An analysis of recent Punjab and Haryana HC judgment on construction activity – held valid

[C.A. DEV KUMAR KOTHARI]

Relevant links: Section 65 (30a) , 65 (91a) and  65(105) (zzzh) of the Finance Act,1994 as amended.

Indian Constitution

G.S. Promoters Versus UOI 2010 -TMI - 78878 - PUNJAB AND HARYANA HIGH COURT

M/s Shubh Timb Steels Limited Versus Union of India and another Service Tax - 2010 TMI - 78578 - PUNJAB AND HARYANA HIGH COURT

Provisiosn considered by the Court:

The court considered the following provisions of the Finance Act, 1994 (as amended) in relation to levy of service tax on construction services. The provisions, as considered are reproduced with highlights:

Section 65(zzzh) defines taxable service as :

"any service provided or to be provided 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 intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorized by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer."

Section 65(30a) gives meaning of  "construction of complex":

"Construction of complex 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 fitting and other similar service or

(c) Repair, alteration, renovation or restoration of or similar services in relation to 'residential complex'.

Section 65(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 of the layout and the said construction of such complex is intended for personal use as residence by such person." 

A reading of the above provisions shows that while drafting the provisions expression to convey and cover wider meanings have been used.

Relevant portion from circular with highlights:

Letter D.O.F.No. 334/03/2010-TRU  Dated 1-7-2010

This circular was issued after The Finance Bill 2010 was enacted on 8th May 2010 to clarify the new and amended services. Changes in relation to construction services became effective as the effective date was notified to be the 1st day of July 2010 vide Notification No.24/2010-Service Tax dated the 22nd June 2010.

 2. Services provided or payments made prior to the effective date;

xxxx

About construction services clarification is in the paragraph 6 which is reproduced :

6.1 In the Finance Act, changes have been made in the construction services, both commercial construction and construction of residential complex, using 'completion certificate' issued by 'competent authority'. Before the issuance of completion certificate if agreement is entered into or any payment is made for sale of complex or apartment in residential complex, service tax will be leviable on such transaction since the builder provides the construction service. Completion certificate issued by a Government authority was prescribed as demarcation by introducing an Explanation in the Finance Act. During the post budget discussions, it was pointed that practice regarding issuance of completion certificates varies from state to state. Considering the practical difficulties, the scope of the phrase 'authority competent' to issue completion certificate has been widened by issuing an order for removal of difficulty ( Refer M.F.(D.R) Order No.1/2010 dated 22nd June 2010). Completion certificate issued by an architect or chartered engineer or licensed surveyor can be now taken to determine the service tax liability.

6.2 After the Budget was introduced views were expressed that the tax liability on construction sector has been tightened at a time when the sector was recovering after recession. After considering the issue, abatement available for construction of industrial or commercial complex and also residential complex has been prescribed as seventy five per cent. This means now tax incidence will be the rate of service tax applied on twenty five per cent of gross value of commercial or residential complex or unit, broadly representing the service component in the construction, subject to conditions (Refer Notification 29/2010-Service Tax, dated 22nd June 2010).  Importantly seventy five percent abatement will be applicable only if the gross value of commercial or residential complex or unit includes cost of land. Otherwise the existing rate of abatement of 67% would continue to apply.

6.3 Exemption has been provided xxxx

Case before Punjab and Hariyana High Court:

Facts:

M/s G.S. Promoters ( "Petitioner") is engaged in development and sale of residential flats. Petitioner is considered as a service provider, liable to pay service tax.

The petitioner enter into agreement for construction of flats with the contractors.

The flats are ultimately sold to the customers.

The petitioner challenged amendment by way of writ petition to seek declaration that the Explanation to Section 65(zzzh) of the Finance Act, 1994  and CBEC circular No. 334/3/2010-TRU dated 1 July 2010 are unconstitutional.  

The service provider (petitioner) raised contentions as follows:

1. The explanation to Section 65(zzzh) of the Finance Act widens the scope of levy beyond the concept of service by including therein sale. 
2. Taxing of sale and purchase is beyond the legislative competence of the Union    Legislature. 

Arguments of the revenue: 

The revenue (respondents) opposed the petition and argued that that the Explanation to Section 65(zzzh) of the Finance Act and the Circular are constitutionally valid.  

Observations of the High Court of Punjab and Haryana:       

 Constitutional power- Entry 92C and the residuary Entry 97 of the Union List of the Constitution of India empowers the Central Government to levy tax on services. 

The scope of these entries cannot be taken in limited or narrow manner by way of interpretation.

The entries in the lists being merely topics or fields of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense.

The words and expressions employed in drafting the entries must be given the widest-possible interpretation.

A power to legislate as to the principal matter specifically mentioned in the entry shall also include within its expanse the legislations touching incidental and ancillary matters.     

Taxable activity has to be as per the statutory scheme and unless there is any encroachment in the field of the State Legislature, the competence of the Union Legislature cannot be questioned.

Only the element of service in construction activity has been subjected to levy, in this case.

Accordingly, the impugned levy of service tax cannot be held to be beyond the legislative competence of the Central Government.

Taxation power of the Union Legislature extends to any matters not covered by taxing entries in List II and is not limited by specified entries. 

Whether any service is involved has to be seen not only from the point of view of the service provider (builder in this case) but also from the point of view of the service recipient (buyer of building or part of building).

What is sought to be taxed, in the present case, is the service in relation to construction which is certainly involved even when construction is carried out or got carried out before construction and before flat is sold.

Such transaction of service is not outside the purview of the Union Legislature as the same does not fall in any of the taxing entries of State list. 

Accordingly the writ petition was dismissed as the court did not found any ground to declare the levy of service tax by virtue of Explanation to Section 65(zzzh) of the Finance Act and the Circular as unconstitutional.

Comments of author:

It appears that in cases challenging levy greater emphasis have been pressed on constitutional powers of the Central Government and State Government. It seems that desirable efforts have not been made to challenge the levy on other possible grounds in relation to  various services levy of which were  challenged in High Courts and also Supreme Court. In the case before the Punjab and Hariyana  high court also we find emphasis was on constitutional authorization in relation to constructions service covered in this write-up and also in relation to renting of commercial properties in case of M/s Shubh Timb Steels Limited Versus Union of India and another Service Tax - 2010 TMI - 78578 - PUNJAB AND HARYANA HIGH COURT.

The court has also noted that  "no argument has been raised in the present case that by the impugned levy, there is any encroachment in the legislative power of the State Legislature, except to submit that there was element of sale which was sought to be taxed. It is not the case of the petitioner that the levy falls under Entry 54 List-II relating to sale and purchase of goods. …"

The court viewed that what has been subjected to levy, in the present case, is element of service of construction. In this view of the matter, the impugned levy cannot be held to be beyond the legislative competence. Service and sale may both be included in a transaction. Considering the scope of entry 54 List II, it has been held that the said entry was a source of levy of tax only on transaction of sale and not in a composite transaction of sale and service or transaction of service.

Author feels that there should be more emphasis on nature of service, nature of relationship between parties, the consideration aspect, the nature of dealing to indicate sale or service, and many more aspects peculiar to particular type of activity.