Service Tax – Big Blow to Builders - High Court Dismisses Writ Petition
NETIZENS may recall Finance Act 1994 was amended by the Finance Act 2010 to introduce an explanation to Section 65(105)(zzq) and Section 65(105) (zzzh). Besides, a new provision was introduced in the form of clause (zzzzu) in Section 65(105).
This had been challenged in the Bombay High Court by about 800 members of the Maharashtra Chamber of Housing Industry and the High Court had granted an interim relief – 2010-TIOL-526-HC-MUM-ST.
Now, the High Court has dismissed the writ petitions filed by the builders.
The grounds taken by the petitioners were:
i) The amendment is beyond the legislative competence of Parliament since the subject matter of the tax falls within the legislative power of the States under Entry 49 of List II to the Seventh Schedule of the Constitution. The explanation would indicate that it is a transaction of sale or an agreement to sell an immovable property yet to be constructed or under construction and not certified to be complete by the appropriate authority, which is sought to be taxed. Unless there is a transaction, which involves a transfer of immovable property or a contemplated transfer and a receipt of money, no charge would arise. Hence, the tax is directly one on the transfer of land or buildings and would fall within the legislative competence of the State legislatures under Article 246(3) read with Entry 49 of List II;
ii) By the explanation to clauses (zzq) and (zzzh), the construction of a new building or complex is by a deeming fiction treated to be a service when - (i) The construction is intended for sale; and (ii) Some receipt is envisaged before the grant of a completion certificate by the appropriate authority. The tax in pith and substance is not on construction, but on the sale of land and the element of sale is essential to fasten the charge. The sale of immovable property before, during or after construction, but before a completion is granted can by no stretch of imagination be regarded as a service. Once a completion certificate is received, there would be a sale pure and simple. In substance, the tax is on the transfer of land and buildings and therefore a tax on land and buildings within the meaning of Entry 49 of List II;
iii) The provisions of Section 65(105)(zzzzu) are unconstitutional because - (a) No element of service is involved whatsoever since the advantage that is sought to be brought to tax attaches to the preferential location or development of the property; (b)There is no voluntary act of rendering service; (c) The tax must be regarded as a tax on land per se, because it is a tax on location; and (d) What is the preferential location or an extra advantage or a payment over and above the basic sale price is not defined. The provision is therefore vague and suffers from the vice of an excessive delegation of legislative power since the enforcement of the provision is left to the unguided discretion of the administrative authority;
iv) Between a builder and a contractor who constructs a building, there may be a service element involving a service provider and receiver. Between the builder and a buyer, there is no provision of service. The title to the building which is under construction vests in the builder. After construction is complete and a final transfer of title takes place, there can in any event be no provision of service;
v) The explanation has brought in two fictions of a deemed service and a deemed service provider which will fall foul of the provisions of Sections 67 and 68 of the Finance Act.
The High Court was not impressed and dismissed the petitions. This may not be the end of the story – the Supreme Court is still there!
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