India: Hon'ble Delhi High Court Set Aside The Explanation To Section 65(105)(Zzzh) Of The Finance Act, 1994

The Hon'ble Division Bench of the Hon'ble Delhi High Court on 03.06.2016 has set aside the explanation to Section 65(105)(zzzh) of the Finance Act, 1994, which creates a legal fiction relating to imposition of service tax. This interesting question came before this Hon'ble Delhi High Court in Suresh Kumar Bansal vs. Union of India and Others [W.P. (C) No. 2235/2011] and Anuj Goyal and Others vs. Union of India and Others [W.P. (C) No. 2971/2011].


The Petitioners herein entered into separate agreements with a builder to buy flats in a multi-storey group housing project in Sector 76, Noida, Uttar Pradesh. The builder has in addition to the consideration for the flats also recovered service tax from the Petitioners, which was payable by the Petitioners for services in relation to construction of complex and on preferential location charges.

The Petitioners being 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 (hereafter 'the Act') and inter alia impugning the explanation to Section 65(105)(zzzh) of the Act (hereafter "the impugned explanation") introduced by virtue of Finance Act 2010, approached the Hon'ble delhi High Court as being ultra vires of the Constitution of India. The Petitioners also impugn Section 65(105)(zzzzu) of the Act which seeks to subject preferential location charges charged by a builder to service tax.

The controversy involved in these petitions relates 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.


In nutshell, the main argument of the Petitioners was that the agreements entered into by them with the builder were 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 do 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.

It was urged by the Ld Counsel of the Petitioners that the entries relating to taxation in List I and List II of the Seventh Schedule to the Constitution of India were mutually exclusive and the Parliament did not have the power to levy tax on immovable property; thus, the levy of service tax on agreements for purchase of flats was beyond the legislative competence of the Parliament.

By relying upon the decision of the Hon'ble Supreme Court in Larsen & Toubro Ltd. and Anr. v. State of Karnataka and Anr.: (2014) 1 SCC 708 it was contended that 'works contracts' have been interpreted in an expansive manner and would include an agreement entered into by a flat buyer with a builder. Consequently, the power of Parliament to levy tax would be limited to only on the service component after excluding the value of goods as well as the value of land from such contracts.

It was also argued by placing reliance on the recent decision of the Hon'ble Supreme Court in Commissioner Central Excise and Customs, Kerala and Ors. v. Larsen & Toubro Ltd. and Ors.: (2016) 1 SCC 170 that in order to levy tax, the Statute must clearly specify the three elements of taxation, namely, (i) the subject of tax; (ii) the person who is liable to tax; and (iii) the rate and measure of tax. Since Section 65(105)(zzzh) read with Section 66 of the Act did not restrict the levy of service tax only to the service element of composite contracts, the said provisions could be applied only for imposition of service tax on service contracts simplicitor and their application to composite contracts would render the said provisions unconstitutional.

It was also argued that there was no service element in preferential location charges which were levied by a builder and the same related only to the location of the immovable property and, therefore, such charges were not eligible to service tax.

On the other hand, by relying on the decisions of the Hon'ble Karnataka High Court rendered on 12th December, 2012 in W.P.(C) 24050-51/2010 (Confederation of Real Estate Developers' Association and Anr. v. Union of India & Ors) and the Hon'ble Bombay High Court delivered on 20th January, 2012 in W.P.(C) 1456/2010 (Maharashtra Chamber of Housing Industry and Anr. v. Unoin of India and Ors) wherein the challenge to the explanation to Section 65(105) (zzzh) and Section 65(105)(zzzzu) introduced by virtue of the Finance Act, 2010 was rejected. On the strength of the aforesaid decisions, it was 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.

It was contended by the Revenue that development 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 further submitted that as the gross charges include value of land and construction material, only 25% of the Base Selling Price (BSP) charged by a builder from the ultimate consumer is subjected to levy of service tax. However in case of preferential location charges, the entire amount charged by a developer is for value addition and, therefore, the gross amount charged for such services is chargeable to service tax under Section 66 read with Section 65(105)(zzzzu) of the Act.


While adjudicating the present dispute, the Hon'ble Delhi High Court not only took a pragmatic view of the matter, but also considered the historical development of Service Tax in India.

Service tax was introduced for the first time in India in 1994 by virtue of the Finance Act, 1994. In his Budget speech, the then Finance Minister explained that the service tax was being introduced on the recommendation of the Tax Reforms Committee, which had recommended imposition of tax on services as a measure for broadening the base of indirect taxes. The Constitution (88th Amendment) Bill, 2003 was introduced pursuant to which the Constitution was amended by, inter alia, insertion of Article 268A as well as Entry 92C in List-I of the Seventh Schedule to the Constitution of India. Article 268A(1) provided that taxes on services shall be levied by the Government of India and such tax shall be collected in a manner as provided in Article 268A(2) of the Constitution of India.

However, Finance Act, 1994 continues to be the legislative enactment by virtue of which service tax is levied. The said Act has been amended extensively since its enactment in 1994. Over a period of time, various services were brought within the scope of the levy of service tax by expanding the definition of "taxable services" under Section 65(105) of the Act. The Finance Act, 2012 brought about a paradigm shift in the service tax regime; with effect from 1st July, 2012, Section 65(105) of the Act was deleted and all services as defined under Section 65B (44) except as specified under Section 66D of the Finance Act, 2012 (negative list) were chargeable to service tax.

The circular bearing Circular No.108/02/2009 - ST dated 29th January, 2009 issued by the Central Board of Excise and Customs (CBEC) clarifies that the taxable service under clause (zzzh) did not cover builders who were developing and selling immovable property. However, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax. The counter affidavit filed on behalf of the Respondents also affirms the above Circular as clarifying that service tax was not applicable in respect of construction/ development by a developer/builder engaged in the business of developing real estate for selling units to prospective buyers.

The Hon'ble Court observed that the Respondents are not seeking to levy tax for taxable service under Section 65(105)(

a) of the Act (which was introduced by virtue of the Finance Act, 2007) as according to them builders engaged in constructing complexes and selling units are liable to pay service tax on the transaction with the purchaser only with effect from 1st July, 2010 by virtue of the impugned explanation to Section 65(105)(zzzh) of the Act.

Insofar as the impugned explanation is concerned, the Hon'ble Court observed that it is apparent that the same expands 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.

The Hon'ble Court further observed that 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 installments linked to the builder achieving certain specified milestones. However, but for the legal fiction introduced by the impugned explanation, such value add would be outside the scope of services because sensu strict no services, as commonly understood, are rendered in a contract to sell immovable property.

The imposition of service tax by virtue of the impugned explanation is not a levy on immovable property as contended on behalf of the Petitioner. 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.

In Union of India v. H.S. Dhillon: (1972) 83 ITR 582(SC), the Hon'ble Constitution Bench of the Hon'ble Supreme Court applied the doctrine of pith and substance while in considering the question whether the levy of Wealth Tax Act on immovable property would retrench upon the legislative field reserved for the states under Entry 49 of List II of the Seventh Schedule of the Constitution of India.

Considering all the above, the Hon'ble Court do not find any merit in the contention 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.

Therefore, it became essential for the Hon'ble Court to examine the measure of tax used for the levy. The measure of tax must have a nexus with the object of tax and it would be impermissible to expand the measure of service tax to include elements such as the value of goods because that would result in extending the levy of service tax beyond its object and would impinge on the legislative fields reserved for the State Legislatures.

In BSNL v. Union of India: (2006) 3 SCC 1, the Hon'ble Supreme Court explained the question whether value of SIM Cards could be included in the cost of services. The Hon'ble Supreme Court referred to its earlier decision in Gujarat Ambuja Cements Ltd. v. Union of India: (2005) 4 SCC 214 and quoted the following passage from the said judgment:- "This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading of the entry does not cover. If in substance, the statute is not referable to a field given to the State, the court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field."

The Hon'ble Court further observed that 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/de veloper of a complex – who is developing the complex for sale is, essentially, one of purchase and sale of developed property.

The Hon'ble also held that in the present case, neither the Act nor the Rules framed therein provide for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax. The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract.

Therefore, the Hon'ble Court ultimately held that insofar as the challenge to the levy of service tax on taxable services as defined under Section 65(105)(zzzzu) is concerned, the same is also without any merit. In view of the above, the Hon'ble Court negates the challenge to insertion of clause (zzzzu) in Sub-section 105 of Section 65 of the Act.

However, the Hon'ble Court was pleased to accept 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. Therefore, 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, by the Hon'ble Court. Additionally, the Hon'ble court also passed direction for refund along with interest.


In the present situation, where the real estate market in India needs a desperate boom, this Judgment of the Hon'ble Court, which is in favour of the Buyer, may be lucrative towards the buyers. Whatever, it may be, this judgment will give certain relief to the buyers, who are otherwise faced with so many taxes, duties and fees. Although, it would be far stretched to suggest that this will alone impact the property market, however, it is needless to say that it will definitely have persuasive value to the prospective buyers to fulfill their wish list.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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