Service tax on deemed service of construction of complex service – seeking to tax the element of service tax

PJ/Case Laws/2010-11/1097

Service tax on deemed service of construction of complex service – seeking to tax the element of service tax – not unconstitutional.

Case: GS Promoters v/s Union of India

Citation: 2011 (21) STR 100 (P&H)

Issue: -Service tax on deemed service of construction of complex service – seeking to tax the element of service tax – not unconstitutional.

Brief Facts: -Petitioner is engaged in the development and sale of residential flats and enters into agreement for construction of flats with contractors. The said flats are ultimately sold to the customers.

The Finance Act, 2010 added an explanation to the taxable service of construction of complex service under Section 65(zzzh) of the Finance Act by which deemed service provided by the builder to the customer even before the issuance of completion certificate was covered under tax net. The Board has also issued Circular No. 334/3/2010-TRU dated 01.07.2010 explaining the coverage of deemed service under service tax.

The Petitioner has filed this writ petition seeking declaration that the explanation to Section 65(zzzh) of the Finance Act, 1994 and CBEC Circular No. 334/3/2010-TRU dated 01.07.2010 are unconstitutional.

Petitioner’s Contention: - Petitioner contended that the explanation widened the scope of levy beyond the concept of service by including therein sale. Taxing of sale and purchase was beyond the legislative competence of the Union Legislature. If construction activity is not undertaken by a builder, then the builder cannot be considered to be a service provider in relation to service of construction activities.

Petitioner relied upon the judgment of the Guahati High Court in Magus Construction Pvt Ltd v/s Union of India [2008 (11) STR 225] wherein it was held that when a person provides service of construction by construction activities to himself, it could not be held that he was providing any service, in absence of service provider in relation to a service recipient.

Respondent’s Contention: -

Reasoning of Judgment: - The High Court referred to judgment given in All India Federation of Tax Practitioners and Others v/s Union of India and Others [2007 (7) STR 625] that with the enactment of the Finance Act, 1994 by which service tax was introduced, the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of Article 268-A in the Constitution vide the Constitution (Eighty-eighth Amendment) Act, 2003.

The High Court relied upon the judgment in Hoechst Pharmaceuticals Ltd v/s State of Bihar [(1983) 4 SCC 45]. The scope of legislative entry cannot be taken to be limited by narrow interpretation but should receive a liberal construction inspired by a broad and generous spirit.

The judgment in M/s Shubh Timb Steels Limited v/s Union of India and Another [2010 (20) STR 737 (P&H)] was also referred wherein it was held that Activity sough to be subjected to tax has to be as per the statutory scheme and unless there is any encroachment in the field of State Legislature, the competence of the Union Legislature cannot be questioned.

The High Court noted that in the present case it has not been pointed out that there is any encroachment in the legislative power of the state legislature. It was only submitted that there was an element of sale which was sought to be taxed. It is not the case of the Petitioner that the levy falls under Entry 54 List-II relating to sale and purchase of goods. It was held that what is subjected to levy was element of service of construction.

It was held that Service whether involved or not, to be seen not only from the builder’s point of view but also that of the service recipient. The Service in relation to construction of was sought to be taxed and the same involved even when construction carried out or got carried out before construction and before sale of flat took place.

It was held that levy of service tax was on the service and not on the service provider and the construction service was provided even when constructed flat was sold. Taxing of such transaction was not outside the purview of Union Legislature as the same did not fall under taxing entries of State list.

Thus, it was held that there was no ground to declare the impugned levy to be unconstitutional.

Decision: - Petition dismissed.

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PJ/Case Laws/2010-11/1097

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