Whether explanation added on 1.7.2010 with respect to leviability of service tax on construction services has retrospective effect?

PJ/Case Law/2013-14/1653

Case:-R F PROPERTIES & TRADING LTD VERSUS COMMISSIONER OF CENTRAL EXCISE, JAIPUR

Citation:-2013-TIOL-971-CESTAT-DEL

Brief Facts:-This appeal by the assessee is preferred against the adjudication order dated 27.6.2008 passed by the Commissioner, Central Excise, Jaipur assessing service tax liability of Rs.33,74,121/-, interest and penalties under Section 75 to 78 of the Finance Act, 1994 as stipulated in the order impugned.

The relevant facts fall within a narrow compass. The assessee undertook execution of a project known as World Trade Park (WTP), a commercial complex, having acquired the land from the Jaipur Development Authority, Jaipur. According to the statement of the assessee's representative recorded under Section 14 of Central Excise Act, 1944, the assessee received Rs. 9,35,58,510/- as application money/advance from persons desirous of purchasing space/shop/office in the proposed WTP complex; the advance to be adjusted at the time of sale of the agreed space/shop etc. to the buyer. Advances were received during the period 4.7.05 to 30.6.2006. Revenue, on the assumption that assessee is liable to remit service tax under the taxable head "commercial and industrial construction" defined under Section 66(25) (b) read with Section 65(105)(zzq) of the Act, issued a show cause notice culminating into the adjudication order.

The adjudicating authority concluded that that though title to the property in the office/space/shop in the WTP had not passed to the prospective buyers, since advances were received and constructions made by the assessee (by employing a construction agency), the assessee must be held to have rendered, a taxable service, Commercial and industrial construction service. The relevant provisions require to be noticed. Section 65 (25b) defines 'commercial or industrial construction' as meaning - (a) construction of a new building or a civil structure or a part thereof; or (b) construction of pipeline or conduit and other similar services in relation to completion and civil construction (as the provision was at the relevant time). Section 65(105)(zzq) of the Act, which is relevant for the purpose, enumerates a taxable service as a meaning - any service provided or to be provided to any person, by any other person in relation to commercial or industrial construction service.

In the context of the facts and the relevant statutory provisions, the singular enquiry relevant is whether commercial or industrial construction service provided by the assessee, which is also the owner of the property (on which the construction was put up), was a service provided "to any other person" ( the prospective buyers). Instead of focusing on this singular issue, the ld. adjudicating authority digressed to areas not wholly relevant and considered whether the expression 'in relation to' had a narrow or an expansive connotation.

Paragraphs 16.04 to 16.08 of the adjudication order set out the relevant analyses and the conclusion that the expression 'in relation to' has wide import and therefore activities in relation to construction would constitute the taxable service of commercial or industrial construction. There can be no quarrel with the assumption that the activity of the assessee constitutes activity in relation to commercial or industrial construction as defined in Section 65 (25b) of the Act. This anyalsis per se does not determine the issue whether the transaction of the assessee is liable to tax. To be liable to the charge of service tax, the commercial or industrial service provided by the petitioner/assessee must be to any other person. In para 16.09, the adjudicating authority after referring to the Board Circular dated 17.9.2004, understood the clarification as enabling immunity to the charge of service tax only to a developer or builder who contemplates a transaction by way of outright sale of space in a commercial complex after its construction; in respect of a construction executed without reference to any agreement with the customer/buyer; and where the recipient of the service is not in the picture at all at any stage of construction. On this analysis, the adjudicating authority concluded that the assessee had rendered taxable service and was liable to service tax, interest and penalties as a consequence.

Reasoning of Judgment:-It was held by the Tribunal that an explanation was appended to Section 65(105)(zzq) by Finance Act 2010 with effect from 1.7.2010. This explanation reads:

Explanation: For the purposes of this sub-clause, the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorized by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force shall be deemed to be service provided by the builder to the buyer.

On true and fair construction of provisions of Section 65(105)(zzq) read in the light of the Explanation, it is clear that construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction, where no sum is received from or on behalf of the prospective buyer by the builder or the person authorized by the builder, before grant of a completion certificate by an authority competent to issue such certificate under any law for the time being in force, shall be deemed to be a taxable service provided by the builder to the buyer. Thus, irrespective of whether the title in the property (the construction) is formally transferred (by way of execution and registration of a sale deed), in favour of a prospective buyer, if the parameters of the Explanation are satisfied, the transaction becomes liable to the charge of service tax.

The consequence of the 'explanation' fell for consideration by the Bombay High Court in Maharashtra Chamber of Housing Industry vs. UOI reported in 2012 (25) STR 305 (Bom.) = (2012-TIOL-78-HC-MUM-ST). The High Court traced the history of the provision enabling levy of service tax on commercial and industrial construction; referred to the Board Circular dated 29.1.2009 (which clarified that where an agreement to sell is entered into by a buyer with the builder, the property belongs to the builder till completion of the transaction and any service provided towards construction would be in the nature of 'self-service'); to the Explanation to Section 65(105)(zzq) introduced by the Finance Act, 2010; and declared that as a consequence of the Explanation, the ambit of the expression 'taxable service' in relation to commercial or industrial construction service or, as the case may be, construction of a complex service [chargeable to tax under Section 65(105)(zzh) - where an identical expression was introduced (also by the Finance Act, 2010)], has undergone a material change, by bringing within the fold of service tax construction services provided by builders to buyers.

The Bombay High Court explained that Explanations to statutory provisions belong to different genres. Sometime these may be clarificatory in nature, clarifying an existing legislative intent or could be expansive, by adding to the existing meaning. The High Court pointed out that there was no constitutional fetter to clarifying the meaning of an existing legislative provision by introducing a clarificatory provision ex abundanti cautella or to explain the ambit and purview of an existing provision; nor is there a constitutional fetter to add an explanation, expansive of the current provision; the trajectory of a legislative introduction must however be identified by employment of the appropriate principle of statutory construction.

The High Court proceeded to analyse the text and structure of the Explanation introduced by the Finance Act, 2010 and concluded that the Explanation was brought in to expand the scope of the existing taxable service; and that prior to the Explanation, the view taken was that since a mere agreement to sell does not create any interest in the property in favour of the prospective buyer and title to the property continues with the builder, no service was provided to the buyer and the service, if any, would be in the nature of a service rendered by the builder to himself.

In our respectful view the analysis and conclusion in the judgment of the Bombay High Court accords with the primary analysis of the relevant provisions namely Section 65(105(zzq) read with Section 65(25b) and that is how the Board also understood the provisions vide the clarification dated 29.1.2009 (issued prior to introduction of the Explanation).

An analogous situation, relating to the taxable service of "construction of complex", in Section 65(105)(zzh) of the Act fell for consideration by this Tribunal in C.C.E., Chandigarh vs. Skynets, Builders, Developers, Colonizer reported in 2012 (27) STR 388 = (2012-TIOL-440-CESTAT-DEL). Expressing the same view as the latter judgment of the Bombay High Court, the Tribunal held that the Explanation to Section 65(105)(zzh) [which is in pari materia the Explanation to Section 65(105) (zzq] does not have a retrospective reach and would apply only to transactions falling within its scope, which are subsequent to enactment of the Explanation.

On the aforesaid analysis, since admittedly the transaction in issue in the present appeal falls during the period 4.7.05 to 30.6.2006 (prior to introduction of the Explanation to Section 65(105)(zzq) and the service offered by the assessee in relation to the construction of commercial or industrial complex in respect of WTP cannot be said to be service provided or to be provided to another person, the transaction falls outside the purview of the taxable service. As a consequence of this analysis and conclusion, the impugned adjudication order cannot be sustained and is accordingly quashed. There shall be no order as to costs.

Decision:-Appeal is allowed.

Comment:-It was held in this case that as the explanation was added w.e.f. 1.7.2010, it had retrospective application and was not applicable in the present case and no service tax was leviable on the advances received for the sale of office to the prospective buyers due to construction on the land owned by the assessee as it would amount to service provided to oneself.

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PJ/Case Law/2013-14/1653

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