Judgment:
(These writ petitions are filed under Articles 226 and 227 of the Constitution of India praying to declare that the provisions of finance Act, 1994 as amended by finance Act, 2010 introducing an explanation to Section 65(105) (zzq) and 65(105) (zzzh) and a new entry(zzzzu) in Section 65 (105) of the finance act 1994 is unconstitutional void and ultra vires and etc.)
(Oral):
In these writ petitions, the petitioners are challenging the Constitutional validity of the Explanations to clauses (zzq) and (zzzh) and clause (zzzzu) of sub-Section 105 of Section 65 of the Finance Act, 1994 ('the Act' for short). The aforesaid provisions were inserted by the Finance Act, 2010 with effect from 1st July 2010. It is stated that petitioner No.1 is an Association of persons and entities engaged in the business of real estate, development and allied activities and petitioner No.2 is its President.
2. I have heard Sri Vivek Holla, learned counsel appearing for the petitioners and Ms. Geetha, appearing for Sri N.R.Bhaskar, Central Government Standing Counsel for the respondents.
3. The impugned provisions read as follows:
"65. Definitions.-
(1) ..............................................
(2) ..............................................
(105) "taxable service" means any service provided or to be provided, -
(a) ................................................
(zzq) - to any person, by any other person, in relation to commercial or industrial construction;
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 authorised 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 authorised 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;
............................
(zzzh) - to any person, by any other person, in relation to construction of complex;
Explanation: For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised 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 a person authorised by the builder before the 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;
..........................
(zzzzu) - to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorised by such builder, for providing preferential location or development of such complex but does not include services covered under sub-clauses (zzg), (zzq), (zzzh) and in relation to parking place.
Explanation: For the purposes of this sub-clause, "preferential location" means any location having extra advantage which attracts extra payment over and above the basic sale price."
4. Before referring to the contentions urged, a brief survey of the relevant provisions of the Service Tax Legislation is necessary. The nature of the impugned provisions also requires to be stated.
4.1 Scheme of the Act: Chapter V of the Finance Act, 1994 relates to Service tax. Sub-Section (95) of Section 65 defines 'Service Tax' as tax leviable under the provisions of Chapter V. Section 66 provides for levy of service tax on the value of Taxable services. Taxable Services are listed in sub-Section 105 of Section 65. Section 67 provides for valuation of Taxable Services for charging service tax. Section 68(1) obligates every person providing taxable service to pay service tax. Under Section 83, several provisions of the Central Excise Act, 1944 are made applicable for collection and recovery of Service tax. The administration of Service tax is given to the authorities under the Central Excise Act.
4.2 Nature of the impugned provisions:
The impugned explanations provide for a deemed definition of Taxable service by a legal fiction. The effect of the explanations is that construction of a new building or complex, which is intended for sale, wholly or partly, shall be deemed to be 'service' provided by the builder to the buyer except in cases where no sum is received from the prospective buyer before grant of Completion Certificate by the Competent Authority.
Under clause (zzzzu), providing of a preferential location or development of a residential or a commercial complex is also added to the list of taxable services.
5. Let me now refer to the contentions urged by the learned counsel for the petitioners. The main contention is that no element of service is involved in construction and sale of a building/flat or in providing a preferential location vis-a-vis the builder and the buyer. Hence the impugned provisions are unconstitutional as Parliament lacks legislative competence to tax the services referred to therein, as the tax, in substance, is a tax on transfer of lands and buildings and therefore, the subject matter will fall within the ambit of Entry 49 of List II (State list) of the Seventh Schedule of the Constitution of India.
5.1 He further submitted that the impugned explanations are discriminatory inasmuch as no service tax is leviable on the construction, if no sum had been received from the prospective buyer before grant of completion certificate by the Competent Authority, whereas, if any sum had been received before grant of completion certificate, such a construction is exigible to service tax. He submitted that the aforesaid classification is not only discriminatory but also arbitrary.
5.2 Without prejudice to the above contentions, he also submitted that even assuming that there is some element of service in the process of construction and sale of flats, the measure of tax could be only the service component and not the gross amount charged for the construction as per Section 67 of the Act; as the measure of tax is notional, in the sense the service component is not taken as the measure, the impugned provisions are unconstitutional. In support of this submission, he relied on a judgment of the Supreme Court in State of Rajasthan vs. Rajasthan Chemists Association [(2006) 6 SCC 773].
6. Counsel appearing for the respondents submitted that the impugned provisions are held to be constitutionally valid by a Division Bench of the Bombay High Court in Maharashtra Chamber of Housing Industry and Another vs. Union of India and others [2012 Vol. 114(2) Bom. L. R. 0734]. She also referred to a Division Bench judgment of the Punjab and Haryana High Court in G.S.Promoters vs. Union of India [(2011) 37 VST 272 (Pand H)].
7. I will now examine the contentions urged by the learned Counsel for the petitioners in the order in which they were urged:
Re. Legislative Competence of Parliament to enact the impugned provisions:
To examine the contention that the tax on the services referred to in the impugned provisions is really a tax on 'lands and buildings' specified in Entry 49 of List II (State list), the scope and ambit of Entry 49 requires to be examined. On this aspect, it is useful to refer to the following observations made by a Seven Judge Bench of the Supreme Court in India Cement Ltd. v. State of T.N. [(1990) 1 SCC 12]:
"23. In Asstt. Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. this Court reiterated the principles laid down in S.C.Nawn case and held that Entry 49 of List II was confined to a tax that was directly on land as a unit. In Second Gift Tax Officer, Mangalore v. D.H. Nazareth it was held that a tax on the gift of land is not a tax imposed directly on land but only on a particular user, namely, the transfer of land by way of gift. In Union of India v. H.S. Dhillon, this Court approved the principle laid down in S.C. Nawn case as well as Nazareth case. In Bhagwan Dass Jain v. Union of India this Court made a distinction between the levy on income from house property which would be an income tax, and the levy on house property itself which would be referable to Entry 49 List II. It is, therefore, not possible to accept Mr. Krishnamurthy Iyer's submission and that a cess on royalty cannot possibly be said to be a tax or an impost on land. Mr.Nariman is right that royalty which is indirectly connected with land, cannot be said to be a tax directly on land as a unit. ................................"
(Emphasis supplied)
In the light of the above observations of the Supreme Court as to the scope of Entry 49, a tax on a particular activity in connection with land (in the present case it is Construction) cannot be said to be a tax directly on land to fall within the ambit of Entry 49 of List II of the Seventh Schedule of the Constitution. I may add that the law with respect to a subject might incidentally affect another subject in some way; but that is not the same thing as the law being on the latter subject. In this context, it is relevant to refer to the following observations made in Federation of Hotel and Restaurant v. Union of India[(1989) 3 SCC 634] on 'aspect theory' and 'overlapping':
"31. Indeed, the law 'with respect to' a subject might incidentally 'affect' another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects. Lord Simonds in Governor General in Council v. Province of Madras in the context of concepts of Duties of Excise and Tax on Sale of Goods said:
"... The two taxes, the one levied on a manufacturer in respect of his goods, the other on a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale...."
(Emphasis supplied)
In my opinion, as stated above, the subject matter relating to the impugned provisions will not fall within the ambit of Entry 49 of List II of the Seventh Schedule of the Constitution. Nature of the levy is determined on the basis of the taxable event. By the two impugned explanations, certain services are made exigible to service tax. It is a tax with respect to the services rendered and not with respect to lands and buildings. In my opinion, an element of service is certainly involved in construction of flats and buildings. Similarly, in the context of property based services, it cannot be said that no element of service at all is involved in providing a preferential location to a buyer. Accordingly, the subject matter of the impugned provisions will fall within the ambit of Entry 92C of List I which was inserted by the Constitution (Eighty-eighth Amendment) Act, 2003 w.e.f. 19th February 2004 and in any case, it would certainly fall under the residuary entry i.e. Entry 97 of List I (Union list). I may add that even assuming that no service element is involved in providing a preferential location, clause (zzzzu) will not fall to the ground for want of legislative competence as it is not a law with respect to any of the matters in List II. Hence, it cannot be said that Parliament had no power to enact clause (zzzzu), as its power to make law extends to any matter not covered by List II. In any event, as the impugned provisions are not with respect to any of the matters enumerated in List II, Parliament's power to levy service tax could be traced to its residuary power of Legislation under Article 248 read with Entry 97 of List I of the Seventh Schedule of the Constitution. It is useful to refer to a Seven judge Bench decision of the Supreme Court in Union of India vs. H.S.Dhillon (AIR1972 SC 1061), wherein it was held that the power of Parliament to make law extends to any matter not covered by List II (State list). The following observations made therein are relevant:
"59. ......................................... we have the three lists and a residuary power and therefore it seems to us that in this context, if a Central Act is challenged, as being beyond the legislative competence of Parliament, it is enough to enquire if it is a law with respect to matters or taxes enumerated in List II. If it is not, no further question arises." (Emphasis supplied)
In view of the above, the contention that Parliament lacks competence to enact the impugned provisions is devoid of merit.
8. Whether the impugned explanations are discriminatory and arbitrary:
It is true that tax laws do not fall outside the scope of Article 14. However, the Legislature enjoys a great deal of latitude in the matter of classification of objects for purposes of taxation and thus a statute is not open to attack on the ground that it taxes some persons or objects and not others. A legislature does not have to tax everything in order to be able to tax something. While applying the doctrine of classification, the Legislature is allowed more freedom of choice in the matter of taxation vis-a-vis other types of laws. In this context, it is useful to refer to a Five judge Bench decision of the Supreme Court in East India Tobacco Co. vs. State of Andhra Pradesh (AIR 1962 SC 1733) wherein a tax imposed on sales of Virginia tobbaco but not on Country tobacco was held to be not violative of Article 14 on the ground that the former has certain features which distinguish it from the latter. The following observations made therein are relevant:
"(4) It is not in dispute that taxation laws must also pass the test of Art. 14. That has been laid down recently by this Court in Kunnathat Thathunni Moopil Nair v. State of Kerala. AIR 1961 SC 552. But in deciding whether a taxation law is discriminatory or not it is necessary to bear in mind that the State has a wide discretion in selecting the persons or objects it will tax, and that a statute is not open to attack on the ground that it taxes some persons or objects and not others. It is only when within the range of its selection, the law operates unequally, and that cannot be justified on the basis of any valid classification, that it would be violative of Art. 14. The following statement of the law in Willis on "Constitutional Law" page 587, would correctly represent the position with reference to taxing statutes under our Constitution:-
"A State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably .... .... .... .. The Supreme Court has been practical and has permitted a very wide latitude in classification for taxation."
In the light of these principles, we may now proceed to discuss whether the impugned Act is repugnant to Art. 14 of the Constitution. The point for consideration is whether there is in fact a real distinction between Virginia tobacco and other tobacco called country tobacco 'Nattu tobacco.' If there is, then the Act is valid, if not it must be held to be unconstitutional. The finding of learned Judges on this point is as follows:-
.................................................................. ........................................
Thus it will be seen that Virginia tobacco has features which distinguish it from country tobacco, and can be treated as a class in itself. It will therefore be within the power of the State to impose a tax on the sales of Virginia tobacco while exempting the country tobacco.
(5) It is argued for the appellants that to repel the charge of discrimination in taxing only Virginia tobacco, and not the country tobacco, it is not sufficient merely to show that there are differences between the two varieties, but that it must further be shown, as held in Budhan Choudhry v. State of Bihar, 1955-1 SCR 1045: ((S) AIR 1955 SC 191) and Ram Krishna Dalmia v. S. R. Tendolkar, 1959 SCR 279: (AIR 1958 SC 538), that the differentia has reasonable relation to the object of the legislation ............................................................................................ .................................................. We are unable to agree with this contention. If a State can validly pick and choose one commodity for taxation and that is not open to attack under Art. 14, the same result must follow when the State picks out one category of goods and subjects it to taxation.
...................................................
(8) In our judgment the differences which exist between the Virginia and 'Nattu' country tobacco, as found by the learned Judges, are materials on which the State could treat Virginia tobacco as forming a class by itself for purpose of taxation, and the impugned legislation must be held to be not obnoxious to Art. 14 of the Constitution."
(Emphasis supplied)
Coming to the contention urged, it cannot be said that sale or intended sale of a completed building after grant of completion certificate by the Competent Authority stands on the same footing as that of a building, before, during or after construction but before grant of completion certificate. Hence, it cannot be said that equals are being treated unequally or that the classification does not rest on a valid basis. The 'Completion Certificate' is the differentia which keeps apart the constructions to which the Act does not apply. I find nothing discriminatory or arbitrary in excluding completed constructions, from the purview of service tax, for which no sum is received from the prospective buyer before grant of completion certificate. The reason for exclusion appears to be that no element of service relating to the construction is involved after completion of the Construction.
9. Re. Measure of tax: The contention of the learned counsel for the petitioners that the measure of tax could be only the service component and not the gross amount charged for the construction cannot be accepted. The subject of a tax is different from the measure of tax. It is a well settled position in law that the measure of tax cannot affect the nature of tax. The measure of tax is also not notional as contended; it is the gross value of construction charged by the service provider. Hence, the judgment of the Supreme Court in Rajasthan Chemists Association is of no assistance to the petitioners. Any standard having a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of the levy. Character of the levy being service tax on Construction, the gross value of construction clearly will have nexus with the element of service involved in the construction. It is stated that presently 75% of the gross value of Construction is exempted from service tax vide notification dated 22.06.2010, issued by the Central Government in exercise of the power under Section 93(1) of the Finance Act, 1994. Be that as it may. As all the contentions fail, the writ petitions are liable to be dismissed and are accordingly dismissed.
Petitions dismissed.