Service tax on commercial or industrial service was introduced in 2004 and that on residential complex was introduced in 2005 in the Finance Act, 1994 (the Act). Later in the year 2007, under the entry of `Execution of works contract service’, specifically construction contracts of new commercial or industrial buildings and new residential complex during the execution of works contract chargeable as sale of goods were made liable for service tax. The scope of these entries covered contractors providing construction services.
The Finance Act, 2010 with effect from July 01, 2010 inserted explanation in clause (zzq) and in clause (zzzh) of section 65(105) of the Act dealing with these construction services. By these explanations, a legal fiction is created and a builder is deemed to be a service provider of construction service to the prospective buyer of the immovable property or a unit thereof and thus liable for service tax. The explanation to become applicable has two pre-requisites:
- Construction of a new building or a complex must be intended for sale wholly or partly by a builder or his authorised person either before, during or after construction; and
- A sum must be received from or on behalf of prospective buyer by the builder before the grant of completion certificate by a competent authority under the applicable law.
Challenging the service tax imposed on the builders on the ground that between the builder and a buyer there is no provision of service, writ petition filed in the Bombay High Court by the Maharashtra Chamber of Housing Industry (MCHI) & Others (Writ Petition No.1456 of 2010) and similar petitions filed by various builders were dismissed.
Brief analysis of the decision:
The petitioners urged that title to the building under construction vests in the builder. On completion of construction, a final transfer of title takes place, there is no event of provision of service. Thus, the tax is directly on the transfer of land and buildings, which falls within the legislative power of the States under Entry 49 of List II to the Seventh Schedule of the Constitution. The builders also challenged the levy made under the new entry in section 65(105) (zzzzu) of the Act dealing with preferential location of the property or an extra advantage accorded on a payment over and above the basic sale price of the property sold. This was also challenged on the ground that it is a tax on land per se, because it is a tax on location and there is no voluntary act of rendering service.
The Revenue urged that the explanation does not tax transfer of property at all. The tax is on construction service, but it is triggered when there is intent to sell and some payment is received. These are incidents but do not form the subject-matter of the tax. Further, there is no tax imposed when the duly constructed property is sold after receiving completion certificate.
The Hon. High Court observed that it had the task to examine the object of taxation or the taxable event to determine whether the tax in its true nature is a tax on land and buildings. Incidence of the tax is not relevant to construing the subject-matter of tax and it is distinct from the taxable event; it identifies, as it were, the person on whom the burden of tax would fall. As regards the explanation, it observed that intent to sell whether before, during or after construction is the touchstone of the deeming definition of the service of the builder to the buyer. The explanation expanded the scope materially to include deemed service provided by builders to buyers. According to the Court, an explanation could be of different genres and the Legislature is not prevented to enact an explanation which is not clarificatory but expansive. In this frame of reference, reliance was placed on the Supreme Court decisions, Dattatraya Govind Mahajan v. The State of Maharashtra (AIR 1977 SC 915) and an earlier decision in Hira Ratan Lal v. The Sales Tax Officer (AIR 1973 SC 1034).
To address the issue of challenge of legislative competence of the levy, the Court in its order has discussed inter alia the following decisions of the Supreme Court almost on identical lines as it discussed the issue of legislative competence in relation to renting of immovable property service in Retailers Association of India v. Union of India (Writ Petition 2238 of 2010 & connected petition decided on 21/08/2011 – Refer BCAJ – October 2011 Issue – Service Tax feature):
- Sudhir Chandra Nawn v. Wealth Tax Officer – AIR 1969 SC 59
- Second Gift Tax Officer, Mangalore v. D.H. Nazareth – AIR 1970-SC 999
- Union of India v. H. S. Dhillon AIR 1972 SC 1061
- India Cement Limited v. State of Tamilnadu AIR 1990 SC 85
- State of Bihar v. Indian Aluminium Company AIR 1997 SC 3592
The Court stated that principles emerging from the Supreme Court decisions were that in order to be a tax on land and buildings, it must be directly imposed on land and buildings as units, whereas one imposed on a particular use of land or building or an activity in connection therewith or arrangement in relation therewith or a tax on income arising therefrom or a tax on transaction of a transmission of title to or a transfer of land and building is not a tax on land and buildings. In the instant case, the charge of tax is on rendering of taxable services. The taxable event is rendering of a service which falls within the description set out in sub-clauses (zzq), (zzzh) and (zzzzu) of the Act. The Legislature has imposed levy on the activity involving provision of service by a builder to the buyer in the course of the execution of a contract involving intended sale of immovable property. The charge is not on land and buildings as a unit and it is not on general ownership of land. The activity rendered on land does not make the tax a tax on land. A service rendered in relation to land does not alter the character of the levy.
The explanation bringing in two fictions of a deemed service and deemed service provider is not ultra vires the provisions of sections 67 and 68 of the Finance Act, 1994. Such submission by the petitioners lacked substance. Further, builders following the practice of levying charges under diverse heading including preferred location involved value addition and a service before obtaining a completion certificate. If no charge is levied for a preferential location or development, no service tax is attracted. Therefore there is no vagueness and uncertainty and there is no excessive delegation. Accordingly, finding no merits and no other submission other than the recorded being urged, the petitions were dismissed.
The question therefore arises is whether the observation made in Magus Construction P. Ltd. v. UOI in 2008 (11) STR 225 (Gau) stands completely negated by the deeming fiction? The Guwahati High Court in this case held that when a builder or a promoter undertakes construction activity for its own self, in the absence of relationship of “service provider”, and “service recipient” the question of providing taxable service to any person does not arise at all. Advance made by a prospective buyer is against consideration of sale of flat or building and not for the purpose of obtaining any service. Now in the scenario, it remains to be seen whether filing an appeal to the Supreme Court would bring a change in the situation or the above decision has decided the fate of the builders.
