Petitioner’s contentions
The explanation which was inserted into clauses (zzq) and (zzzh) of Section 65(105) is unconstitutional because the tax sought to be levied, by the said insertion, is directly on the transfer of land or buildings and would fall within the legislative competence of the State legislatures under Article 246(3) read with Entry 49 of List II.
The provisions of Section 65(105)(zzzzu) are unconstitutional because
a) No element of service is involved whatsoever since the advantage that is sought to be brought to tax attaches to the preferential location or development of the property
b) There is no voluntary act of rendering service
c) The tax must be regarded as a tax on land per se, because it is a tax on location; and
d) What is the preferential location or an extra advantage or a payment over and above the basic sale price is not defined.
The provision is therefore vague and suffers from the vice of an excessive delegation of legislative power since the enforcement of the provision is left to the unguided discretion of the administrative authority
Respondent’s contentions
The explanation to clauses (zzq) and (zzzh) does not seek to tax a transfer of property at all. The subject matter of the tax is the service rendered during the course of construction. Construction is an activity on land which does not fall within the ambit of Entry 49 of List II.
The explanation to clauses (zzq) and (zzzh) was enacted to plug a loop hole and to obviate a seepage from the value added net of agreements which intrinsically involved service during the course of construction
Even if the explanation was to be construed to bring within the ambit of the tax a transfer of property, it is a settled principle of law that a tax on the transfer of property does not fall under Entry 49 of List II.
Service tax on services in relation to „provision of preferential location‟ was introduced to cover diverse services which builders provide under different heads for which charges are levied separately. Parliament has intervened in order to ensure that they do not slip out of the value added tax net. If no charge is levied for a service, no liability would arise.
Observations of the Hon’ble High Court
The Supreme Court in the case of Chhotabhai Jethabhai Patel v. Union of India, AIR 1962 SC 1006, observed that under the Indian Constitution the “scheme of division of the taxing powers between the Union and the States is not based on any criterion dependent on the incidence of the tax”. This distinction was elaborated upon by holding that while excise duty is a duty on manufacture or production; there is no reason why in theory it cannot be imposed even on a retail sale of the article if the taxing Act so provides.
In Gujarat Ambuja Cements Ltd. v. Union of India AIR 2005 SC 3020 the Supreme Court emphasized that there is a distinction between the object of tax, the incidence of tax and the machinery for the collection of tax. Legislative competence is to be determined with reference to the object of the levy and not with reference to its incidence or machinery. This principle must be borne in mind by the Court in determining the issue of constitutional validity which arises in the present case.
The Finance Act of 2010 sought to bring within the field of service tax such cases which may have passed out of the net of value added tax merely on account of the timing of the execution of the agreement. By the amendment, an explanation came to be inserted in clause (zzq) and clause (zzzh) of Section 65(105). The explanation creates a legal fiction. The effect of the fiction is to provide a deeming definition of what constitutes a service provided by the builder to a buyer.
In Hiralal Ratan Lal v. The Sales Tax Officer AIR 1973 SC 1034 the Supreme Court held that if on a true reading of an expression, it appears to have widened the scope of the main section, effect must be given to the legislative intent, notwithstanding the fact that the legislature labelled it as an explanation. In other words, the nomenclature of a provision in a statute as an explanation is not determinative of its scope. The explanation may in a certain situation do no more than clarify the intent or remove an ambiguity by explaining the provision. In another situation the explanation may widen the ambit of the main provision. In either case, the duty of the Court is to determine the true intent of the legislature by construing the words which have been used.
The charge of tax under Section 66 of the Finance Act is on the taxable services defined in clause (105) of Section 65. The charge of tax is on the rendering of a taxable service. The taxable event is the rendering of a service which falls within the description set out in sub clauses (zzq), (zzzh) and (zzzzu). The object of the tax is a levy on services which are made taxable. The fact that a taxable service is rendered in relation to an activity which occurs
on land does not render the charging provision as imposing a tax on land and buildings. The tax continues to be a tax on taxable services. The tax is not a tax on land or buildings as a unit.
There is a legislative assessment underlying the imposition of the tax which is that during the course of a construction related activity, a service is rendered by the builder to the buyer. That legislative assessment does not impinge upon the constitutional validity of the tax
In relation to Service tax on services in relation to „provision of preferential location‟, if no separate charge is levied, the liability to pay service tax does not arise and it is only where a particular service is separately charged for that the liability to pay service tax arises. The fact that the service is rendered in the context of a location, does not make it a tax on land within the meaning of Entry 49 of List II. The tax continues to be a tax on the rendering of a service by the builder to the buyer. There is no vagueness and uncertainty. The legislative prescription is clear.
Final Order
Based on the discussions above, the Honorable High Court decided that it did not find any merit in the constitutional challenges raised in the Petitions. The Petitions were dismissed accordingly.
Source: Order of the Bombay High Court dated 19/20 January 2012
The explanation which was inserted into clauses (zzq) and (zzzh) of Section 65(105) is unconstitutional because the tax sought to be levied, by the said insertion, is directly on the transfer of land or buildings and would fall within the legislative competence of the State legislatures under Article 246(3) read with Entry 49 of List II.
The provisions of Section 65(105)(zzzzu) are unconstitutional because
a) No element of service is involved whatsoever since the advantage that is sought to be brought to tax attaches to the preferential location or development of the property
b) There is no voluntary act of rendering service
c) The tax must be regarded as a tax on land per se, because it is a tax on location; and
d) What is the preferential location or an extra advantage or a payment over and above the basic sale price is not defined.
The provision is therefore vague and suffers from the vice of an excessive delegation of legislative power since the enforcement of the provision is left to the unguided discretion of the administrative authority
Respondent’s contentions
The explanation to clauses (zzq) and (zzzh) does not seek to tax a transfer of property at all. The subject matter of the tax is the service rendered during the course of construction. Construction is an activity on land which does not fall within the ambit of Entry 49 of List II.
The explanation to clauses (zzq) and (zzzh) was enacted to plug a loop hole and to obviate a seepage from the value added net of agreements which intrinsically involved service during the course of construction
Even if the explanation was to be construed to bring within the ambit of the tax a transfer of property, it is a settled principle of law that a tax on the transfer of property does not fall under Entry 49 of List II.
Service tax on services in relation to „provision of preferential location‟ was introduced to cover diverse services which builders provide under different heads for which charges are levied separately. Parliament has intervened in order to ensure that they do not slip out of the value added tax net. If no charge is levied for a service, no liability would arise.
Observations of the Hon’ble High Court
The Supreme Court in the case of Chhotabhai Jethabhai Patel v. Union of India, AIR 1962 SC 1006, observed that under the Indian Constitution the “scheme of division of the taxing powers between the Union and the States is not based on any criterion dependent on the incidence of the tax”. This distinction was elaborated upon by holding that while excise duty is a duty on manufacture or production; there is no reason why in theory it cannot be imposed even on a retail sale of the article if the taxing Act so provides.
In Gujarat Ambuja Cements Ltd. v. Union of India AIR 2005 SC 3020 the Supreme Court emphasized that there is a distinction between the object of tax, the incidence of tax and the machinery for the collection of tax. Legislative competence is to be determined with reference to the object of the levy and not with reference to its incidence or machinery. This principle must be borne in mind by the Court in determining the issue of constitutional validity which arises in the present case.
The Finance Act of 2010 sought to bring within the field of service tax such cases which may have passed out of the net of value added tax merely on account of the timing of the execution of the agreement. By the amendment, an explanation came to be inserted in clause (zzq) and clause (zzzh) of Section 65(105). The explanation creates a legal fiction. The effect of the fiction is to provide a deeming definition of what constitutes a service provided by the builder to a buyer.
In Hiralal Ratan Lal v. The Sales Tax Officer AIR 1973 SC 1034 the Supreme Court held that if on a true reading of an expression, it appears to have widened the scope of the main section, effect must be given to the legislative intent, notwithstanding the fact that the legislature labelled it as an explanation. In other words, the nomenclature of a provision in a statute as an explanation is not determinative of its scope. The explanation may in a certain situation do no more than clarify the intent or remove an ambiguity by explaining the provision. In another situation the explanation may widen the ambit of the main provision. In either case, the duty of the Court is to determine the true intent of the legislature by construing the words which have been used.
The charge of tax under Section 66 of the Finance Act is on the taxable services defined in clause (105) of Section 65. The charge of tax is on the rendering of a taxable service. The taxable event is the rendering of a service which falls within the description set out in sub clauses (zzq), (zzzh) and (zzzzu). The object of the tax is a levy on services which are made taxable. The fact that a taxable service is rendered in relation to an activity which occurs
on land does not render the charging provision as imposing a tax on land and buildings. The tax continues to be a tax on taxable services. The tax is not a tax on land or buildings as a unit.
There is a legislative assessment underlying the imposition of the tax which is that during the course of a construction related activity, a service is rendered by the builder to the buyer. That legislative assessment does not impinge upon the constitutional validity of the tax
In relation to Service tax on services in relation to „provision of preferential location‟, if no separate charge is levied, the liability to pay service tax does not arise and it is only where a particular service is separately charged for that the liability to pay service tax arises. The fact that the service is rendered in the context of a location, does not make it a tax on land within the meaning of Entry 49 of List II. The tax continues to be a tax on the rendering of a service by the builder to the buyer. There is no vagueness and uncertainty. The legislative prescription is clear.
Final Order
Based on the discussions above, the Honorable High Court decided that it did not find any merit in the constitutional challenges raised in the Petitions. The Petitions were dismissed accordingly.
Source: Order of the Bombay High Court dated 19/20 January 2012
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