Charges.

In this case, the assessee, a private limited company under the Karnataka Value Added Tax Act (KVAT Act), collected PLC/ FRC for flats in prime locations. The assessee argued that it had already paid service tax on PLC/FRC and thus should be exempt from KVAT Act taxes related to these charges. However, the Assistant Commissioner of Commercial Tax rejected this exemption claim, leading to an appeal to the Joint Commissioner of Commercial Taxes, who also upheld the rejection. The Karnataka Appellate Tribunal (KAT) subsequently confirmed this decision. The crux of the revenue's argument was that PLC/FRC falls within the definition of 'works contract' and was therefore taxable under the KVAT Act.

The division bench of Justice P.S. Dinesh Kumar and Justice T.G. Shivashankare Gowda referred to Section 2(37) of the KVAT Act, which defines 'works contract,' and noted that it pertained to actions undertaken for consideration related to building and construction, among other things.

The bench pointed out that the estimated and actual construction costs are determined by the materials used in construction and are not influenced by factors such as the direction of the flat or the view from a particular flat compared to others on the same floor. The PLC/FRC are determined by the preferences of the buyer and should not be considered as part of the construction cost.

The bench concluded that, as per the definition, ‘works contract’ does not encompass preferential location charges. Therefore, the revenue's rejection of the assessee's request to exempt PLC/ FRC from payment of KVAT was not sustainable in law.

Therefore, the substantial questions of law were answered in favour of the assessee and against the revenue.