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TMI Blog2016 (6) TMI 192X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. According to the Petitioners, the agreements entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplicitor 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 further contended that there was no service element in preferential loca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 for 40% of the GDP and there was no sound reason for exempting services from ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the layout, and the construction of such complex is intended for personal use as residence by such pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that at the material time, Section 67 of the Act which provided for the valuation of taxable services for charging service ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rection, 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 intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 goods used for construction are subsumed in the immovable property; thus at that stage sale of a complex or a part thereof to a buyer constitutes an outright sale of immovable property, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 - the distinction between a person who engages a builder to construct a unit for him and a person who enters into an arrangement to purchase a unit in a complex, which is under development, from a build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 limited purpose for which the legal fiction enacted, that does not exist. The Parliament is fully competent to enact such legal fiction. In the present case the Parliament has done precisely that; it has enacted a legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 Supreme Court stated as under: "Certain rules have been evolved in this regard, and it is well settled now that the various entries in the three lists are not powers but fields of legislation. The power to legislate is given by Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etract 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 Supreme Court referred to its earlier decision in Gujarat Ambuja Cements Ltd. v. Union of India: (2005) 4 SCC 214 and quoted the following passage from the said judgment:- "This mutual exclusivity which has been reflected in Article 246(1) me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the Seventh Schedule of the Constitution of India. 38. In Commissioner of Central Excise and Customs v. Larsen & Toubro (supra), the Supreme Court clearly explained the necessity for segregating the elements of services and sale of goods in a composi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertainable, 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 value of services, the Central Government has made Service Tax (Determination of Value) Rules 2006 (hereafter 'the Rules'). However none of the rules provides for any machinery for ascertaining the value of services involved in relation to construction of a complex. 44. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 alterations to abandoned or damaged structures on land that are required to make them workable; (II) "total amount" means the sum total of gross amount and the value of all goods, excluding the value added tax, if any, levied on goods and services supplied free of cost for use in or in relation to the execution of works cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax 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, the taxable services referred in clauses (g), (zzd), (zzh), (zzq) and (zzzh) of sub-section 105 of Section 65 of the Act could only refer to services in relation to a service contract simplicitor and not to composite contracts. The relevant extract of the said decision is quoted below:- "A close look at the Finance Act, 1994 would show tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts 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 contract, the levy on services referred to in Section 65(105)(zzzh) could only be imposed on contracts of service simplicitor - that is, contracts where the builder has agreed to perform the services of constructing a complex for the buyer - and would not take within its ambit composite works contract which also entail transfer of property in goods as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmity 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. So those circulars cannot hold the field. As stated in the judgments referred to above, in the absence of any statutory basis for calculation of taxable turnover, the Act remains unworkable. Such gap in the statute cannot be filled up by the circulars which are purely ad hoc and administrative in nature and specially so when it relates to taxing law. It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the complex. 55. In view of the above, we negate the challenge to insertion of clause (zzzzu) in Sub-section 105 of Section 65 of the Act. However, we accept the Petitioners contention that 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. 56. These petitions were admitted by an order dated 21.07.2011 and the applications for stay of recovery filed along with the petitions were disposed of by directing that if any amount is collected on the basis of the impugned explanation, the same shall be refunded with the interest in case the Petitioners succeed. Accordingly, the concerned officer of Respondent No. 1 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 refun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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