Introduction :
Till today the law on the subject of repairing and maintenance of roads and other infrastructural facilities was clear in the minds of all stakeholders (barring a few service tax commissionerates).
There was this discussion that maintenance and/or repairing of roads may be a taxable activity, but a conclusive view came across from most corners that no such taxing is possible because the law itself was clear enough.
This view was based on a sound principle of law which says that if a service activity is specifically excluded from the purview of taxation from one service category, it cannot be included in some other category unless and until specific inclusion thereof is provided for it in that Section.
The Central Board of Excise and Customs (CBEC) has now come up with a Circular No. 110/2009, dated 23.02.2009 clarifying the doubts in respect of levy of service tax on repair/renovation/widening of roads.
The Circular has tried to give extra-judicial meaning to 2 sections involved :
1. Commercial or industrial construction service [Section 65(105) (zzq)]
2. Management, maintenance or repair service [Section 65(105) (zzg)].
Legislative Background :
I. Commercial or Industrial Construction Service :
As per Section 65(25b) of the Finance Act, 1994 (Act), ‘Commercial or industrial construction service’ means —
(a) construction of a new building or a civil structure or a part thereof; or
(b) construction of pipeline or conduit; or
(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or
(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,
which is —
(i) used, or to be used, primarily for; or
(ii) occupied, or to be occupied, primarily with; or
(iii) engaged, or to be engaged, primarily in,
commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;
The above defining Section clearly spells out that all kinds of repairing, alteration, renovation, restoration or similar services provided in relation to any infrastructural facilities including roads is completely non-taxable. Therefore it can be safely said that there was and still exists a specific exclusion from charging of service tax on repairing and related services in respect of roads.
II. Management, Maintenance or Repair Service :
As per section 65 (64) of the Act,
“management, maintenance or repair service means any service provided by —
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorised by him,
in relation to,
(a) management of properties, whether immovable or not;
(b) maintenance or repair of properties, whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle.
[Explanation : For the removal of doubts, it is hereby declared that for the purposes of this clause, —
(a) ‘goods’ includes computer software;
(b) ‘properties’ includes information technology software;]
This section puts in place a charge on management, maintenance or repair services in relation to all movable and immovable goods and properties. This Section was first amended w.e.f. 16.06.2005 to include maintenance services in respect of immovable properties and it was further amended from 1.05.2006 to include repairing services therein also.
Legal Importance of circular :
It is an accepted rule of law that an Act passed by the Parliament is supreme in authority and its provisions cannot be re-defined by issuance of Circulars. Circulars can only be guides to law and law cannot be re-defined by these instruments. Many Circulars have been struck down by Courts. In the case of Commissioner of Sales Tax vs. Indra Industries, (2001) 248 ITR 338 (SC), the apex court has opined that,
“A Circular by tax authorities is not binding on the Courts. It is not binding on the assessee.”
Hence Circulars at best are instruments in the hands of administrators to clear doubts where they exist, but unfortunately these are being used to create doubts where none exist.
Defining the Circular
Circular no. 110 is issued in response to clarification sought by the Nashik Commissionerate on the issue. The Circular has tried to clarify 2 issues —
a. Whether management, maintenance or repairs of roads is taxable under similar service head or not.
b. Segregation of activities in relation to roads into 2 distinct heads as under :
i. Maintenance & repair activities
1. Resurfacing
2. Renovation
3. Strengthening
4. Relaying
5. Filling of potholes
ii. Construction Activities
1. Laying of a new road
2. Widening of narrow road to broader road (such as conversion of a two-lane road to a four-lane road)
3. Changing road surface (gravelled road to metalled road/metalled road to black-topped/blacktopped to concrete, etc.).
In simple language, as per this Circular all activities of management, maintenance or repairing in respect of roads will be taxable with retrospective effect at least from 1.05.2006 if not earlier. It has tried to define what activities are classifiable as Maintenance or Repair services and what can be defined as Construction. As there is no legal standing of the Circulars, its impact cannot be retrospective in nature.
If we believe this Circular to be sacrosanct, then at least from 1.05.2006 all jobs of resurfacing, renovation, strengthening, relaying or filling of potholes in respect of roads will become taxable.
This can be stretched to mean that if a road is constructed once – all relaying work done on it for as many years to come – would be a taxable activity given that the quality of surface of the road is not changed from gravelled road to metalled road/metalled road to blacktopped/blacktopped to concrete, etc.
Mistake of Omission:
The Circular fails to recognise one important sub-clause of section 65 (25b) of the Act.
As explained earlier, this Section defines the words “Commercial or Industrial Construction” – wherein sub-clause (d) of Section 65 (25b) clearly includes all kinds of repair, alteration, renovation, restoration or similar services. Thereby meaning that repairs is also a sort of Construction.
The definition further has an the exclusion clause which says that,
“but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.]”
The words “Such services” – refer to sub-clause 65 (25b) (a) to (d) – which means that all repairing, renovation, etc., jobs in relation to roads are NOT TAXABLE at all.
Why was this clause not referred to before issuance of the impugned Circular is a question that only the Board can answer. It is clear that they have not considered this sub-clause and this mistake of omission would give birth to serious litigation issues for the infrastructure sector as a whole.
Conclusion:
As far as repairing jobs of roads, etc., is concerned there was no iota of doubt in the legislative intent, because infrastructure is the need of the day and upkeep of the infrastructural facilities is a core area in which the Government is working hard. Unfortunately this Circular may undo all the good intentions of law.
It is not as if the law is silent on the issue. On the contrary, the law is crystal clear and specifically excludes all kinds of repair jobs done in respect of all infrastructural facilities like roads, airports, railways, transport terminals, bridges, tunnels and dams as explained above.
This Circular must be withdrawn with immediate effect and all efforts must be taken by all stake-holders to force the Central Government into withdrawing it. The Circular, in any case according to me, is Void-ab-initio and will not stand the scrutiny of Tribunals and courts in the long run. But till that happens, it would have played the mischief it is intended to. The litigation-creating potential of this Circular is immense and immediate.
This Circular would proverbially open a Pandora’s box for the maintenance and repairing of infrastructural facilities sector as a whole, because the logic of this circular, if accepted, would mean that similar services in relation to infrastructural facilities other that roads -like airports, tunnels, dams, etc., – will also be taxable and that too retrospectively.
This Circular has all the right ingredients to do all the wrong things !
