HC upholds decision to levy service tax on flat, shop construction

In a decision that might have an impact on realty prices, the Bombay High Court has upheld the decision of the Union government to levy service tax on construction of flats and shops. A division bench held by Justice DY Chandrachud and Justice Amjad Sayed on Friday upheld the decision of the Centre to levy service tax, saying it was legal and constitutional.

Maharashtra Chamber of Housing Industries (MCHI) had filed a petition challenging the decision mainly on the ground levying service tax on land and landed properties was the prerogative of the state government and therefore the Centre could not impose such tax on the construction industry.

MCHI prayed that the Centre’s decision to levy service tax on construction of properties may be struck down as it was illegal and unconstitutional.

The Union government had amended the Finance Act of 2009 and imposed 2.5% service tax on construction of flats and shops with effect from July 1, 2010.

The bench concurred with the argument of the Additional Solicitor General of India Darius Khambata that construction activity was a service and so the union government was empowered by the Constitution to levy service tax.

To buttress his argument, Khambata cited several Supreme Court judgments and also quoted provisions of Maharashtra Ownership of Flats Act which allows registration of flats and shops even before they are constructed and are ready for possession.

The judges felt that the decision of the Centre was absolutely legal and constitutional and that it could levy service tax on the construction of properties such as flats and shops.

Grounds on which the High Court dismissed the petitions can be summarised as follows:

• Various judgements of the Supreme Court bring out the principle that the incidence of tax, the stage at which it is collected and the machinery for its collection do not have a bearing on the constitutional validity of the tax imposed. What is important is the object of tax or taxable event.

• A determination of whether the tax in its true nature is a tax on land and buildings must, therefore, depend upon the object of taxation or the taxable event on which the charge of tax arises.

• While levy on construction services was imposed earlier, the CBEC, though its Circular dated 29 January 2009, opined that a service provided by a seller in connection with the construction of a residential complex till the execution of a sale deed would be in the nature of self-service.

• The amendments in 2010 sought to bring within the ambit of Service tax such cases which remained out of the purview of tax net tax merely on account of the timing of the execution of the agreement.

• The amendment creates a legal fiction as to what constitutes a service by a builder to a buyer. It has two pre-requisites: one, construction of a new building/ complex must be intended for sale and two, a sum must be received from or on behalf of the prospective buyer by the builder before the grant of a completion certificate by the competent authority.

• Different parts of the country follow different patterns of agreements. The legislative intent behind the amendment was to bring about a parity in tax treatment by stipulating that unless the entire consideration for the property is paid by the prospective buyer after the completion of construction, the activity of construction would be deemed to be a taxable service provided by the builder to the prospective buyer.

• The charge of tax is not a charge on land or building as a unit, nor is it a tax on the general ownership of land; thus, it is not a tax which is directly imposed on land and buildings.

• Various rulings of the Courts have held that a tax on a transaction involving a transmission of title or a transfer of land and buildings is not a tax on land and buildings under Entry 49 List II of the Constitution.

• The legislative assessment that a service is rendered by builders to buyers during the course of construction activities 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 necessarily fall within the legislative competence of Parliament, since the residuary power to legislate on a subject 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.

• As far as preferential location services are concerned, what is taxed therefore is the value addition involved in the rendering of the service. 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.