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2016 (6) TMI 192
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....x and on preferential location charges. 3. The Petitioners are aggrieved by the levy of service tax on services 'in relation to construction of complex' as defined under Section 65 (105)(zzzh) of the Finance Act, 1994 (hereafter 'the Act') and inter alia impugn the explanation to Section 65(105)(zzzh) of the Act (hereafter 'the impugned explanation') introduced by virtue of Finance Act 2010 as being ultra vires of the Constitution of India. The Petitioners also impugn Section 65(105)(zzzzu) of the Act which seeks to subject preferential location charges charged by a builder to service tax. The Petitioners state that their agreement with the builder is a composite contract for purchase of immovable property and contend that in absence of specific provisions for ascertaining the service component of the said agreement, the levy would be beyond the legislative competence of the Parliament. 4. The controversy involved in these petition relates to the question whether the consideration paid by flat buyers to a builder/promoter/developer for acquiring a flat in a complex, which under construction/development, could be subjected to levy of service tax. Accord....
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....ied only for imposition of service tax on service contracts simplicitor and their application to composite contracts would render the said provisions unconstitutional. 7. Next, Mr Agrawal referred to the decision of this Court in G.D. Builders. v. Union of India and Anr.: (2013) SCC OnLine Del 4543 and pointed out that this Court had examined the challenge to levy of service tax on composite contracts, including in the context of Section 65(105)(zzzh) of the Act, and had upheld the levy even in absence of any rule for ascertaining the element of service component. He pointed out that this decision was overruled by the Supreme Court in Commissioner Central Excise and Customs, Kerala v. Larsen & Toubro Ltd. (supra) by accepting the Assessee's contention that the charging Section must itself specify that the service tax is only on the service element of a composite contract and the statutory framework must provide for machinery provisions to ascertain the value of such element for the purposes of service tax. He contended that since, in the present case, the provisions to ascertain the service element were insufficient, the levy of service tax must fail. 8. Mr Agrawal furthe....
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....arious services such as consulting services, engineering services, management services, architectural services etc. These services are subsumed in the taxable service as contemplated under Section 65(105)(zzzh) of the Act. She further submitted that as the gross charges include value of land and construction material, only 25% of the Base Selling Price (BSP) charged by a builder from the ultimate consumer is subjected to levy of service tax. However in case of preferential location charges, the entire amount charged by a developer is for value addition and, therefore, the gross amount charged for such services is chargeable to service tax under Section 66 read with Section 65(105)(zzzzu) of the Act. Discussion and Conclusion 12. Service tax was introduced for the first time in India in 1994 by virtue of the Finance Act, 1994. In his Budget speech, the then Finance Minister explained that the service tax was being introduced on the recommendation of the Tax Reforms Committee - Dr. Raja Chelliah Committee on tax reforms - which had recommended imposition of tax on services as a measure for broadening the base of indirect taxes. He observed that service sector accounted f....
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....plex' means-- (a) construction of a new residential complex or a part thereof,* or (b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or (c) repair, alteration, renovation or restoration of, or similar services in relation to, residential complex." 16. The term 'residential complex' is defined under Section 65(105)(91a) as under:- "(91a) "residential complex" means any complex comprising of- (i) a building or buildings, having more than twelve residential units; (ii) a common area; and (iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system, located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning ....
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.... to pay service tax." 18. The counter affidavit filed on behalf of the Respondents also affirms the above Circular as clarifying that service tax was not applicable in respect of construction/development by a developer/builder engaged in the business of developing real estate for selling units to prospective buyers. It is affirmed on behalf of the Respondents that the "Circular was issued within the existing law because at that time, no service tax was applicable on such services within the Finance Act, 1994. The same was specifically inserted by way of amendment in the Finance Act, 2010". Thus, even according to the Respondents, prior to the Finance Act, 2010 -by virtue of which the impugned explanation to Section 65(105)(zzzh) and clause (zzzzu) were introduced - service tax was not chargeable on builders/developers who were engaged in construction of real estate residential projects and selling residential units in those projects to prospective buyers. Thus, unless the builder was rendering the service of construction of a complex simplicitor, no service tax was chargeable for service covered under clause (zzzh) of Section 65(105) of the Act. 19. It is relevant to note tha....
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....urse of providing maintenance or repair service; vii. the cost of parts or other material, if any, sold to the customer during the course of providing erection, commissioning or installation service; and viii. interest on loans. Explanation. 2. - Where the gross amount charged by a service provider is inclusive of service tax payable, the value of taxable service shall be such amount as with the addition of tax payable, is equal to the gross amount charged. Explanation. 3. - For the removal of doubts, it is hereby declared that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service." 20. By virtue of Finance Act, 2010, an explanation was added to Section 65(105)(zzzh) which is impugned in these petitions. After the insertion of the impugned explanation, the said clause read as under: "S.65 (105) "Taxable Service" means any service provided or to be provided:- xxxx xxxx xxxx xxxx xxxx "(zzzh) to any person, by any other person, in relation to construction of complex" [Explanation:. For the purposes of this sub-clause, construction of a complex which is....
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....t propose to examine whether services involved in construction of complexes is exigible to service tax as services in relation to execution of a works contract falling within the scope of Section 65(105)(zzzza) of the Act or under Section 65B(44) after the amendments brought about in the Act by virtue of Finance Act, 2012 - the said controversy is outside the scope of the present petitions and it would not be appropriate for us to examine it in these petitions [see Hindustan Polymers Co. Ltd. and Others v. Collector of Central Excise, Guntur: (1997) 11 SCC 302]. 24. Insofar as the impugned explanation is concerned, it is apparent that the same expands the scope of the taxable service as envisaged in clause (zzzh) of the Act. By a legal fiction, construction of a complex which is intended for sale by a builder or any person authorised by him before, during or after construction is deemed to be a service provided by the builder to the buyer. The only exception contemplated is where no sum is received from the prospective buyer prior to grant of the completion certificate. The grant of completion certificate implies that the project is complete and at that stage all services and go....
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....chase of the constructed unit. In some cases, prospective buyers make the payment upfront while in other cases, the buyers may opt for construction linked payment plans, where the agreed consideration is paid in instalments linked to the builder achieving certain specified milestones. Whilst it may be correct to state that the title to the unit (the immovable property) does not pass to the prospective buyer at the stage of booking, it can hardly be disputed that the buyer acquires an economic stake in the project and in one sense, the services subsumed in construction - services in relation to a construction the complex - are rendered for the benefit of the buyer. However, but for the legal fiction introduced by the impugned explanation, such value add would be outside the scope of services because sensu stricto no services, as commonly understood, are rendered in a contract to sell immovable property. 28. The impugned explanation was enacted to principally bring about parity in various forms of arrangements entered into between the builders and prospective buyers for the purposes of levy of service tax. The object was to obliterate - for the purposes of levy of service tax -....
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....entation has been devised to pay lesser stamp duty. In many cases, an instrument called 'Construction Agreement' is parrallely executed under which the obligations of the promoter to get property constructed and that of the buyer to pay the required consideration are incorporated. 8.5 These different patterns of execution, terms of payment and legal formalities have given rise to confusion, disputes and discrimination in terms of Service tax payment. 8.6. In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), the activity of construction would be deemed to be a taxable service provided by the builder/ promoter/ developer to the prospective buyer and the Service tax would be charged accordingly. This would only expand the scope of the existing service, which otherwise remain unchanged." 29. The use of a legal fiction is a well known legislative device to assume a state of facts (or a position in law) for the l....
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....r Pradesh v. Hari Ram: (2013) 4 SCC 280). 30. The imposition of service tax by virtue of the impugned explanation is not a levy on immovable property as contended on behalf of the Petitioner. The clear object of imposing the levy of service tax in relation to a construction of a complex is essentially to tax the aspect of services involved in construction of a complex the benefit of which is available to a prospective buyer who enters into an arrangement - whether by way of an agreement of sale or otherwise - for acquiring a unit in a project prior to its completion/development. 31. The controversy whether a legislature has the competence to enact a law has to be judged in the context of the pith and substance of that law. In Union of India v. H.S. Dhillon: (1972) 83 ITR 582(SC), a Constitution Bench of the Supreme Court applied the doctrine of pith and substance while in considering the question whether the levy of Wealth Tax Act on immovable property would retrench upon the legislative field reserved for the stakes under Entry 49 of List II of the Seventh Schedule of the Constitution of India. 32. In India Cements v. State of Tamilnadu: (1991) 188 ITR 690 (SC) the Suprem....
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....w being on the latter subject. There might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects..." 34. We do not find any merit in the contention that the imposition of service tax in relation to a transaction between a developer of a complex and a prospective buyer impinges on the legislative field reserved for the States under Entry-49 of List-II of the Seventh Schedule to the Constitution of India. 35. Having stated the above, it is also essential to examine the measure of tax used for the levy. The measure of tax must have a nexus with the object of tax and it would be impermissible to expand the measure of service tax to include elements such as the value of goods because that would result in extending the levy of service tax beyond its object and would impinge on the legislative fields reserved for the State Legislatures. 36. In BSNL v. Union of India: (2006) 3 SCC 1, the Supreme Court explained the question whether value of SIM Cards could be included in the cost of services. The Supr....
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.... who is developing the complex for sale is, essentially, one of purchase and sale of developed property. But, by a legislative fiction, such agreements, which have been entered into prior to completion of the project and/or construction of a unit, are imputed with a character of a service contract; the works involved in construction of a complex are treated as being carried by the builder on behalf of the buyer. However, indisputably the arrangement between the buyer and the builder is a composite one which involves not only the element of services but also goods and immovable property. Thus, while the legislative competence of the Parliament to tax the element of service involved cannot be disputed but the levy itself would fail, if it does not provide for a mechanism to ascertain the value of the services component which is the subject of the levy. Clearly service tax cannot be levied on the value of undivided share of land acquired by a buyer of a dwelling unit or on the value of goods which are incorporated in the project by a developer. Levying a tax on the constituent goods or the land would clearly intrude into the legislative field reserved for the States under List II o....
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....on of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner." 41. Prior to the amendment brought about by Finance Act 2010, Section 67 of the Act provided that the value of taxable services would be "the gross amount charged by the service provider for such service rendered by him". Section 67 of the Act was amended also to provide for value in cases where the consideration for the services was not wholly or partly consisting of money and in cases where the consideration for the service was not ascertainable. 42. Section 65(86) of the Act defines the expression "prescribed" to mean as " 'prescribed' by rules made under this Chapter". Thus, by virtue of Section 67(1)(iii) of the Act, in cases where the consideration for provision of services is not ascertainable, the same was to be determined in accordance with the Rules made under the Act. 43. For the purposes of ascertaining the valu....
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....ng the value of works contract service under this clause. (ii) Where the value has not been determined under clause (i), the person liable to pay tax on the taxable service involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:- (A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract: Provided that where the gross amount charged includes the value of the land, in respect of the service provided by way of clause (8) of section 66E of the Act, service tax shall be payable on twenty five per cent. of the total amount including such gross amount; (B) in case of other works contracts including completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings not covered under subclause (A), service tax shall be payable on sixty per cent. of the total amount charged for the works contract; Explanation 1.- For the purposes of this rule,- (I) "original works" means- (i) all new constructions; (ii) all types of additions and alte....
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....mposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness ill the legislative scheme defining any of those components of the levy will be fatal to its validity." 48. In Commissioner Central Excise and Customs, Kerala v. Larsen & Toubro Ltd. (supra), the Supreme Court considered the question whether service tax could be levied on indivisible works contract under clauses (g), (zzd), (zzh), (zzq) and (zzzh) of sub-section 105 of Section 65 of the Act. The Court referred to various earlier decisions on the question whether a levy of tax could be sustained in absence of the machinery provisions and held that since neither the Act nor Rules provided for any machinery provisions to exclude the non-service element from a composite contract, ....
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....h) of the Act, it does not provide any machinery for excluding the non-service components from the taxable services covered therein. The Rules also do not contain any provisions relating to determination of the value of services involved in the service covered under Section 65(105)(zzzh) of the Act. Thus the said clause cannot cover composite contracts such as the one entered into by the Petitioners with the builder. 50. In Maharashtra Chamber of Housing Industry (supra), the Bombay High Court upheld the constitutional validity of the impugned explanation by examining the object of the taxation. The Court held that the legislative competence must be determined with reference to the object of the levy and not with reference to the incidence of tax or the machinery provisions. As indicated above, we are also of the view that in the present case, the Parliament would have the legislative competence to levy service tax in relation to the services rendered in construction of a complex. However, as explained in Commissioner Central Excise and Customs, Kerala v. Larsen & Toubro Ltd. (supra) in absence of machinery provisions to exclude non-service elements from a composite co....
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....low:- "This Court is of the opinion that if the Act is unworkable in the absence of necessary Rules, as has been held by several judgments referred to above, any assessment under the said Act cannot be enforced even if such an assessment order is made by an authority under the Act purportedly in accordance with the provisions of the Act. The inherent infirmity of an assessment order passed on the basis of circulars which have no statutory sanction cannot be cured by an appellate order. In other words, if the assessment order itself is not sustainable on account of unworkability of the provisions under which they are purportedly made, no purpose would be served by filing appeal against the said order and this question cannot be decided by the appellate authority under the Act. In the instant case, both the assessing officer and the appellate authority are bound to follow the instructions contained in the circulars. Therefore, no purpose would be served by filing appeal before the appellate authority. In order to constitute valid basis for taxation, the rate of deduction, specially a flat rate of deduction cannot be applied to calculate the taxable turnover in works contract. S....