By TIOL News Service

CHENNAI, APR 25, 2016: THE Petitioner and his brothers are the owners of land. They entered into a Joint Development Agreement with M/s LCS City Makers Pvt Ltd. The Petitioners get 65% of the constructed area in exchange of 35% of the constructed area along with land share given to the Developer. The Developer demanded Service Tax from the Petitioner in respect of 65% area. It is the case of Petitioner that the transaction does not attract Service Tax. Hence, the Petitioner filed a Writ Petition seeking to declare that the CBEC Circular No 151/2/2012 dated 10.02.2012 and the TRU clarification dated 20.01.2016 as unconstitutional and ultra vires the powers of the Parliament.

After hearing all sides, the High Court held:

+ At the outset, the writ petition is not maintainable, in as much as the law makes the service provider namely the fifth respondent (LCS) liable to pay service tax. It is always open to the service providers either to pass on the burden to the recipient of the services or not to pass it on. Under Clause 23 of the agreement for development, the petitioner and his siblings, who are the service recipients, agreed to take the burden to the extent they are liable. Therefore, the circulars, cannot be challenged by the petitioner.

+ The contention that the person, to whom the burden of tax is ultimately passed on, is entitled to challenge a levy, if accepted, would lead to disastrous consequences. Any increase in the incidence of sales tax affects all consumers of all products. Therefore, any person will be entitled to come and challenge the increase in the levy on the ground that the manufacturer or dealer will eventually pass on the burden only to the ultimate consumer. Millions of consumers are entitled to come and challenge such levies, if such a contention is accepted. Therefore, the petitioner has no locus standi to challenge the above circulars.

+ It is possible for the Department to contend that a person, who is the owner of the land, had engaged a contractor to put up a construction for themselves upto a particular limit. Since the cost of construction could not be paid by the owner in the form of cash, they agreed to exchange the undivided share of the land with the contractor. If viewed from that angle, what the developer had done is actually the service of construction. Therefore, it is not an easy proposition that it was a transfer of immovable property by way of sale or exchange.

+ The agreement gave rise to a bouquet of rights for the fifth respondent builder. One was to put up a construction of an area, a part of which could be sold by them to third parties. They could be sold not only as such, but also along with the undivided share of land. Those parties had certainly availed the services of the fifth respondent as a service provider. The petitioner did not stand on a different footing than those persons. Therefore, the challenge of the petitioner to the circular, apart from the question of locus standi, does not merit acceptance.

Accordingly, the High Court dismissed the Writ Petition.

(See 2016-TIOL-824-HC-MAD-ST)