TMI Blog2012 (1) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 levyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be provided to any person, by a commercial concern, in relation to construction service. The expression construction service' was defined in clause (30a) to mean inter alia the construction of a new building or civil structure or repairs, alteration or restoration of a building or civil structure, used, occupied or engaged or to be used, occupied or engaged primarily in commerce or industry. By the Finance Act of 2005 clause (zzzh) was introduced into Section 65(105) so as to bring within the purview of the expression taxable service, a service provided or to be provided to any person by any other person in relation to construction of complex . Simultaneously, clause (25b) was introduced to provide for a definition of the expression commercial or industrial construction service . Clause (91a) provided for the definition of the expression residential complex'. 4. By the Finance Act of 2010 an explanation has been inserted into clause (zzq) and clause (zzzh) of Section 65(105). Clause (zzq) relates to a service provided or to be provided to any person by any other person in relation to commercial or industrial construction and clause (zzzh), a service in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. 7. The expression construction of complex' is defined in clause (30a) as follows : (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. 8. The expression residential complex' is defined in clause (91a) as follows : (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 treatmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (a) No element of service is involved whatsoever since the advantage that is sought to be brought to tax attaches to the preferential location or development of the property; (b)There is no voluntary act of rendering service; (c) The tax must be regarded as a tax on land per se, because it is a tax on location; and (d) What is the preferential location or an extra advantage or a payment over and above the basic sale price is not defined. The provision is therefore vague and suffers from the vice of an excessive delegation of legislative power since the enforcement of the provision is left to the unguided discretion of the administrative authority; iv) Between a builder and a contractor who constructs a building, there may be a service element involving a service provider and receiver. Between the builder and a buyer there is no provision of service. The title to the building which is under construction vests in the builder. After construction is complete and a final transfer of title takes place, there can in any event be no provision of service; v) The explanation has brought in two fictions of a deemed service and a deemed service provider which will fall foul of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is provided during the course of construction, to which there is no traverse on the part of the Petitioners; v) Clause (zzzzu) was introduced to cover diverse services which builders provide under different heads for which charges are levied separately. Parliament has intervened in order to ensure that they do not slip out of the value added tax net. If no charge is levied for a service, no liability would arise. Builders do charge for providing preferential locational and other development amenities which form part of service rendered. There is no vagueness or arbitrariness in the provision. 11. When the validity of a law which imposes tax is called into question, it is necessary for the Court, while interpreting the provisions of the statute to distinguish between the subject matter or the object of the tax, the incidence of the tax and the machinery for collection. The taxing event, as it called in this branch of jurisprudence, determines the object or the event of taxation. The object of the tax or its subject matter determines the character of the tax. The incidence of the tax is distinct from the taxable event. The incidence of the tax identifies, as it were, the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies in the fact that in India, the first two have been given a Constitutional status, whereas the incidence of tax would be a matter of statutory detail. The incidence of tax would be relevant in construing whether a tax is a direct or an indirect one. But it would be irrelevant in determining the subject matter of the tax. [See: M/s. Chhotabhai Jethabhai Patel Co. vs. Union of India Another AIR 1962 Sc 1006.] 12. In Gujarat Ambuja Cements Ltd. v. Union of India AIR 2005 SC 3020 the Supreme Court emphasized that there is a distinction between the object of tax, the incidence of tax and the machinery for the collection of tax. Legislative competence is to be determined with reference to the object of the levy and not with reference to its incidence or machinery. 13. This principle must be borne in mind by the Court in determining the issue of constitutional validity which arises in the present case. The incidence of the tax, the stage at which it is collected and the machinery which has been laid down by the legislature for the process of collection do not have a bearing on the constitutional validity of the tax imposed. A determination of whether the tax in its true n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... often difficult, an abatement of 67% was provided in case of composite contracts where the gross amount charged included the value of the material cost. 16. On 29 January 2009, a circular was issued by the Central Board of Excise and Customs recording that once an agreement of sale is entered into with a buyer for a unit in a residential complex, he becomes the owner of the unit and the activity provided by the builder of constructing the unit is a service to the customer on which service tax would be applicable. The contrary view which was expressed was that where a buyer makes a construction linked payment after entering into an agreement to sell, the nature of the transaction is not a service but a sale. Where an agreement to sell is entered into by a buyer with the builder, the property belongs to the builder till the completion of the transaction and any service provided towards construction would be in the nature of self service . The circular of the Board noted that the matter was examined. The Board was of the view that in the case of a mere agreement to sell an interest in the property is not created under the Transfer of Property Act and the property continues to remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suance of a completion certificate, the activity of construction would be deemed to be a taxable service provided by the builder or developer to the prospective buyer and service tax would be charged accordingly. The reason for the explanation emerges from the following extract from the circular: Service tax on construction services 8.1 The service tax on construction of commercial or industrial construction services was introduced in 2004 and that on construction of complex was introduced in 2005. 8.2. As regards payment made by the prospective buyers/ flat owners, in few cases the entire consideration is paid after the residential complex has been fully developed. This is in the nature of outright sale of the immovable property and admittedly no Service tax is chargeable on such transfer. However, in most cases, the prospective buyer books a flat before its construction commencement / completion, pays the consideration in installments and takes possession of the property when the entire consideration is paid and the construction is over. 8.3 In some cases the initial transaction between the buyer and the builder is done through an instrument called A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued by the Central Board of Excise and Customs it is evident that in different parts of the country agreements involving the transfer of residential and commercial properties followed various patterns. In certain cases, agreements to sell were entered into, at which stage the full consideration is not paid. The transfer of title to the property would take place on the conclusion of the contract and the completion of payments when a sale deed would be executed with appropriate stamp duty. The sale deed would transfer title from the builder to the buyer. In other parts of the country initially an instrument for the sale of an undivided portion of the land would be executed by which an undemarcated interest in a portion of the land would be transferred to the buyer. This was a device adopted to reduce the incidence of stamp duty since the vacant land in which an undivided interest was created would have a lower value. Simultaneously a construction agreement would be executed incorporating the obligation of the builder to build and of the buyer to pay the consideration. The legislative intent underlying the explanation was to bring about a parity in tax treatment by stipulating that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the legislature and they must be construed having regard to the context and setting in which they occur. Therefore, even though the provision in question has been called an Explanation, we must construe it according to its plain language and not on any a priori considerations. 22. In an earlier decision in Hiralal Ratan Lal v. The Sales Tax Officer AIR 1973 SC 1034 the Supreme Court held that if on a true reading of an expression it appears to have widened the scope of the main section, effect must be given to the legislative intent notwithstanding the fact that the legislature labelled it as an explanation. In other words, the nomenclature of a provision in a statute as an explanation is not determinative of its scope. The explanation may in a certain situation do no more than clarify the intent or remove an ambiguity by explaining the provision. In another situation the explanation may widen the ambit of the main provision. In either case the duty of the Court is to determine the true intent of the legislature by construing the words which have been used. 23. The explanation which was inserted by the Finance Act of 2010 clearly brings within the fold of taxable service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text of diverse challenges to laws enacted by Parliament. The judgment of the Constitution Bench in Sudhir Chandra Nawn v. Wealth Tax Officer AIR 1969 SC 59 negatived a challenge to the constitutional validity of the Wealth Tax Act of 1957 on the ground that Entry 49 of List II contemplates the levy of a tax on land and buildings as units and is a tax which is directly imposed on land and buildings. A tax on the capital value of assets was held not to bear a definable relationship to lands and buildings which may form a component of the total assets of an assessee. In Second Gift Tax Officer v. D.H. Nazareth AIR 1970 SC 999 a challenge to the constitutional validity of the Gift Tax Act 1958 was similarly dismissed, overruling an objection that it trenched upon Entry 49 of List II. The principles in these decisions were reiterated by a Bench of seven judges of the Supreme Court in Union of India v. H.S. Dhillon AIR 1972 SC 1061. In India Cement Limited v. State of Tamil Nadu AIR 1990 SC 85 the Supreme Court once again reiterated the principles which were laid down in the earlier cases and observed that Entry 49 of List II is confined to a tax that is directly levied on land as a uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Supreme Court in India Cement. In the decision in State of Bihar v. Indian Aluminium Company AIR 1997 SC 3592 the Supreme Court held that a tax which was levied on the activity of the removal or excavation of land was not a tax on land itself and would therefore fall outside the ambit of Entry 49 of List II. Reliance has also been placed by the Learned Additional Solicitor General on the judgment of a Division Bench of the Gujarat High Court in Ambalal Maganlal v. Union of India 1975 ITR 237 and on a judgment of a Division Bench of this Court Manubhai A. Sheth v. N.D. Nirgudkar, 2nd Income Tax Officer 1981 (128) ITR 8 7 in support of the proposition that a tax on capital gains has been held to be a tax which arises from gains from the transfer of a capital asset and is therefore not a tax within the meaning of Entry 49 of List II. The decision in Godfrey Phillips does not mark any departure from the earlier decisions. Godfrey Phillips as a matter of fact did not construe Entry 49 of List II. 29. The charge of tax under Section 66 of the Finance Act is on the taxable services defined in clause (105) of Section 65. The charge of tax is on the rendering of a taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the States, the tax must of necessity fall within the legislative competence of Parliament. This is a settled principle of law, since the residuary power to legislate on a field of legislation which does not fall within the exclusive domain of the States is vested in Parliament under Article 248 read with Entry 97 of List I. However, it would be necessary for the Court to advert to the reply which has been filed on behalf of the Union of India in these proceedings. In paragraph 4 of the affidavit in reply it has been stated that service tax has been levied on account of the activity involving a value addition such as activities undertaken by an architect in designing a building, by civil contractors and engineers in constructing the building and in the provision of other utility services. A sample flat on site is normally made to enable prospective purchasers to envisage the final product. Choices are offered to buyers in respect of flat designs, internal shifting of walls, flooring patterns, wall colours, types of materials used for interior decoration, electrical and plumbing etc. These are also modified and personalized to suit the requirements of the buyer. Value additions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a advantage or the basic sale price has not been defined. 33. Now what clause (zzzzu) of Section 65(105) brings in are services provided to a buyer by a builder of a residential complex or a commercial complex for providing a preferential location or development of such complex, but to the exclusion of services covered under sub clauses (zzg), (zzq) and (zzzh) and those in relation to parking places. A preferential location is defined to mean any location having extra advantages which attracts extra payment over and above the basic sale price. The circular which was issued by the Central Board of Excise and Customs on 26 February 2010 takes note of the fact that in addition to activities involving construction, completion and furnishing repair, alteration, renovation or restoration builders of residential or commercial complexes provide other facilities and charge separately for them. These charges do not form part of the taxable value for charging of tax. These facilities include (i) Prime / preferential location charges for allotting a plot - or commercial space according to the choice of the buyer; (ii) Internal or external development charges which are collected for developi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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