R S Sharma : High Court okays service tax on sale of flats
Punjab and Haryana High Court vide a recent Ruling AIT-2010-574-HC in C.W.P. No.21427 of 2010; has upheld constitutional validity of service tax levied on sale of Residential Flats with effect from 1st July 2010 vide insertion of Explanation to Section 65(zzzh) of the Finance Act, 1994 vide Finance Act,2010.
HC dismissed the 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.
As a result; the builder is liable to pay service tax on 25 per cent of the value of flat sold by him if the flat has been booked prior to completion of construction.
The petitioner GS Promoters sought declaration that explanation to Section 65(zzzh) of the Finance Act, 1994 and CBEC Circular No.334/3/2010-TRU dated 1.7.2010 are unconstitutional.
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.
As per CBEC circular dated 1.7.2010, 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.
HC held that 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.
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. The Explanation inserted vide Finance Act,2010 provides as under:
“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.”