prpri “Deeming” – ‘A Legal Fiction’ !- Service Tax – A Case Study “Deeming” – ‘A Legal Fiction’ !- Service Tax – A Case Study
V Swaminathan


The point (s) of issue settled in the recently reported Delhi HC Judgment in S K Bansal’s case, Ref.-  (herein after , for brevity sake, referred -the HC Judgment)  seem to be  worthy of an independent analytical study. Such a study has become inevitable, more so on a priority basis, mainly for the following reason:

The point (s) of dispute pertains to levy of ‘service tax’ in respect of a transaction of sale and purchase of ‘Flat’ in a building complex (in brief, ST). That is a special kind of property, being ‘unit’ of a building, having peculiar and distinct characteristics; in that, for all practical purposes, it is different from an independent property exclusively owned and enjoyed by its holder. Nonetheless, as is common knowledge, it is an accepted and well settled legal position that, for purposes of taxation- that is, besides others such as wealth tax and property tax, – income-tax, a Flat has perforce to be, hence is being treated as an ‘immovable property’. To be precise, for taxing both income from (under the head of ‘house property’ or ‘business’, as the case may be),  and out of (under the head of ‘capital gains’), Flat, that may be found  provided for and specially covered in the scheme of things enshrined in the IT Act itself; and some in the form of deeming provisions. For knowing more, and appreciation in proper light, anyone concerned may mindfully go through the published articles- citation of one of which is – KLJ 2014 (3) PART No. 9.   For the purpose of ST, however, the diagonally opposite / self-contradicting stance taken by the Revenue is to the effect that Flat is not to be so regarded as an ‘immovable property’; that has given rise to the whole dispute.

2. The core idea, that initially gave rise to such a dispute, came to be mooted by the Government dating as far back as to over five decades ago. And it was in the year 1959, being the point in time at which, that the issue (s) arising out of the said core idea came to be settled by the apex court in taxpayers’ favour. Those were the days when state governments, including the TN, did not have even in contemplation a special legislation to separately govern the building activities- construction and sale of a ‘UNIT’ in a building. It was only much later, in the 1970 s that TN and other states came to realise the compulsion and need to have a special legislation as aforesaid.

The surrounding controversy (ies), contrary to common expectation, was not allowed to rest there; but happens to have been pursued further, obsessively and relentlessly, so much so has come to be finally settled not until a year ago. For knowing more, and about the further interim developments, suggest to mindfully  look through, if not done before, the text of the Judgment of the SC reported @ Commnr.,Central Excise & … vs M/S. Larsen & Toubro … – Indian Kanoon

3. In the aftermath of the HC Judgment, there have been a few thoughts that have been floated around and are in circulation; so much so, there is an ongoing discussion / debate, in limited circles though, regarding its implications and possible further developments. Some points of doubt raised, surmise and apprehensions aired, which are currently doing the round, are mainly on the below-mentioned premises:

1. The constitutional validity of the levy of ST, by and large, has been settled.

2. Even so, the disputed levy of service tax has been disapproved and set aside by the HC but on a limited but different ground.

The ground of the HC’s verdict is that the levy cannot be upheld as there has been no standard or acceptable measure / mechanism prescribed in the governing statute for determining the value of services (being one of the three components embedded in the ‘composite contract’); and for excluding the value of ‘land’ (being the other component, indisputably an ‘immovable property’).

3. The Revenue will possibly take up and further pursue the issue (s), before the SC, challenging the HC’s decision which is currently in the writ- petitioners’ (WPs) favour,

As regards the premise mentioned in 3. above, in his response to a reader’s personal query raised with specific reference to the HC Judgment, a learned member of the Expert group on this website has shared his information indicating that the dispute is slated to be so pursued.

The discussion herein is primarily intended to examine and make an independent appraisal of as to whether at all anyone or more of those premises are to be regarded to be well-founded; so as to try and ascertain, to satisfy oneself, as far as feasible, what really is in store for the future. An attempt has incidentally been made to also cover some of the other related / connected aspects, in brief; as a prelude to, and with a view to deal with those separately, in details, if so called for, or considered necessary and decided, at a later date.

For convenience of ready reading and better understanding, extracts of a few selected portions from the text of the HC Judgment are furnished below; along with the respective comments, supplied in brief, in inset:

“4. The controversy involved in these petitions relates to the question whether the consideration paid by flat buyers to a builder/promoter/developer for acquiring a flat in a complex, which is under construction/development, could be subjected to levy of service tax. According to the Petitioners, the agreements entered into by them with the builder are for purchase of immovable property and the Parliament does not have the legislative competence to levy service tax on such transaction. The Petitioners further claim that the Act and the rules made there under do not provide any machinery for computation of value of services, if any, involved in construction of a complex and, therefore, no such tax can be imposed.”

It is thus seen, the proposition principally addressed is that the subject matter of the transaction (of sale and purchase of ‘Flat’) is ‘immovable property’, and therefore, it is outside the legislative competence of the central Government to levy service tax.

In the alternative, as the second / other proposition, it has been urged that no machinery has been provided in the statute for determining the ‘value’ of the ‘service’, to the exclusion of ‘land’ (which, in any view, an immovable property , comprising the composite contract), hence cannot conceivably  be subjected to the disputed levy.  


“5.  Mr Puneet Aggarwal, the learned counsel appearing for the Petitioners contended that the entries relating to taxation in List I and List II of the Seventh Schedule to the Constitution of India were mutually exclusive and the Parliament did not have the power to levy tax on immovable property; thus, the levy of service tax on agreements for purchase of flats was beyond the legislative competence of the Parliament”.

Paragraphs 6, 7, 8, 9, and 10 – In these paragraphs are set out submissions / arguments advanced, and the case law cited, for support as precedents and relied upon by the counsel for WPs.

Paragraph 11 – This is devoted to the submissions made by counsel for the UOI (the Revenue) and case law relied on, in support.

By and large, the case law cited and relied upon, respectively by either side, are, as is noted, same as those to be found reiterated in the Judgment of the SC reported @ Commnr.,Central Excise & … vs M/S. Larsen & Toubro … – Indian Kanoon as well.

Discussion and Conclusion

Paragraphs12,13,14,15,16 – In these paragraphs, the court has discussed at length the historical developments since 1994, being the year in which the Service tax came to be first  introduced.

“17. The Petitioners have referred to various circulars issued by the Central Board of Excise and Customs (CBEC) which, according to the Petitioner, clarified that the taxable service under clause (zzzh) did not cover builders who were developing and selling immovable property. In this context, Circular No.108/02/2009 – ST dated 29th January, 2009 is relevant. The relevant extract of the said Circular is reproduced below:-

―3. The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self- service’ and consequently would not attract service tax. 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 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. …..

“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 received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer;]”

The CBEC circular of 29 th January, 2009   referred to and stoutly relied upon by the WP s, contents of which have also been affirmed in the counter-affidavit filed on behalf of the UOI (the Respondents), and on record, vide paragraphs 17 and 18   of the HC judgment could not but only be construed to be tantamount to a categorical ADMISSION of the correct position in law by the Revenue, in the court of law. In essence, accordingly, it is not to be regarded,- rather will be patently wrong to so regard, -as  one of those so called ‘beneficial circulars’ a tax authority is empowered by law to issue  if and so warranted, in a given instance. Instead, that has to be taken, in one’s well considered opinion, rightly so, to have clinched the issues, thereby setting at rest, once for all, the hitherto surviving controversies. Also seeing that, the legal position is no different, if due regard be had, and the implications of the special state law on Flats had been urged to be taken into account.

Paragraphs 21, 22 ……

“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 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].”

 It stands to be readily inferred that, the WPs have disputed only the levy of service tax, not the tax on the value of goods (VAT) comprising the ‘works contract’, hence the HC considered it inappropriate to go into the validity of levy of VAT. According to the facts / observations in paragraph 6, it seems to be more or less clear that the WPs deliberately did not contest the levy of VAT by reason of the fact that in the SC Judgment of 2014 (referred therein) the concept of ‘’ ‘works contracts’ have been interpreted in an expansive manner and would include an agreement entered into by a flat buyer with a builder”. Even so, to one’s mind, what is not quite clear but remains not fully explained and therefore not understood is, why the WPs, out of their own volition, chose to do so, despite stoutly contesting the service tax levy; albeit the elements of goods and services are part and parcel of one and the same ‘works contract’ , being a composite contract’ as held by the HC.

Paragraphs 24,25. ….

“26. Service tax is essentially a tax on the value created by services as distinct 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.”

Paragraph  27….

“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 builder. The purpose and object of introducing the impugned explanation was explained in a circular dated 26th February, 2010 issued by the Central Board of Excise and Customs, the relevant extract of which is reproduced below:-

―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 instalments 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 ‘Agreement to Sell’. At that stage neither the full consideration is paid nor is there any transfer in ownership of the property although an agreement to ultimately sell the property under settled terms is signed. In other words, the builder continues to remain the 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 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.

In own perspective, and going by independent line of thinking / reasoning, however, one is, to say the least, unclear as to why the fact of different practices followed, and / or types of distinctly structured contract agreements adopted,  by builders, should make any significant or vital  difference to the fundamental and basic contention that  Flat, as such, and as one wholesome  property,  is an ‘immovable property’ and therefore, it is unconstitutional  to tax any portion of it whatsoever.

“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 fiction, where a set of activities carried on by a builder for himself are deemed to be that on behalf of the buyer. In J.K. Cotton Spinning and Weaving Mills Ltd. and Anr v. Union of India (UOI) and Ors. : (1987) Supp 1 SCC 350 the Supreme Court held that ―It is well settled that a deeming provision is an admission of the non- existence of the fact deemed…The Legislature is quite competent to enact a deeming provision for the purpose of assuming the existence of a fact which does not really exist‖. In G. Viswanathan v. Hon’ble Speaker Tamil Nadu Legislative Assembly, Madras and Ors.: (1996) 2 SCC 353, the Supreme Court held that “By the decision of this Court it is fairly well settled that a deeming provision is an admission of the non-existence of the fact deemed. The Legislature is competent to enact a deeming provision for the purpose of assuming the existence of a fact which does not even exist. It means that the Courts must assume that such a state of affairs exists as real, and should imagine as real the consequences and incidents which inevitably flow there from, and give effect to the same. The deeming provision may be intended to enlarge the meaning of a particular word or to include matters which otherwise may or may not fall within the main provision. The law laid down in this regard in East End Dwellings Co. 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).”

These observations are seen to have been made on the premise that the deeming provisions of relevance herein are impregnable or unimpeachable, and therefore, have to be construed as a ‘legal fiction’, so as to be given full effect and taken to its logical conclusion. No doubt, that is just one of the principles enunciated by courts as an aid for interpretation of any enactment of a deeming provision of the ordinarily – come-across types. However, the deeming provisions of relevance herein, as viewed, are not so, but are of a different type. In that, the deeming is NOT about or confined to just one ‘fact’ or ‘phrase’ as envisaged and found covered in case law. On the contrary, if the provisions were to be critically examined, it may be realised that those have been so framed as to change the very meaning of, –

(A)‘Sale’ and ‘Purchase’ transaction;

(B) ‘Immovable property’, a legal concept by itself,  not simply a ‘fact’or ‘phrase’;

(C) ‘Works contract’ being a concept, which has an altogether different meaning in commercial parlance, so also for accounting in accordance with prescribed ‘standards’.

Moreover, admittedly, the deeming provisions came to be introduced / brought in on the statute, solely with a view to / the aim of changing and rewriting the concept of ‘works contract’, so as to serve the Government’s obviously intended purpose of breaking /dissecting the property i.e. Flat, an otherwise ‘immovable property’, violently, into its 3 components – land, goods and services, thereby tax payments attributed to the latter two- goods and services – as liable, respectively, for VAT and Service tax.

In view of the foregoing, in one’s firm conviction, there may be good scope for successfully urging that legal validity of the subject deeming provisions require to be examined, on first principles. For, the deeming provisions could be contested to prima facie suffer from a faulty logic and to be ill-founded by any reasoning; that is, – primarily for two reasons: 

(A) Any such deeming which , in effect, has the result of cutting at the very root of the basic concept/legal meaning of ‘immovable property’ is not to be construed to be within the constitutional powers of  the central and / or state legislatures to enact any such de-meaning deeming provisions; and 

(B) that the subject deeming provisions, no doubt, create a fiction though, but not a legal fiction, in its profound sense, so as to be upheld that it is within the legislative powers,

To be precise, the bone of contention, as suggested, is that any ‘fiction’ sought to be created must be ‘legal’, so as to qualify as a ‘legal fiction’; otherwise, its legal validity may be open to be challenged as not being legitimate, if that were to be tested on the supervening ‘principles of natural justice’.

In the instant case, so also in the line of cited cases, so far as is gathered, there is no answer to be found to a very fundamental question; that is, – why and how, by resort to a deeming provision, a property (Flat), which, having regard to its essentially inherent characteristics, ought to be necessarily treated as an ‘immovable property’, could be treated to be not so; that too, in isolation, for only VAT or ST.

In short, the submission is that, any such fiction, more so a combination of more than one as irrationally imputed herein, may not qualify as a ‘legal fiction’ in its absolute sense. No doubt, it is a fiction, but it is not to say that could be rightly construed to be a ‘legal fiction’, within its legal meaning, and within the fundamental principles of jurisprudence.

In this context, further, it needs to be essentially kept in focus that, for income tax and wealth tax purposes the legislature has, in its wisdom, considered it necessary hence through specially designed /structured provisions enabled the Government to treat it as an ‘immovable property’ so as to be taxed. In a manner of viewing, therefore, any deeming provision brought in solely to treat it as NOT an immovable property, only with a view to rendering it exigible to VAT and Service tax is tantamount to offending the wisdom of the very same legislature by whom both income tax and wealth tax laws happen to have been enacted.

The suggested line of reasoning, as above, of course, gives rise to a moot point, of its unique kind, never thought of, or raised and gone into, ever before. The intriguing poser, however, is, -even so, there is no valid or sensible reason why it should not be raised even at this stage, in order to having it to the end of judicially considered and specifically adjudicated upon, in the next opportune occasion if and when that arises.

Paragraphs 30, 31, 32, and 33 …….

“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) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading of the entry does not cover. If in substance, the statute is not referable to a field given to the State, the court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field. The Supreme Court further held that while a State may have legislative competence to levy sales tax, the same would not however permit the State to entrench on the Union List by including the value of service in the cost of goods sought to be taxed. The relevant passage from the said judgment is quoted below:-

―No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible 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 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 composite contract in the following words:-

―At this stage, it is important to note the scheme of taxation under our Constitution. In the lists contained in the 7th Schedule to the Constitution, taxation entries are to be found only in lists I and II. This is for the reason that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There is no concurrent power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be struck down. In the present case, the dichotomy is between sales tax leviable by the States and service tax leviable by the Centre. When it comes to composite indivisible works contracts, such contracts can be taxed by Parliament as well as State legislatures. Parliament can only tax the service element contained in these contracts, and the States can only tax the transfer of property in goods element contained in these contracts. Thus, it becomes very important to segregate the two elements completely for if some element of transfer of property in goods remains when a service tax is levied, the said levy would be found to be constitutionally infirm.

“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.”

Paragraphs 40 to 54 …………………..

“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 refunded to the Petitioners with interest at the rate of 6% from the date of deposit till the date of refund.” 

“57. The petitions are disposed of in the aforesaid terms.”



It is suggested, anyone wanting to study independently with a view to formulating own well-considered views /forming an opinion, and sharing with anyone else equally concerned, should, for obvious reasons, firstly closely go through the full text of the HC Judgment. Also, for a better understanding and appraisal of the subject matter, should insightfully read through, besides others, the SC Judgment, –

Commnr.,Central Excise & … vs M/S. Larsen & Toubro … – Indian Kanoon

No need to add, in order that the endeavor eventually serves the honestly intended purpose, for the common good, also the copious material shared and available in public domain, on this website, besides elsewhere, might have to be given a studious and intelligent reading.


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August 2021