2013 (6) TMI 588 - HC - Service Tax

Constitutional validity of Finance Act 1994's tax provisions upheld

The court upheld the constitutional validity of the Explanations to clauses (zzq) & (zzzh) and clause (zzzzu) of sub-Section 105 of Section 65 of the ... Constitutional validity of taxation by legal fiction - taxable service - construction and development treated as service - deemed service by builder to buyer - preferential location treated as taxable service - legislative competence under Entry 92C of List I and residuary Entry 97 - classification and discrimination under Article 14 - measure and valuation of taxable servicesConstitutional validity of taxation by legal fiction - taxable service - construction and development treated as service - deemed service by builder to buyer - The Explanations to clauses (zzq) and (zzzh) and clause (zzzzu) of sub Section 105 of Section 65 insofar as they deem construction, complex development and preferential location to be services are constitutionally valid. - HELD THAT: - The court held that the impugned Explanations create a legal fiction by deeming certain construction and development activities to be taxable services, and that the nature of the levy must be determined by the taxable event. A tax on an activity connected with land (construction) is not a tax directly on land as a unit and therefore does not fall within Entry 49 of List II. The court relied on the aspect/overlap principle: different aspects of the same transaction can attract separate imposts. Consequently, the subject matter of the impugned provisions falls within Union legislative competence - specifically Entry 92C as inserted and, in any event, within the residuary legislative power under Entry 97 of List I - and Parliament was competent to enact the provisions. The court also observed that even if an element of service in providing preferential location were minimal, clause (zzzzu) would not be rendered ultra vires as it is not a law with respect to any matter in List II and, therefore, is within Parliament's power to legislate. [Paras 7]The impugned Explanations are within Parliament's legislative competence and are not ultravires for being a law with respect to lands and buildings.Classification and discrimination under Article 14 - The distinction drawn by the statute which exempts constructions for which no sum is received before grant of completion certificate is not arbitrary or violative of Article 14. - HELD THAT: - The court reiterated that taxation measures enjoy a wide latitude of classification. The Completion Certificate was held to be a rational differentia separating constructions to which the Act applies from those to which it does not, since no element of service relating to construction is involved after completion where no pre completion receipt is taken. Therefore treating these two situations differently does not amount to treating equals unequally or to an irrational classification. [Paras 8]The classification embodied in the impugned provisions is valid and not discriminatory or arbitrary under Article 14.Measure and valuation of taxable services - The measure of service tax may be the gross value charged for construction and is not unconstitutional for not isolating a separate notional 'service component'. - HELD THAT: - The court distinguished the subject of the tax from its measure, holding that the measure cannot alter the character of the levy. Any standard having a nexus with the essential character of the levy is a valid basis for assessment; where the character is service tax on construction, the gross value of construction bears a sufficient nexus to the service element. The court therefore rejected the contention that only the notional service component could be taxed and found the reliance on the Supreme Court decision in Rajasthan Chemist Association inapplicable. [Paras 9]Using the gross value of construction as the measure for service tax is constitutionally permissible.Final Conclusion: All challenges to the impugned Explanations fail; the writ petitions are dismissed. 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.