The Delhi High Court in a recent ruling upheld the validity of section 65(105) (zzzzu) of the Finance Act, 1994, but invalidated the explanation to Section 65(105)(zzzh) of the Act inserted via Finance Act, 2010. The brief facts and details of the decision are stated below.
The Petitioners are individuals who have entered into separate agreements with a builder to buy flats in a multi-store group housing project being developed by the builder in 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 services in relation to the construction of complex and on preferential location charges. The Petitioners are aggrieved by the levy of service tax on services ‘in relation to construction of complex’ as defined under Section 65 (105)(zzzh) of the Finance Act, 1994 and inter alia impugn the explanation to Section 65(105)(zzzh) of the Act introduced by virtue of Finance Act 2010 as being ultra vires of the Constitution of India.
The Petitioners also impugn Section 65(105)(zzzzu) of the Act which seeks to subject preferential location charges charged by a builder to service tax. The Petitioners state that their agreement with the builder is a composite contract for the purchase of immovable property and contend 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.
The petitioners raised a question before the Court that whether the consideration paid by flat buyers to a builder/promoter/developer for acquiring a flat in a complex, which 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 the 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 thereunder do not provide any machinery for computation of the value of services, if any, involved in the construction of a complex and, therefore, no such tax can be imposed.
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.
They further contended that since Section 65(105)(zzzh) read with Section 66 of the Act did not restrict the levy of service tax only to the service element of composite contracts, the said provisions could be applied only for imposition of service tax on service contracts simplicitor and their application to composite contracts would render the said provisions unconstitutional.
It was also submitted that there was no service element in preferential location charges which were levied by a builder and the same related only to the location of the immovable property and, therefore, such charges were not exigible to service tax.
The Court observed that “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.”
Prior to the amendment brought about by Finance Act 2010, Section 67 of the Act provided that the value of taxable services would be ―the gross amount charged by the service provider for such service rendered byhim‖. Section 67 of the Act was amended also to provide for value in cases where the consideration for the services was not wholly or partly consisting of money and in cases where the consideration for the service was not ascertainable.
The Court further pointed out that in the present case, neither the Act nor the Rules framed therein provide for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax. 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 Court rejected the contention of the petitioner that there is no element of service involved in the preferential location charges levied by a builder. Preferential location charges are charged by the builder based on the preferences of its customers. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit. Such charges may be attributable to the preferences of a customer in relation to the directions in which a flat is constructed; the floor on which it is located; the views from the unit; accessibility to other facilities provide in the complex etc. As stated earlier, service tax is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction derived by a customer from certain additional attributes of the property developed. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex.
The Court refused to accept the petitioner’s challenge to insertion of clause (zzzzu) in Sub-section 105 of Section 65 of the Act. However, 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 was accepted.The impugned explanation to the extent that it seeks to include composite contracts for the purchase of units in a complex within the scope of taxable service was held to be set aside.
Read the full text of the Judgment below.
