The arrangement between the buyer and the builder is a composite one which involves not only the element of services but also goods and immovable property. In order to sustain the levy of service tax on services, it is essential that the machinery provisions provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax. Service tax since is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction derived by a customer from certain additional attributes of the property developed. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex. Court accordingly held that no service tax under section 66 of the Act read with Section 65(105)(zzzh) of the Act could be charged in respect of composite contracts such as the ones entered into by the Petitioners with the builder.
The Petitioners in the present petition were aggrieved by the levy of service tax on services ‘in relation to construction of complex’ as defined under Section 65 (105)(zzzh) of the Finance Act, 1994 (‘the Act’) and accordingly the explanation to Section 65(105)(zzzh) of the Act (hereafter ‘the impugned explanation’) introduced by virtue of Finance Act 2010 was challenged as being ultra vires of the Constitution of India. The Petitioners also impugned Section 65(105)(zzzzu) of the Act which seeks to subject preferential location charges charged by a builder to service tax. The Petitioners stated that their agreement with the builder is a composite contract for purchase of immovable property and contended that in the absence of specific provisions for ascertaining the service component of the said agreement, the levy would be beyond the legislative competence of the Parliament. The controversy involved in the instant petitions thus related to the question whether the consideration paid by flat buyers to a builder/promoter/developer for acquiring a flat in a complex, which under construction/development, could be subjected to levy of service tax. According to the Petitioners, the agreements entered into by them with the builder are for purchase of immovable property and the Parliament does not have the legislative competence to levy service tax on such transaction. The Petitioners further claimed that the Act and the Rules made thereunder does not provide any machinery for computation of value of services, if any, involved in construction of a complex and, therefore, no such tax can be imposed.
Revenue contended that the concerned legislative amendment introduced by the Finance Act, 2010, namely, insertion of explanation to Section 65(105)(zzzh) and clause (zzzzu), were valid and enforceable. Development, as contended, of a project results in the substantial value addition on bare land and includes various services such as consulting services, engineering services, management services, architectural services etc. These services are subsumed in the taxable service as contemplated under Section 65(105)(zzzh) of the Act.
It was observed by the Court that insofar as the impugned explanation were concerned, it was apparent that the same expanded the scope of the taxable service as envisaged in clause (zzzh) of the Act. By a legal fiction, construction of a complex which is intended for sale by a builder or any person authorised by him before, during or after construction is deemed to be a service provided by the builder to the buyer. The only exception contemplated is where no sum is received from the prospective buyer prior to grant of the completion certificate. The grant of completion certificate implies that the project is complete and at that stage all services and goods used for construction are subsumed in the immovable property; thus at that stage sale of a complex or a part thereof to a buyer constitutes an outright sale of immovable property, which admittedly is not chargeable to service tax.
In cases where construction is carried on by a builder on behalf of or for another person it could hardly be disputed that the builder renders a host of services which are involved in construction. Such services would normally include services in the nature of architectural services, engineering services, services in relation to development of infrastructure etc. A developer directly or through sub-contractor carries on myriad of activities for construction of a complex which apart from construction of buildings also involves planning, preparation of a layout plan, development of land, construction of sewer lines, development of infrastructure for supply of electricity and water, etc. In such cases, it could not be disputed that no services are rendered by a builder; the controversy as to whether any services are rendered arises only in cases where the builder does not carry on the development activities on behalf of the purchaser but on his own but with an intention to sell the developed units; he enters into agreements with prospective buyers to sell fully developed units as and when such buyers are found. He may do so before commencing any construction/ development activity or during the course of developing the complex.
Service tax is essentially a tax on the value created by services as distinct from a tax on the value added by manufacturing goods. Construction of a complex essentially has three broad components, namely, (i) land on which the complex is constructed; (ii) goods which are used in construction; and (iii) various activities which are undertaken by the builder directly or through other contractors. The object of taxing services in relation to construction of complex is essentially to tax the various activities that are involved in the construction of a complex and the resultant value created by such activities.
It is a usual practice for builders/developers to sell their project at its launch. Builders accept bookings from prospective buyers and in many cases provide multiple options for making payment for the purchase of the constructed unit. In some cases, prospective buyers make the payment upfront while in other cases, the buyers may opt for construction linked payment plans, where the agreed consideration is paid in instalments linked to the builder achieving certain specified milestones. The title to the unit (the immovable property) does not pass to the prospective buyer at the stage of booking, it can hardly be disputed that the buyer acquires an economic stake in the project and in one sense, the services subsumed in construction – services in relation to a construction the complex – are rendered for the benefit of the buyer. However, but for the legal fiction introduced by the impugned explanation, such value add would be outside the scope of services because sensu stricto no services, as commonly understood, are rendered in a contract to sell immovable property.
The impugned explanation was enacted to principally bring about parity in various forms of arrangements entered into between the builders and prospective buyers for the purposes of levy of service tax. The object was to obliterate – for the purposes of levy of service tax – the distinction between a person who engages a builder to construct a unit for him and a person who enters into an arrangement to purchase a unit in a complex, which is under development, from a builder.
The imposition of service tax by virtue of the impugned explanation is not a levy on immovable property. The clear object of imposing the levy of service tax in relation to a construction of a complex is essentially to tax the aspect of services involved in construction of a complex the benefit of which is available to a prospective buyer who enters into an arrangement – whether by way of an agreement of sale or otherwise – for acquiring a unit in a project prior to its completion/development.
Court rejected the contention that as merit less that the imposition of service tax in relation to a transaction between a developer of a complex and a prospective buyer impinges on the legislative field reserved for the States under Entry-49 of List-II of the Seventh Schedule to the Constitution of India.
Undisputedly, the contract between a buyer and a builder/promoter/ developer in development and sale of a complex is a composite one. The arrangement between the buyer and the developer is not for procurement of services simplicitor. An agreement between a flat buyer and a builder/developer of a complex – who is developing the complex for sale is, essentially, one of purchase and sale of developed property. But, by a legislative fiction, such agreements, which have been entered into prior to completion of the project and/or construction of a unit, are imputed with a character of a service contract; the works involved in construction of a complex are treated as being carried by the builder on behalf of the buyer. However, indisputably the arrangement between the buyer and the builder is a composite one which involves not only the element of services but also goods and immovable property. Thus, while the legislative competence of the Parliament to tax the element of service involved cannot be disputed but the levy itself would fail, if it does not provide for a mechanism to ascertain the value of the services component which is the subject of the levy. Service tax cannot be levied on the value of undivided share of land acquired by a buyer of a dwelling unit or on the value of goods which are incorporated in the project by a developer. Levying a tax on the constituent goods or the land would clearly intrude into the legislative field reserved for the States under List II of the Seventh Schedule of the Constitution of India.
It was held that there was no machinery provision for ascertaining the service element involved in the composite contract. In order to sustain the levy of service tax on services, it is essential that the machinery provisions provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax.
Court however clarified that on challenge to the levy of service tax on taxable services as defined under Section 65(105)(zzzzu) on the contention that there is no element of service involved in the preferential location charges levied by a builder. Court rejected the contention by holding that such charges relate solely to the location of land. Thus, preferential location charges are charged by the builder based on the preferences of its customers. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit. Such charges may be attributable to the preferences of a customer in relation to the directions in which a flat is constructed; the floor on which it is located; the views from the unit; accessibility to other facilities provide in the complex etc. Service tax since is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction derived by a customer from certain additional attributes of the property developed. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex.
Court accordingly negated the challenge to insertion of clause (zzzzu) in Sub-section 105 of Section 65 of the Act. However, accepted the Petitioners contention that no service tax under section 66 of the Act read with Section 65(105)(zzzh) of the Act could be charged in respect of composite contracts such as the ones entered into by the Petitioners with the builder. The impugned explanation to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service was set aside.
Suresh Kumar Bansal and Anr. vs. Union of India and Ors.
Delhi HC, 03.06.2016
W.P. (C) 2235/2011