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TMI Blog2012 (1) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... a tax on the value of taxable services. Section 67 stipulates that the value of any taxable service shall be the gross amount charged by a service provider of such service provided or to be provided by him. Under subsection (1) of Section 68 the obligation to pay service tax is cast on every person providing a taxable service. 3. In the Finance Act of 2004 clause (zzq) was introduced in Section 65(105) in order to bring within the fold of the expression taxable service any service provided or to 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 intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or (d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, which is (i) used, or to be used, primarily for; or (ii) occupied, or to be occupied, primarily with; or (iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The construction is intended for sale; and (ii) Some receipt is envisaged before the grant of a completion certificate by the appropriate authority. According to the Petitioners the tax in pith and substance is not on construction, but on the sale of land and the element of sale is essential to fasten the charge. The sale of immovable property before, during or after construction, but before a completion is granted can by no stretch of imagination be regarded as a service. Once a completion certificate is received, there would be a sale pure and simple. In substance, the tax is on the transfer of land and buildings and therefore a tax on land and buildings within the meaning of Entry 49 of List II; iii) The provisions of Section 65(105)(zzzzu) are unconstitutional because - (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax has not been imposed on the transfer or sale of immovable property. The tax is on a construction service, but is triggered when there is an intent to sell and some payment is received; iii) In the alternate even if the explanation was to be construed to bring within the ambit of the tax a transfer of property, it is a settled principle of law that a tax on the transfer of property does not fall under Entry 49 of List II; iv) Construction reasonably construed does involve an element of service. Even if arguably it were to be suggested that no element of service was involved, that would not impinge on the power of parliament as long as it does not trench upon a subject reserved to the States in the state list of the Seventh Schedule. The affidavit in reply contains a sufficient elaboration of the nature of the service that 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh (2005) 2 SCC 515. In the judgment of the Court, delivered by Justice Ruma Pal, the principle was stated to be thus : "Classically, a tax is seen as composed of two elements: the person, thing or activity on which the tax is imposed and the incidence of tax. Thus every tax may be levied on an object or an event of taxation. The distinction between the two may not, ultimately, be material in the context of the Indian Constitution as we will find later. But for the time being we may note that both these elements are distinct from the incidence of taxation. For example the tax may be imposed on goods on the event of their manufacture, sales, import etc. The law imposing the tax may also prescribe the incidence or the manner in which the burden of the tax would fall on any person and would take within itself the amount and measure of tax. The importance of this distinction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir own use, for renting out or selling subsequently) were not regarded as taxable service providers. However, if a real estate owner were to hire a contractor, the payment made to a contractor would be subjected to service tax under the head. The circular clarified that the gross value charged by a building contractor would include the cost of materials. The service provider would be eligible to take credit of the excise duty paid on inputs under the Cenvat Credit Rules 2004. Since the inputs were normally procured from the market and were therefore not covered by duty paying documents, a general exemption was available to goods sold during the course of providing a service, but the exemption was subject to the condition of availability of documentary proof indicating the value of the goods sold. Since in the case of a composite contract, a bifurcation of the value of the goods sold is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or on behalf of the prospective buyer by the builder before the grant of a completion certificate by the authority competent to issue such a certificate under any law for the time being in force. Intent to sell whether before, during or after construction is therefore made the touchstone of the deeming definition of a service provided by the builder to the buyer. The exception is where no sum has been received by the builder from the prospective buyer before the grant of a completion certificate, in which case the deeming definition will not apply. 18. The rationale for the introduction of the explanation is contained in a circular issued by the Central Board of Excise and Customs on 26 February 2010. The circular explains that in the definition of taxable service in clauses (zzq) and (zzzh) it is provided that unless the entire consideration for the property is paid after the issuance 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: & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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." 19. The notes on clauses annexed to the Finance Bill of 2010 would indicate that Section 65 was sought to be amended to modify the scope inter alia of certain taxable services by amending, among others, clauses (zzq) and (zzzh). From the circular issued 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the legislative competence of the legislature which enacts the law. 21. At this stage, a brief reference may be made to two decisions of the Supreme Court. In Dattatraya Govind Mahajan v. The State of Maharashtra AIR 1977 SC 915 , the Supreme Court emphasised that while a traditional function of an explanation is to expound the meaning and effect of the provision which it explains, ultimately it is the intention of the legislature which matters : "It is true that the orthodox function of an explanation is to explain the meaning and effect of the main provision to which it is an explanation and to clear up any doubt or ambiguity in it. But ultimately it is the intention of the legislature which is paramount and mere use of a label cannot control or deflect such intention. It must be remembered that the legislature has different ways of expressing itself and in the last analysis the words used by the legislature alone are the true repository of the intent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislature regarded that the transaction did involve an element of service, were sought to be taxed . The element of service evidently according to the legislature remains the same notwithstanding the timing at which a formal document conveying title from the builder to the buyer is executed. The explanation thus reaches out to service provided by builders to buyers in pursuance of an intended sale of immovable property before, during or after construction. 24. Now it is in this background that it is necessary for the Court to address itself to the challenge on the grounds of legislative competence. The submission of the Petitioners is that the tax in question is a tax on land and buildings within the meaning of Entry 49 of List II to the Seventh Schedule and would therefore fall within the exclusive legislative competence of the State legislatures under Article 246(3) of the Constitution. 25. The Supreme Court has dealt with the ambit of Entry 49 of List II in the context 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the value of the total gifts made, in a year which is above the exempted limit. There is no tax upon lands or buildings as units of taxation. Indeed the lands and buildings are valued to find out the total amount of the gift and what is taxed is the gift. The value of the lands and buildings is only the measure of the value of the gift. A gift tax is thus not a tax on lands and buildings as such (which is a tax resting upon general ownership of lands and buildings) but is a levy upon a particular use, which is transmission of title by gift. The two are not the same thing and the incidence of the tax is not the same. Since entry 49 of the State List contemplates a tax directly levied by reason of the general ownership of lands and buildings, it cannot include the gift tax as levied by Parliament." 28. The principles which have been enunciated in the judgments of the Constitution bench of the Supreme Court in Sudhir Chandra Nawn and Nazareth and subsequently have been consistently followed. Reference may be made in this context to paragraph 23 of the judgment of the Supreme Court in India Cement. In the decision in State of Bihar v. Indian Aluminium Company AIR 1997 SC 3592 the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 30. Parliament, in bringing about the amendment in question has made a legislative assessment to the effect that a service is rendered by builders to buyers during the course of construction activities. In our view, that legislative assessment does not impinge upon the constitutional validity of the tax once, the true nature and character of the tax is held not to fall within the scope of Entry 49 of List II. So long as the tax does not fall within any head of legislative power reserved to the States, the tax must of necessity fall within the legislative competence of Parliament. This is a settled principle of law, si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s value. What is taxed therefore is the value addition involved in the rendering of the service. 31. 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. 32. The provisions of clause (zzzzu) which were introduced by the Finance Act of 2010 in the provisions of Section 65 (105) are also sought to be challenged. The challenge is on the ground that firstly there is no element of service involved and the addition attaches to a location. Secondly, it has been submitted that there is no voluntary act of rendering a service. Thirdly, it has been urged that the tax is a tax on land per se, since it is a tax on location. Fourthly, it has been submitted that the provision is vague and therefore arbitrary since what constitutes a preferential location, an extra advantage or the basic sale price has not been defined. 33. Now what clause (zzzzu) of Section 65(105) brings in are services provided t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 34. Before concluding, we may also refer to the decision rendered by this Court in Retailers Association of India v. Union of India (Writ Petition 2238 of 2010 and connected petitions decided on 4 August 2011). A Division Bench of this Court rejected a challenge to the levy of service tax in connection with the provision of a service in relation to the renting of immovable property for use in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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