2012 (1) TMI 98 - HC - Service Tax

Levy of service tax on Builders - amendment to clauses (zzq), (zzzh) and (zzzzu) - constitutional validity - held that - The fact that the activity in question is an activity which is rendered on land does not make the tax a tax on land. The charge is on rendering a taxable service and the fact that the service is rendered in relation to land does not alter the nature or character of the levy. The legislature has expanded the notion of taxable service by incorporating within the ambit of clause (zzq) and clause (zzzh) services rendered by a builder to the buyer in the course of an intended sale whether before, during or after construction. There is a legislative assessment underlying the imposition of the tax which is that during the course of a construction related activity, a service is rendered by the builder to the buyer. Whether that assessment can be challenged in assailing constitutional validity is a separate issue which would be considered a little later. At this stage, what merits emphasis is that the charge which has been imposed by the legislature is on the activity involving the provision of a service by a builder to the buyer in the course of the execution of a contract involving the intended sale of immovable property. - The submission that the explanation brings in two fictions and is ultra vires the provisions of Sections 67 and 68 of the Finance Act is completely lacking in substance. The levy under Section 66 is on the value of taxable services. Section 65(105) defines taxable services. The explanation cannot possibly be held to be ultra vires Sections 67 and 68. - Constitutional validity of levy of service tax upheld. Service tax on Preferential location charges or development of complex clause (zzzzu) - held that - These according to the Revenue involve value additions and services when the prospective purchaser purchases a flat or a unit before the completion certificate is obtained. We find merit in the contention which has been urged on behalf of the Revenue that if no charge is levied for a preferential location or development, no service tax would be attracted in the first place. Builders, however, follow the practice of levying charges under diverse heads including preferred development of the property intended to be sold or in terms of a preferred location which is made available to the buyer. Clause (zzzzu) only intends to obviate a leakage of revenue and plugs a loophole which would have otherwise resulted. To reiterate, if no separate charge is levied, the liability to pay service tax does not arise and it is only where a particular service is separately charged for that the liability to pay service tax arises. The fact that the service is rendered in the context of a location, does not make it a tax on land within the meaning of Entry 49 of List II. The tax continues to be a tax on the rendering of a service by the builder to the buyer. There is no vagueness and uncertainty. The legislative prescription is clear. Hence, there is no excessive delegation. - Levy of service tax upheld on preferential location charges or development of complex.

Issues Involved:
1. Constitutional validity of the amendments to Section 65(105)(zzq), Section 65(105)(zzzh), and the introduction of clause (zzzzu) in Section 65(105) of the Finance Act, 1994.
2. Legislative competence of Parliament to impose service tax on construction-related activities.
3. Nature of service tax as a tax on services versus a tax on land and buildings.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Amendments and Introduction of Clause (zzzzu):
The amendments to Section 65(105)(zzq) and Section 65(105)(zzzh) of the Finance Act, 1994, and the introduction of clause (zzzzu) were challenged on the grounds of legislative competence and the nature of the tax. The amendments aimed to include construction services provided by builders to buyers within the scope of taxable services, deeming such activities as services when certain conditions were met, such as receiving payments before the issuance of a completion certificate.

The Court upheld the amendments, noting that the explanation inserted by the Finance Act of 2010 expanded the concept of taxable service to include construction services provided by builders to buyers in the course of an intended sale. This expansion was deemed necessary to plug loopholes and ensure that such services did not slip out of the value-added tax net.

2. Legislative Competence of Parliament:
The Petitioners argued that the amendments were beyond the legislative competence of Parliament, as the tax on construction-related activities fell within the legislative power of the States under Entry 49 of List II (tax on land and buildings). The Court rejected this argument, stating that the tax in question was on the service rendered during construction, not on the land or buildings themselves. The Court emphasized that the charge of tax was on the rendering of a taxable service, and the fact that the service was rendered in relation to land did not alter the nature or character of the levy.

The Court referred to several Supreme Court decisions, including Sudhir Chandra Nawn v. Wealth Tax Officer and Second Gift Tax Officer v. D.H. Nazareth, which clarified that taxes on activities related to land or buildings, such as the transmission of title or the use of land, do not fall under Entry 49 of List II. The Court concluded that the tax on construction services was within the legislative competence of Parliament.

3. Nature of Service Tax as a Tax on Services versus a Tax on Land and Buildings:
The Petitioners contended that the tax was essentially on the sale of land and buildings, which should fall under the State's jurisdiction. The Court disagreed, stating that the tax was on the service provided by the builder to the buyer during construction. The legislative assessment was that construction activities involved value addition and services, which justified the imposition of service tax.

The Court also addressed the challenge to clause (zzzzu), which covered services provided by builders for preferential location or development of complexes. The Court found that these services involved value additions and were not merely related to the location of the property. The tax was on the service rendered by the builder, not on the land itself.

Conclusion:
The Court dismissed the constitutional challenges, affirming the validity of the amendments and the introduction of clause (zzzzu). The Court held that the tax on construction services was within the legislative competence of Parliament and was not a tax on land and buildings. The legislative intent to tax services provided during construction was upheld, ensuring that such activities were appropriately taxed under the service tax regime.

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