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II. High Court
In absence of machinery provisions to exclude non-service elements from a composite contract of construction of residential complex service, no service tax can be levied.
Facts
The petitioner entered into an agreement with a builder to buy flats in a housing project developed by the builder. It is contended that the agreement with the builder is a composite contract for purchase of immovable property and therefore in absence of a specific provision for ascertaining the service component of the said agreement, the levy would be beyond the legislative competence of the Parliament. Thus the question before the Court is whether consideration paid by flat buyers to builder/developer for acquiring a flat in a complex which is under construction is leviable to service tax. Reliance was placed on Circular No. 108/02/2009-ST dated 29/01/2009 wherein it was provided that the initial agreement between the promoters/builders/developers and the ultimate owner is in the nature of agreement to sell and the property remains under the ownership of the seller. 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 levy of service tax on preferential location charges was also challenged
Held
The High Court observed that the explanation to section 65(105)(zzzh) inserted by the Finance Act, 2010 created a legal fiction, whereby a set of activities carried on by a builder for himself are deemed to be that on behalf of the buyer and the Parliament is also competent to create such a deeming fiction. Moreover it cannot be disputed that the buyer acquires an economic stake in the project and the services subsumed in construction service in relation to a construction of a complex are rendered for the benefit of the buyer. Therefore it was held that the element of service involved cannot be disputed. However it was noted that it is essential to examine the measure of tax used for the levy as it is impermissible to tax the nonservice elements involved in the transaction viz. goods and immovable property. In the present case section 67 of the Finance Act, 1994 read with the Service Tax (Determination of Value) Rules, 2006 do not provide for any machinery for ascertaining the value of services involved in relation to construction of a complex. Rule 2A of the said rules does not cater to determination of value of service which involves sale of land. Thus neither the Act nor the Rules provide the required machinery. 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. Thus it was held that in absence of a measure of tax, the levy fails. Further the levy of service tax on service of preferential location was upheld as it represented an additional value that a customer would derive by obtaining a particular unit as per its preference and therefore involved an element of service.
Note: Readers may note a contrary decision of the Madras High Court in the case of N. Bala Baskar vs. Union of India & others [2016-TIOL-824-HC-MAD-ST] digest provided in BCAJ June 2016 wherein the Court primarily held that the writ was not maintainable as it is not open for a recipient to challenge the levy. However it is important to note that decision dealt with the case of joint development agreement and the Court merely held that such agreement for development is a service exigible to service tax without commenting on its valuation aspect.
