Parliament Can Levy Service Tax on Preferential Location Charges, Not on Undivided Land Shares in Flat Purchases

The HC held that Parliament has competence to levy service tax on preferential location charges as these involve a service element reflecting customer preferences and value addition. However, service tax cannot be imposed on the undivided share of land or goods in a composite contract for purchase of flats, as there is no mechanism to ascertain the value of the service component separately. The explanation extending service tax to composite contracts under Section 65(105)(zzzh) was struck down. The challenge to clause (zzzzu) relating to preferential location charges was dismissed. The court ruled in favor of the assessee regarding composite contracts, directing refund with 6% interest of any service tax collected and deposited under the impugned provision.

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Issues Involved:
1. Levy of service tax on services 'in relation to construction of complex' under Section 65(105)(zzzh) of the Finance Act, 1994.
2. Constitutionality of the explanation to Section 65(105)(zzzh) introduced by Finance Act 2010.
3. Levy of service tax on preferential location charges under Section 65(105)(zzzzu) of the Finance Act, 1994.
4. Legislative competence of the Parliament to levy service tax on composite contracts.
5. Absence of machinery provisions to ascertain the service component in composite contracts.
6. Validity of service tax imposition on services post 1st July 2012 under Section 66E(b) read with Section 65B(22) and Section 65B(44).

Detailed Analysis:

1. Levy of Service Tax on Services 'in Relation to Construction of Complex' under Section 65(105)(zzzh):
The petitioners contended that their agreements with the builder were for the purchase of immovable property, and thus the Parliament lacked the legislative competence to levy service tax on such transactions. They argued that the agreements were composite contracts and, without specific provisions to ascertain the service component, the levy was beyond the Parliament's legislative competence.

2. Constitutionality of the Explanation to Section 65(105)(zzzh) Introduced by Finance Act 2010:
The explanation to Section 65(105)(zzzh) expanded the scope of taxable service by deeming construction of a complex intended for sale by a builder as a service provided to the buyer. The petitioners challenged this explanation as ultra vires the Constitution. The court noted that the explanation was a legal fiction created to bring parity in various forms of agreements between builders and buyers for the purpose of service tax. The Parliament was competent to enact such legal fiction.

3. Levy of Service Tax on Preferential Location Charges under Section 65(105)(zzzzu):
The petitioners argued that preferential location charges related only to the location of the immovable property and did not involve any service element. The court rejected this contention, stating that preferential location charges were based on the preferences of customers and were a measure of additional value derived from certain attributes of the property. These charges embodied the value of satisfaction derived by a customer from additional attributes, thus justifying the levy of service tax.

4. Legislative Competence of the Parliament to Levy Service Tax on Composite Contracts:
The petitioners relied on the Supreme Court's decision in Larsen & Toubro Ltd. v. State of Karnataka, which held that composite contracts could only be taxed for the service component after excluding the value of goods and land. The court affirmed that the Parliament had the legislative competence to levy service tax on the service component of composite contracts but emphasized the necessity of machinery provisions to segregate the service component from the composite contract.

5. Absence of Machinery Provisions to Ascertain the Service Component in Composite Contracts:
The court noted that neither the Finance Act nor the rules provided a mechanism to ascertain the value of services in composite contracts. The absence of such machinery provisions rendered the levy of service tax on composite contracts invalid. The court emphasized the need for clear statutory provisions to determine the value of services to sustain the levy of service tax.

6. Validity of Service Tax Imposition on Services Post 1st July 2012:
The petitioners contended that the challenge to the provisions of Section 65(105)(zzzh) and 65(105)(zzzzu) would also apply to the taxing provisions introduced from 1st July 2012. The court did not specifically address this issue in detail but focused on the legislative competence and the necessity of machinery provisions for the levy of service tax on composite contracts.

Conclusion:
The court held that the Parliament had the legislative competence to levy service tax on services involved in the construction of a complex. However, it set aside the impugned explanation to Section 65(105)(zzzh) to the extent it sought to include composite contracts within the scope of taxable service due to the absence of machinery provisions to segregate the service component. The court upheld the levy of service tax on preferential location charges under Section 65(105)(zzzzu). The petitions were disposed of with directions for refund of any service tax collected based on the impugned explanation, with interest.

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