Friday, 10 June 2016

Delhi High Court on Service Tax to Builders

Delhi High Court on Service Tax to Builders

The Delhi High Court bench of Justice S Muralidhar and Justice Vibhu Bakhru in its judgment on June 3 has set aside the provision of Section 65(105)(zzzh) of the Finance Act, 1994, which includes “services” from any person to another person “in relation to construction of complex” within the ambit of service tax. The bench has also directed the service tax department to refund the tax charged from the two petitioners. The judgment applies to service tax payments towards under construction flats made before July 1, 2012 only.

Points to Note:

(1) The Petitioners were 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 and had challenged the explanation to Section 65(105)(zzzh) of the Act introduced by virtue of Finance Act 2010 as being ultra vires of the Constitution of India of the Finance Act, 1994.

(2) Hon'ble Delhi High Court held 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. The explanation to Section 65(105)(zzzh) of the Act to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service has been set aside. 

(3) The Hon'ble High Court observed that 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.

(4) The Hon'ble High Court has also directed the concerned officer of Govt of India to examine whether the builder has collected any amount as service tax from the Petitioners for taxable service as defined in Section 65(105)(zzzh) of the Act and has deposited the same with the respondent authorities. Any such amount deposited shall be refunded to the Petitioners with interest at the rate of 6% from the date of deposit till the date of refund. It is important to mention here that the Hon'ble High Court has so far issued directions specifically for the petitioners in the two petitions.  

(5) The Finance Act, 2012 brought about major changes 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. However since the amendments brought about in the Act by virtue of Finance Act, 2012 were outside the scope of present petitions, the Hon'ble High Court has not examined the amended Act. Therefore, judgment applies to service tax payments towards under construction flats made before July 1, 2012 only.

(6) The petitioners had also challenged Section 65(105)(zzzzu) of the Act which seeks to subject preferential location charges (PLC) charged by a builder to service tax. The court, however, held that service tax on the Preferential Location Charges were valid as it was a ‘service’.

Case Numbers: 
W.P.(C) 2235/2011
W.P.(C) 2971/2011

Case Title:
Suresh Kumar Bansal Versus Union of India & Ors.
Anuj Goyal & Ors. Versus Union of India & Ors.


Date of Judgement: 
3rd June 2016

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Full judgement / Order Link:

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