ADARSH KUMAR GOEL, J.

1. This petition seeks declaration that explanation to Section 65(zzzh) of the Finance Act, 1994 (‘the Act’) and CBEC Circular No. 334/3/2010-TRU dated 1.7.2010 are unconstitutional.

2. Case of the petitioner is that it is engaged in development and sale of residential flats and enters into agreement for construction of flats with the contractors. The said flats are ultimately sold to the customers. Service tax is leviable as per the provisions of the Act on taxable services as defined under Section 65. Section 65 (zzzh) includes service in relation to construction of a complex. Definition of construction of a complex under Section 65(30a) refers to construction of a new residential complex and other activities mentioned therein. Residential complex is defined under Section 65(91a) as comprising of buildings, common areas and other facilities. As per the impugned circular, service tax is leviable on the builders even when they enter into an agreement for sale and receive payment without issuance of completion certificate. As per explanation added to Section 65(zzzh), vide Finance Act, 2010, construction of complex by a builder or any person authorized by the builder, is deemed to be service by the builder to buyer.

3. According to the petitioner, the explanation widens the scope of levy beyond the concept of service by including therein sale. Taxing of sale and purchase was beyond the legislative competence of the Union Legislature. If construction activity is not undertaken by a builder, then the builder cannot be considered to be a service provider in relation to service of construction activities.

4. We have heard learned counsel for the petitioner who reiterates the contentions raised in the petition and also submits that some matters have been admitted in Bombay High Court on the issue and interim orders have also been granted. He also relies upon judgment of Gauhati High Court in Magus Construction Pvt. Ltd. v. Union of India 2008(11) STR 225, wherein it was held that when a person provides service of construction by construction activities to himself, it could not be held that he was providing any service, in absence of service provider in relation to a service recipient.

5. Before considering the question raised, it will be appropriate to refer to the relevant statutory provisions which are as under:-

Section 65(zzzh):

“any service provided or to be provided to any person, by any other person in relation to construction of complex.”

Section 65(30a):

“Construction of complex means-

(a) Construction of a new residential complex or a part thereof; or

(b) Completion and finishing services in relation to residential complex such as glazing plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fitting and other similar service or

(c) Repair, alteration, renovation or restoration of or similar services in relation to ‘residential complex’.

Section 65(91a):

“residential complex means any complex comprising of -

(i) a building or buildings, having more than twelve residential units;

(ii) a common area and

(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout and the said construction of such complex is intended for personal use as residence by such person.”

Explanation to Section 65 (zzzh):

“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 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 a person authorized 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.”

6. Service tax has been introduced by Finance Act, 1994. As observed in All India Federation of Tax Practitioners and others v. Union of India and others, (2007) 7 SCC 527, “the source of the concept of service tax lies in economics. It is an economic concept. It has evolved on account of service industry becoming a major contributor to the GDP of an economy, particularly knowledge-based economy. With the enactment of the Finance Act, 1994, the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of Article 268-A in the Constitution vide the Constitution (Eighty-eighth Amendment) Act, 2003”.

7. The scope of legislative entry cannot be taken to be limited by narrow interpretation. The entries in the lists being merely topics or fields of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The words and expressions employed in drafting the entries must be given the widest-possible interpretation. A power to legislate as to the principal matter specifically mentioned in the entry shall also include within its expanse the legislations touching incidental and ancillary matters. (Hoechst Pharmaceuticals Ltd. v. State of Bihar, (1983) 4 SCC 45).

8. Activity sought to be subjected to tax has to be as per the statutory scheme and unless there is any encroachment in the field of State Legislature, the competence of the Union Legislature cannot be questioned. This principle has been discussed elaborately in our recent judgment dated 22.11.2010 in M/s Shubh Timb Steels Limited v. Union of India and another, CWP No. 11597 of 2010.

9. No argument has been raised in the present case that by the impugned levy, there is any encroachment in the legislative power of the State Legislature, except to submit that there was element of sale which was sought to be taxed. It is not the case of the petitioner that the levy falls under Entry 54 List-II relating to sale and purchase of goods. What has been subjected to levy, in the present case, is element of service of construction. In this view of the matter, the impugned levy cannot be held to be beyond the legislative competence. Service and sale may both be included in a transaction. Considering the scope of entry 54 List II, it has been held that the said entry was a source of levy of tax only on transaction of sale and not in a composite transaction of sale and service or transaction of service. This aspect was considered in State Of Madras v. Gannon Dunkerley & Co., (Madras) Ltd, AIR 1958 SC 560 and several decisions thereafter including in Imagic Creative (P) Limited v. CCT, (2008) 2 SCC 614. Parameters applied to Entry 92C read with Entry 97 of List I are different from those applied to Entry 54 List II. Taxation power of the Union Legislature extends to any matters not covered by taxing entries in List II and is not limited by specified entries. As held in T.N Kalyana Mandapam Association v. Union of India, (2004) 5 SCC 632 that service tax is tax on service and not on service provider. Quantification of tax should not be confused with the nature of tax. In Union of India v. Bombay Tyre International Limited, (1984 (1) SCC 467, it was observed:-

“13. While the levy in our country has the status of a constitutional concept, the point of collection is located where the statute declares it will be. We shall return to this later when it is necessary to consider a submission in regard to the effect of transactions to or through “related persons”…….

14…… The point was considered by this Court again in D.G Gouse and Co. v. State of Kerala, (1980) 2 SCC 410 where reference was made to the measure adopted for the purpose of the levy of tax on buildings under the Kerala Building Tax Act. The Court examined the different modes available to the Legislature for measuring the levy, and upheld the action of the Legislature in linking the levy with the annual value of the building and prescribing a uniform formula for determining its capital value and for calculating the tax. In the course of its judgment, the Court cited with approval a passage from Seervai's Constitutional Law of India, Second Eddn. Vol. 2 at p. 1258:

“… Another principle for reconciling apparently conflicting tax entries follows from the fact that a tax has two elements: the person, thing or activity on which the tax is imposed, and the amount of the tax. The amount may be measured in many ways; but decided cases establish a clear distinction between the subject-matter of a tax and the standard by which the amount of tax is measured. These two elements are described as the subject of a tax and the measure of a tax….”

It is, therefore, clear that the levy of a tax is defined by its nature, while the measure of the tax may be assessed by its own standard. It is true that the standard adopted as the measure of the levy may indicate the nature of the tax but it does not necessarily determine it. The relationship was aptly expressed by the Privy Council in Re, A Reference under the Government of Ireland Act, 1920 and Section 3 of the Finance Act (Northern Ireland), 1934, , ILR 1936 AC 652,when it said:

“… It is the essential characteristic of the particular tax charged that is to be regarded, and the nature of the machinery — often complicated — by which the tax is to be assessed is not of assistance, except insofar as it may throw light on the general character of the tax.”

The case was referred to by a Constitution Bench of this Court in R.R Engineering Co. v. Zila Parishad, Bareilly, (1980) 3 SCC 330 where the relationship was succinctly described thus: [SCC p. 336, para 16]

“It may be, and is often so, that the tax on circumstances and property is levied on the basis of income which the assessee receives from his profession, trade, calling or property. That is, however, not conclusive on the nature of the tax. It is only as a matter of convenience that income is adopted as a yardstick or measure for assessing the tax. As pointed out in Re, A Reference under Government of Ireland Act, ILR 1936 AC 652, the measure of the tax is not a true test of the nature of the tax. Therefore, while determining the nature of a tax, though the standard on which the tax is levied may be a relevant consideration, it is not a conclusive consideration,….”

The principle was reaffirmed by this Court in Hingir-Rampur Coal Co., Ltd. v. State of Orissa, AIR 1961 SC 459 where the form in which the levy was imposed was held to be an impermissible test for defining in itself the character of the levy. It was observed:

“… the mere fact that the levy imposed by the impugned Act had adopted the method of determining the rate of the levy by reference to the minerals produced by the mines would not by itself make the levy a duty of excise. The method thus adopted may be relevant in considering the character of the impost but its effect must be weighed along with and in the light of the other relevant circumstances….”

It is apparent, therefore, that when enacting a measure to serve as a standard for assessing the levy the Legislature need not contour it along lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of excise is a levy on goods manufactured or produced the value of an excisable article must be limited to the manufacturing cost plus the manufacturing profit. We are of opinion that a broader based standard of reference may be adopted for the purpose of determining the measure of the levy. Any standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of the levy. In our opinion, the original Section 4 and the new Section 4 of the Central Excises and Salt Act satisfy this test.”

10. This being the legal position, contention that there is no element of service of construction involved in a builder selling a flat cannot be accepted. Whether or not service is involved has to be seen not only from the point of view of the builder but also from the point of view of the service recipient. What is sought to be taxed is service in relation to construction which is certainly involved even when construction is carried out or got carried out before construction and before flat is sold.

11. In Magus Construction Pvt. Limited, challenge was to a notice requiring registration under section 69 of the Act on the ground that construction service was rendered by the builder to itself prior to sale of the flat and no construction service was rendered to the buyer. Transaction with the buyer was of sale. Learned Single Judge of Gauhati High Court held that in view of circular dated 1.8.2006, issued by the CBDT, there could be no question of taxable service when a builder undertakes construction work without engaging services of any one else. In our view, the said circular will not apply when service recipient is purchaser of a flat. As already discussed, the levy of tax is on service and not on service provider and construction services are certainly provided even when a constructed flat is sold. Taxing of such transaction is not outside the purview of the Union Legislature as the same does not fall in any of the taxing entries of State list.

12. In view of above, we do not find any ground to declare the impugned levy to be unconstitutional.

13. The petition is dismissed.

(ADARSH KUMAR GOEL) JUDGE

(AJAY KUMAR MITTAL)

Ashwani/gs

December 01, 2010

JUDGE