Sale of flats not being a ‘service’, builders not liable for registration and payment of Service Tax

2. The petitioner constructs buildings and sells
premises/flats in such buildings. The petitioner pleaded that the transaction
between the petitioner and a flat purchaser is a transaction for sale of
premises and cannot be treated as contract for rendering service. The
consideration for the sale of premises is often paid in instalments though the
terms correlate more or less with the stage of development of construction. The
agreement for sale of such flats is stamped as ‘sale of flats’ for the entire
consideration. The agreement for sale is registered by the petitioner. The
agreement contains several details including price, area of the unit, price for
common areas, other facilities concerning the flat, etc.

3. The petitioner engages various reputed contractors for
various construction-related services, yet the construction activity is carried
out for their own purposes and not for anyone else. In some cases where land is
owned by a different person and not the petitioner, an agreement is entered into
with the land owner and this in common parlance is known as development
agreement. After acquiring all the rights of development and raising
construction thereon, constructional or developmental activity is carried out by
the petitioner for its own benefit and not for any other person. The flats are
sold in the same manner as in the case when the land is owned by the petitioner.

4. According to the Department’s affidavit, the activity
undertaken by the builders is for and on behalf of prospective buyers for
consideration of cash or deferred payment and is covered under ‘works contract’
and not ‘sale’. The Department argued that the builder has to enter into
agreement for sale before accepting money as advance/deposit when building/flat
is found only in specifications of the agreements. The saleable products not
being existent at the time of making agreement, construction is the essential
obligation of the petitioner and therefore the petitioner is to be treated as
service provider of construction of complex to the parties in compliance with
the agreements against the advance received according to the statutory
provisions provided in S. 65(105)(zzzh) of the Finance Act, 1994, which are wide
enough to include estate builders such as the petitioner. Since the agreement is
executed prior to the completion of work of construction, it is nothing else but
‘works contract’ and as such, the petitioner is liable to pay Service Tax and
the advance received makes the petitioner work for and on behalf of prospective
buyer.

5. The Court noted that the moot question in the petition
related to whether the petitioner worked as a service provider for prospective
buyers with whom the agreements were entered into OR the petitioner constructs
flats for the purpose of sale to those with whom the agreements are entered into
and proceeded to scrutinise the relevant clauses of the said agreements which
mainly contained details of instalments, the obligation of prospective buyer to
pay stamp duty and registration fee as per applicable laws, etc., the probable
time of handing over possession and the condition that possession would be
provided only after full payment of the sale price and that after payment of all
dues, a sale deed would be registered in favour of the prospective buyer as per
prevailing Stamp Act, Registration Act, Property Transfer Act, etc.

6. The Court observed that the combined reading of various
clauses of the agreement for sale made it clear that the transaction relates to
purchase and sale of premises and not for carrying out any constructional
activity on behalf of the latter. The flat purchasers are entitled for specific
performance of the contract and non-performance may lead to refund of advance
with interest by the petitioner. They also have an obligation to register the
agreement. Further, the registering authority also treats these documents as
agreement for sale/purchase of premises and not relating to construction
activity and as such, stamp duty is levied on the sale consideration.

7. The ‘selective approach’ for taxing services under Service
Tax provisions and the relevant enabling provisions of the Indian Constitution
were discussed at length by the Court. Similarly, the provisions of the Finance
Act, 1994 relating to charge of Service Tax, payment of Service Tax,
registration, relevant provisions of ‘taxable service’ and in particular S.
65(30a), S. 65(25b), S. 65(91a), S. 65(105)(zzq) and 65(105(zzzh) were
discussed. The Court further noted that the term ‘service’ is not defined by the
Finance Act, 1994 by way of any explanation or otherwise or by the rules framed
thereunder. The Court therefore examined the definition of service under the
Income-tax Act, 1961, under the MRPT Act, 1969 as well as under the Consumer
Protection Act and under the FEMA and concluded that one can safely define
‘service’ as an act of helpful activity, an act of doing something useful,
rendering assistance or help, service does not involve supply of goods;
‘service’ rather connotes transformation of goods/user of goods as a result of
voluntary intervention of ‘service provider’ and is an intangible commodity in
the form of human effort. To have service, there must be a ‘service provider’
rendering services to some other person(s), who shall be recipient of such
‘service’.

8. Under the Finance Act, 1994,Service Tax is levied on taxable service only and not on service provider. According to the Court, the relevant legal provisions of Service Tax did not support the view that the petitioner provided any service to anyone and that the activity carried out by a person for his own benefit cannot be termed as service rendered. The Court took note of Circular No. 80/10/2004, dated September 17, 2004, which clarified that estate builders constructing buildings/premises for themselves were not covered within the ambit of construction service. Further, the decision in the case of K. Raheja Development Corporation v. State of Karnataka, (2005) 5 SCC 162 was discussed and was distinguished by noting that this decision was rendered on the facts of its own case. The Court emphatically stated that until the time the sale deed is executed, the title and interest, including the ownership and possession in the construction made remained with the petitioner company. The fact of payment of advance and instalments does not lead to the inference that petitioner company is making construction for and on behalf of the probable allottees. The Court also stated that the decision of the Apex Court in K. Raheja’s case (supra) considered the issue relating to Sales Tax and not relating to Service Tax. According to the Court, as distinguished from the facts of K. Raheja (supra) in the present case, there was no material to show that the petitioner company constructed the premises on behalf of the prospective allottees and also stated that similar view was taken by the Allahabad High Court in the case of Assotech Realty Pvt. Ltd. v. State of Uttar Pradesh, (2007) 8 VST 738.

9. Further, importantly reliance was made on Circular No. 332/35/2006-TRU, dated August 01, 2006 which clarified that the builder/promoter/developer undertaking construction activity on one’s own account did not have relationship of service provider and service recipient with anyone and therefore the question of providing taxable service did not arise. Citing extracts from CIT v. Aspinwall & Co. Ltd., (1993) 204 ITR 225, Keshavji Raoji & Co. v. CIT, (1990) 183 ITR 1 and a catena of other decisions, the binding nature of the circular was affirmed by the Court and it finally contended that the aforementioned Circular dated August 01, 2006was binding on the Department which in more than abundant terms made it clear that a builder /promoter / developer undertaking construction activity for its ownself did not provide any taxable service. The material placed by the petitioner clearly showed that the activity undertaken by them is their own work and they only sold the completed construction work to the buyers. Any advance/deposit received was against consideration of sale of the flat/premises and not for obtaining service from the petitioner.

Note: The above decision is in complete contrast to the Authority for Advance Ruling’s (AAR) decision in case of Hare Krishna Developers 2008 (10) STR 341 (AAR) reported in June 2008 issue under this feature on almost identical facts and clauses of the agreements under both the cases. The ruling of the AAR being binding only on the applicant, the decision of the High Court assumes significant importance. Major contrasting features of the two decisions pronounced by the two separate judicial authorities are provided below:

1. In both the cases, the agreement with the prospective buyer relates to SALE OF UNITS. However, in Hare Krishna’s case (supra), it is contended by the authority that the point of time at which the ownership gets transferred will not be determinative of applicant’s liability to pay Service Tax. The words ‘in relation to’ used in the context of ‘construction of the complex’ are of widest import and are capable of encompassing builders/developers. AAR noted that “package of services is necessarily involved in the activity viewed as a whole”. Not merely construction part of the activity that matters, the co-related and incidental services are all embraced within the scope of the definition and the builder / developer does everything to honour its commitment to the customer (booker) from whom it receives valuable consideration in instalments. As against this, in case of Magus narrated above, distinguishing features are as follows:

2. In case of Hare Krishna, the Department’s reliance on Raheja’s case [2006 (3) STR 337 (SC)], as alternative contention was not discussed or considered while delivering for judgment, as chief reliance was placed on the fact that transaction was regarded as that of construction services in terms of clause (zzzh) and in terms of Classification Rules, ‘construction service’ was the correct classification entry even if the service could be classified as works contract service as per K.Raheja’s case (supra) and therefore, alternative contention was not gone into. As against this, Gauhati High Court distinguished K. Raheja’s decision on two counts: Firstly, the judgment was given on its own facts and secondly, that it related to SalesTaxand not ServiceTaxand therefore was not considered relevant.

3. In Hare Krishna’s case, the Board’s Circular dated August 23, 2007only was considered. Further, the said Circular was interpreted to be distinguishing the applicant’s case from the person/builder who sells flat after completing the entire construction on his own and then selling the same. Whereas in Magus’s case, the Circular No. 80/110/2004 of September 17,2004as well as the Circular of August 01, 2006 were discussed and the latter Circular was heavily analysed and relied upon. These Circulars were not referred to in the former’s case.