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of <h1>Constitutional validity of Finance Act 1994's tax provisions upheld</h1> <h3>Confederation of Real Estate Developers´ Association of India (Karnataka) Versus Union of India</h3> Confederation of Real Estate Developers´ Association of India (Karnataka) Versus Union of India - [2013] 58 VST 350 (Kar), 2015 (37) S.T.R. 211 (Kar.) Issues Involved:1. Constitutional validity of the Explanations to clauses (zzq) & (zzzh) and clause (zzzzu) of sub-Section 105 of Section 65 of the Finance Act, 1994.2. Legislative competence of Parliament to enact the impugned provisions.3. Allegation of discrimination and arbitrariness in the impugned explanations.4. Measure of tax and whether it should be based on the service component or the gross amount charged for construction.Detailed Analysis:Constitutional Validity:The petitioners challenged the constitutional validity of the Explanations to clauses (zzq) & (zzzh) and clause (zzzzu) of sub-Section 105 of Section 65 of the Finance Act, 1994, inserted by the Finance Act, 2010 with effect from 1st July 2010. The petitioners argued that these provisions were unconstitutional as no element of service is involved in the construction and sale of buildings/flats or in providing a preferential location.Legislative Competence:The petitioners contended that Parliament lacks the legislative competence to tax the services referred to in the impugned provisions, arguing that the tax in substance is a tax on the transfer of lands and buildings, falling within Entry 49 of List II (State list) of the Seventh Schedule of the Constitution of India. The court, however, held that the tax on a particular activity in connection with land (construction) cannot be said to be a tax directly on land. It was determined that the subject matter of the impugned provisions falls within Entry 92C of List I or the residuary entry (Entry 97) of List I, thus within Parliament's legislative competence.Discrimination and Arbitrariness:The petitioners argued that the impugned explanations were discriminatory and arbitrary, as they imposed service tax on constructions where sums were received before the grant of completion certificate but not on those where sums were received after. The court found that the 'Completion Certificate' serves as a valid basis for classification, distinguishing between constructions completed and those not yet completed. The court referenced the principle that tax laws must pass the test of Article 14 but allowed a wide latitude in classification for taxation purposes, concluding that the classification was not arbitrary or discriminatory.Measure of Tax:The petitioners contended that the measure of tax should be based only on the service component, not the gross amount charged for construction. The court rejected this argument, stating that the measure of tax is the gross value of construction charged by the service provider, which has a nexus with the element of service involved in the construction. The court noted that the measure of tax cannot affect the nature of the tax and referenced a Supreme Court judgment, emphasizing that any standard having a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of the levy.Conclusion:The court dismissed the writ petitions, upholding the constitutional validity of the impugned provisions and confirming Parliament's legislative competence. The court found no discrimination or arbitrariness in the explanations and validated the measure of tax based on the gross amount charged for construction.
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