2016 (6) TMI 192 - HC - Service Tax

Legislative competence for Levy of service tax on preferential location charges while Purchasing a FLAT in the multi-storey group housing project - composite contract for purchase of immovable property - whether the explanation to Section 65(105)(zzzh) of the Act introduced by virtue of Finance Act 2010 as being ultra vires of the Constitution of India. - 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. Held that - 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. 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. There is no machinery provision for ascertaining the service element involved in the composite contract. In order to sustain the levy of service tax on services, it is essential that the machinery provisions provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax. Insofar as the challenge to the levy of service tax on taxable services as defined under Section 65(105)(zzzzu) is concerned, we do not find any merit in the contention that there is no element of service involved in the preferential location charges levied by a builder. We are unable to accept that such charges relate solely to the location of land. Thus, preferential location charges are charged by the builder based on the preferences of its customers. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit. Such charges may be attributable to the preferences of a customer in relation to the directions in which a flat is constructed; the floor on which it is located; the views from the unit; accessibility to other facilities provide in the complex etc. Service tax is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction derived by a customer from certain additional attributes of the property developed. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex. Challenge to insertion of clause (zzzzu) in Sub-section 105 of Section 65 of the Act negated - Decided against the assessee. However no service tax under section 66 of the Act read with Section 65(105)(zzzh) of the Act could be charged in respect of composite contracts such as the ones entered into by the Petitioners with the builder. The impugned explanation to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service is set aside. - Decided in favor of assessee. Refund of amount already deposited - The concerned officer shall examine whether the builder has collected any amount as service tax from the Petitioners for taxable service as defined in Section 65(105)(zzzh) of the Act and has deposited the same with the respondent authorities. Any such amount deposited shall be refunded to the Petitioners with interest at the rate of 6% from the date of deposit till the date of refund. - Decided in favor of assessee.

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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