Santosh Kumar (Advocate)
Matter in dispute– Service tax on services in relation to construction of complex
His agreement with the builder is a composite contract for purchase of immovable property and contends that in absence of specific provisions for ascertaining the service component of the said agreement, the levy would be beyond the legislative competence of the Parliament.
Basis of Judgment:
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. [Para 37]
Limitation of Judgment:
(1) The Order is most likely to be challenged in the Supreme Court;
(2) the authority of service tax levied under Section 65 (105)(zzzh) of the Finance Act, 1994 has been challenged but the same section have been deleted wef 1st July, 2012.
(3) “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 (2014) 1 SCC 708,, 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. [Para 30 of the Judgment]
Fact of the case:-
The Petitioner is individuals who have entered into agreements with a builder (M/s Sethi Buildwell Pvt. Ltd. – hereafter ‘the 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.
The builder has in addition to the consideration for the flats also recovered service tax from the Petitioners, which is payable by him for 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 (hereinafter‗the impugned explanation‘) introduced by virtue of Finance Act 2010 as being ultra vires of the Constitution of India.
Contentions of Petitioner
Consideration and Judgment
The Court’s consideration for contention (i) [Parliament does not have the legislative competence to levy service tax on composite contract]:-
The Court considered that the entries relating to taxation in List I and List II of the Seventh Schedule to the Constitution of India are mutually exclusive and the Parliament did not have the power to levy tax on immovable property.
But By a legal fiction, construction of a complex which is intended for sale by a builder or any person authorised by him before, during or after construction is deemed to be a service provided by the builder to the buyer. The only exception contemplated is where no sum is received from the prospective buyer prior to grant of the completion certificate. The grant of completion certificate implies that the project is complete and at that stage all services and goods used for construction are subsumed in the immovable property; thus at that stage sale of a complex or a part thereof to a buyer constitutes an outright sale of immovable property, which admittedly is not chargeable to service tax.
The Court’s Judgment for contention (i) [Parliament does not have the legislative competence to levy service tax on composite contract]:-
“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.” [Para 34]
In another words, the court held that the Parliament has the legislative competence to levy service tax in relation to the services rendered in construction of a complex.
The Court’s consideration for contention (ii)[No existence of mechanism to ascertain the value of services component]:-
After deciding that the legislative competence of parliament to tax the element of service involved cannot be disputed, the court considered that the levy itself would fail if it does not provide for a mechanism to ascertain the value of services component.
During the consideration, the court was having clarity that in order to levy tax, the Statute must clearly specify the three elementsof taxation, namely, (i) the subject of tax; (ii) the person who is liable totax; and (iii) the rate and measure of tax.
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.
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.
In Commissioner of Central Excise and Customs v. Larsen & Toubro (2016) 1 SCC 170, the Supreme Court clearly explained the necessity for segregating the elements of services and sale of goods in a composite contract.
Section 67 of the Finance Act, 1994, provides for valuation of taxable services.
Service Tax (Determination of Value) Rules 2006 has been formulated under the Section 67. But the court found that there was no machinery provision for ascertaining the service element involved in the composite contract.
Further the court held that 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.
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 Circularsor 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 Supreme Court in Govind Saran Ganga Saran v. CST: (1985) 155 ITR 144 ( SC) held that:-
“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 on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law.
The Court’s Judgment for contention (ii)[No existence of mechanism to ascertain the value of services component]:-
“In the present case, we find that there is no machinery provision for ascertaining the service element involved in the composite contract. [Para 39]