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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 ..... 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 ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into separate agreements with a builder (M/s Sethi Buildwell Pvt. Ltd. - hereafter 'the W.P.(C) Nos. 2235/2011 2971/2011 Page 2 of 43 builder') to buy flats in a multi-storey group housing project named Sethi Group - Max Royal being developed by the builder in Sector 76, Noida, Uttar Pradesh. 2. The builder has in addition to the consideration for the flats also recovered service tax from the Petitioners, which is payable by him for services in relation to construction of complex 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, Kerala and Ors. v. Larsen Toubro Ltd. and Ors.: (2016) 1 SCC 170 in support of his contention that in order to levy tax, the Statute must clearly specify the three elements of taxation, namely, (i) the subject of tax; (ii) the person who is liable to tax; and (iii) the rate and measure of tax. He earnestly contended that since Section 65(105)(zzzh) read with Section 66 of the Act did not restrict the levy of service tax only to the service element of composite contracts, the said provisions could be applied 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 Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ousing Industry and Anr. v. Unoin of India and Ors) wherein the challenge to the explanation to Section 65(105)(zzzh) and Section 65(105)(zzzzu) introduced by virtue of the Finance Act, 2010 was rejected. On the strength of the aforesaid decisions, she contended that the concerned legislative amendment introduced by the Finance Act, 2010, namely, insertion of explanation to Section 65(105)(zzzh) and clause (zzzzu), were valid and enforceable. She submitted that development of a project results in the substantial value addition on bare land and includes various 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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Finance Act, 2005, with effect from 16th June, 2005, to bring services in relation to construction of a complex within the definition of 'taxable service'. When introduced, Section 65(105)(zzzh) of the Act 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 15. The term construction of complex was defined under Section 65(30a) of the Act as under: (30a) '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 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 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of 'residential complex'. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lex or for leased circuit; ii. the cost of unexposed photography film, unrecorded magnetic tape or such other storage devices, if any, sold to the client during the course of providing the service; iii. the cost of parts or accessories, or consumables such as lubricants and coolants, if any, sold to the customer during the course of service or repair of motor cars, light motor vehicle, or two wheeled motor vehicles; iv. the airfare collected by air travel agent in respect of service provided by him; v. the rail fare collected by rail travel agent in respect of service provided by him; vi. the cost of parts or other material, if any, sold to the customer during the course 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x on the transaction with the purchaser only with effect from 1st July, 2010 by virtue of the impugned explanation to Section 65(105)(zzzh) of the Act. In the present petitions, it is not the case of the Respondents that builders/promoters/developers who develop residential complexes - such as the group housing project developed by the builder in this case - and sell dwelling units in the complexes to prospective users render taxable service under Section 65(105)(zzzza) of the Act, that is, services in relation to a works contract. 23. Although such composite contracts for development of complex and sale of units therein would fall within the scope of works contract as held by the Supreme Court in Larsen and Toubro v. State of Karnataka (supra), we do not 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istinct from a tax on the value added by manufacturing goods. Construction of a complex essentially has three broad components, namely, (i) land on which the complex is constructed; (ii) goods which are used in construction; and (iii) various activities which are undertaken by the builder directly or through other contractors. The object of taxing services in relation to construction of complex is essentially to tax the various activities that are involved in the construction of a complex and the resultant value created by such activities. 27. It is a usual practice for builders/developers to sell their project at its launch. Builders accept bookings from prospective buyers and in many cases provide multiple options for making payment for the purchase 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 buye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legal owner of the property. At the conclusion of the contract and completion of the payments relating thereto, another instrument called 'Sale Deed' is executed on payment of appropriate stamp duty. This instrument represents the legal transfer of property from the promoter to the buyer. 8.4 In other places a different pattern is followed. At the initial stage, instruments are created between the promoter and all the prospective buyers (which may include a person who has provided the vacant land for the construction), known as 'Sale of Undivided Portion of The Land'. This instrument transfers the property right to the buyers though it does not demarcate a part of land, which can be associated with a particular buyer. Since the vacant land has lower value, this system of legal instrumentation 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. case (1952) AC 109 : (1951) 2 All. E.R. 587 has been followed by this Court in a number of cases, beginning from State of Bombay v. Pandurang: 1953Cri LJ 1049 and ending with a recent decision of a three Judge Bench in M. Venugopal v. Divisional Manager, LIC. In Manish Trivedi v. State of Rajasthan: (2014) 14 SCC 420, the Supreme Court held that It is well settled that the legislature is competent to create a legal fiction. A deeming provision is enacted for the purpose of assuming the existence of a fact which does not really exist. When the legislature creates a legal fiction, the court has to ascertain for what purpose the fiction is created and after ascertaining this, to assume all those facts and consequences which are incidental or inevitable corollaries for giving effect to the fiction. (also see: State of Uttar 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e given widest scope, D.C. Rataria v. Bhuwalka Brothers Ltd.: [1955] 1SCR 1071, to find out which of the meanings is fairly capable because these set up machinery of the Govt. (Sic). Each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be comprehended in it. In interpreting an entry it would not be reasonable to import any limitation by comparing or contrasting that entry with any other one in the same list. It is in this background that one has to examine the present controversy. 33. In the case of Federation of Hotel Restaurant Association of India, etc., v. Union of India (UOI) and Ors: (1989) 178 ITR 97 ( SC) the Supreme Court explained: Indeed, the law 'with respect to' a subject might incidentally 'affect' another subject in some way; but that is not the same thing as the law 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visible Under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. As was said in Larsen and Toubro v. State of Rajasthan: (SCC p. 395, para 47). The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods. 37. Undisputedly, the contract between a buyer and a builder/promoter/ developer in development and sale of a complex is a composite one. The arrangement between the buyer and the developer is not for procurement of services simplicitor. As noticed hereinbefore, an agreement between a flat buyer and a builder/developer of a complex 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39. In the present case, we find that 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. 40. Section 67 of the Act provides for valuation of taxable services. The said section as amended by Finance Act 2010 reads as under:- 67. Valuation of taxable services for charging Service tax - (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the works; (ii) amount paid to a sub-contractor for labour and services; (iii) charges for planning, designing and architect's fees; (iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract; (v) cost of consumables such as water, electricity, fuel used in the execution of the works contract; (vi) cost of establishment of the contractor relatable to supply of labour and services; (vii) other similar expenses relatable to supply of labour and services; and (viii) profit earned by the service provider relatable to supply of labour and services; (c) Where value added tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter. 47. A similar view was expressed by the Supreme Court in Govind Saran Ganga Saran v. CST: (1985) 155 ITR 144 ( SC) wherein the Court held as under:- 6. The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remove the non-service elements from the composite works contracts has been made by any of the aforesaid Sections by deducting from the gross value of the works contract the value of property in goods transferred in the execution of a works contract. 49. The Supreme Court further overruled the decision of this Court in G.D. Builders (supra) wherein this Court had, inter alia, held that clauses (g), (zzd), (zzh), (zzq) and (zzzh) of sub-section 105 of Section 65 of the Act would also take within their sweep indivisible composite works contracts. The Supreme Court further concluded that prior the enactment of the Finance Act 2007 - by virtue of which Section 65(105)(zzzza) of the Act was introduced and Section 67 of the Act was amended - a composite contract was not taxable. This was so because in absence of Rule 2A of the Rules there was no machinery for excluding the non-service element from such composite works contracts involving an element of services and transfer of property in goods. Whilst the impugned explanation expands the scope of Section 65(105)(zzzh) of the Act, it does not provide any machinery for excluding the non-service components from the taxable services c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... never intended to be subjected to charge of tax. 52. It was stated that an Assessee is entitled to abatement to the extent of 75% and only 25% of the gross amount charged by a builder from a flat buyer is charged to service tax. It was suggested on behalf of the Revenue that this indicated that the value of the immovable property as well as the property in goods incorporated in the works would stood excluded. In our view, this issue also stands concluded against the Revenue by the judgment in the case of Commissioner of Central Excise v. Larsen and Toubro Limited (supra). In that case, the Supreme Court had affirmed the decision of the Orissa High Court in Larsen and Toubro Limited v. State of Orissa and Ors: (2008) 12 VST 31 (Orissa) wherein the Court held that Circulars or other instructions could not provide the machinery provisions for levy of tax. The charging provisions as well as the machinery for its computation must be provided in the Statute or the Rules framed under the Statute. The relevant extract from the decision of the Orissa High Court is reproduced below:- This Court is of the opinion that if the Act is unworkable in the absence of necessary Rules, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the measure of service tax. The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract. 54. 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. As stated earlier, service tax is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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