Punjab and Haryana High Court in the case of G.S. Promoters v. Union of India reported in MIT-2010-574-HC] upheld the constitutionality of the levy of service tax on the deemed service while selling residential complex by builder to buyer.
Amendment made vide Finance Act 2010 in relation to construction of complex service
An Explanation was added to the definition of taxable service of ‘construction of complex service’ whereby construction of a residential complex intended for sale by the builder before or during or after construction is deemed to be a service provided by the builder to the buyer;
No service tax is leviable if entire payment for the property is paid by the buyer after completion of the construction evidenced by the certification by the local authorities;
Thus service tax has been levied on any construction of residential complex where consideration is received prior to obtaining completion certificate by creating a deeming fiction.
The Bombay High Court had granted an interim protection to the petitioners in a similar petition challenging the constitutional validity, by staying recovery of service tax
Question before the Court:- Whether the Explanation to the taxable service of ‘construction of complex’ service was constitutional?
Decision of the Hign Court
The petitioner contended that the Explanation widens the scope of the levy by including a sale of property. It was further argued that if the builder does not undertake the construction activity, then the builder cannot be considered as a service provider in relation to a service recipient.
The petitioner relied on the decision of the Gauhati High Court in Magus Constructions [2008 (11) STR 225] wherein the High Court held that when a person constructs for himself and thereafter sells the property, there cannot be any service in the absence of a service provider in relation to a service recipient.
The High Court held that the activity sought to be subjected to tax would be presumed to be constitutional unless there is any encroachment in the field of the State Legislature.
The High Court further held that there was no argument raised that there was any encroachment on the power of the State Legislature except that the levy under challenge was on the element of sale of immovable property.
The High Court after relying extensively on the ratio laid down in a plethora of Supreme Court judgments held that whether or not service is involved has to be viewed not only from the perspective of the builder but also the service recipient (buyer).
The High Court while finally upholding the constitutionality of the Explanation held that the Explanation seeks to tax service in relation to construction which is present even when the construction is carried or when the construction is carried out and before the flat is sold.
Comments:- The decision of the High Court is likely to cause additional hardship to the already downcast real estate or its customers. It would be interesting to observe the stance of the other High Courts across India where similar writ petitions challenging the constitutional validity of the Explanation are pending.