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Constitutional validity of Service Tax provisions upheld

2nd February, 2012

Specified provisions of the Service Tax law were put to test but their constitutional validity was upheld again. While the matter before the Allahabad High Court pertained to the validity of provisions concerning import of services i.e. Section 66A of the Finance Act, 1994 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, the Bombay High Court upheld the validity of an explanation inserted in relevant provisions on Construction Services and the newly introduced Preferential Location Service in relation to construction of residential or commercial complex.

Allahabad High Court in its judgment dated 16th December, 2011 (Writ Tax No. 1243-44 of 2010) held that the provisions relating to the import of services, whereby Service Tax liability is cast on the importer, do not suffer from the vice of unconstitutionality. It rejected the pleas of lack of legislative competence and extra-territorial operation of laws.

On Construction Services, explanation as inserted by the Finance Act, 2010 in Section 65(105)(zzq) and (zzzh) of the Finance Act, 1994 and the new service of preferential location as provided in Section 65(105)(zzzzu) were upheld by the Bombay High Court in it judgment dated 20th January, 2012 (W.P. No. 1456 of 2010 and others). The Court observed that the legislative intent underlying the explanation was to bring parity in tax treatment according to which unless entire consideration is paid by the buyer after completion of construction, the activity will be deemed as service provided by the builder.  

Noting that legislature has power to bring explanation which actually expands the purview and ambit of the provisions, the Court held that the fact that the service is rendered in the context of location, does not make it a tax on land within the meaning of Entry 49 of List II of the Constitution of India.
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