By Puloma Dalal, Bakul B. Mody, Chartered Accountants
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I. Authority for Advance Ruling (AAR) :
Ruling No. AAR 13 (ST)/2008, dated 7-4-2008.
Construction of residential complex : Liability of builders :
In re : Hare Krishna Developers [2008 (10) 341 (AAR)]
(i) The applicant was a partnership firm desirous of setting
up a joint venture with a non-resident to develop residential complex in Gujarat
on the following lines :
Complex of more than 12 residential units on its own land
and expense where booking of units would be done on the receipt of token
amount. In the agreement to be executed, full value of the unit would be
indicated. Possession would be provided on receipt of full amount and
completion of construction. The construction would be carried out under two
scenarios :
- by appointing labour contractors.
(ii) The questions for consideration of AAR were :
- Whether booking of units by the applicant considered taxable service in both
the scenarios above i.e., under the category of construction of
residential complex service as per S. 65(105)(zzzh) ?
(iii) The applicant contended that in both the cases,
the construction was their own and so was ownership until handing over
possession and since the development of property was for self, no service
provider-receiver relationship emerged. CBEC Circular No. 96/7/2007-ST of
23-8-2007 in support of such claim was referred to. Further, the Allahabad High
Court’s decision in Assotech Reality’s case [2007 (7) STR 129 was relied upon,
contending that activities in both the cases were not ‘works contract’.
(iv) Contention of the Department as against the above was
that the proposed activity was either taxable as ‘construction of residential
complex’ service or ‘works contract service’. However, the former being more
specific and also that the relevant clause (zzzh) occurred before (zzzza), by
virtue of rules of interpretation laid down in S. 65A, construction service was
the correct classification. Further, that the Board’s circular referred above
did not provide benefit to the activity as it refers to builder/developer
completing construction on his own and then entering into transaction with the
buyer, thus making a sale of the constructed unit. Also that decision of
Assotech Reality (supra) did not fall in line with the law enunciated by
the Supreme Court in Raheja Development Corporation v. State of Karnataka,
2006 (3) STR 337 (SC) and finally whether construction through own labour or
engaging contractors did not alter the position.
(v) AAR examined and discussed the agreement for booking/sale
of units in the self-developed ‘housing project’ in detail and it was noted by
the authority that actual sale of land together with constructed unit would take
place on completion of construction and subject to payment of full
consideration.
The said agreement for sale inter alia contained the
following salient features :
- Construction would be as per approved plan under control and supervision of
the developer and right, title and interest in land and construction would
vest in builder until delivery of possession.
- Total consideration and timing of installments to be paid by the
booker/purchaser.
- The booker to become member of the society to be set up to provide maintenance
of the unit and common infrastructure facility against contribution for the
same on actual basis.
- Booker could cancel the booking if desired at any stage and would be entitled
to refund with interest at agreed rate.
- Builder to be responsible for obtaining requisite permissions for drainage,
water connection, power, building use, etc. and booker to sign relevant papers
for the same.
- Service Tax applicable, if any, would be paid by the booker.
vi) In the above context, Board’s Circular of 23-8-2007 (supra) was distinguished stating that the classification pertained to the case where developer and buyer met only after the construction was completed and therefore, the relationship was purely of seller and buyer, whereas the proposed activity was qualitatively different. AAR contended further that the whole purpose of inserting sub-clause (zzzh) in S. 65(105) appeared to being within its fold the services of builders / developers in connection with construction of complexes. Making construction as per plan, design and specifications, providing amenities and a host of facilities would undoubtedly constitute services to be provided by the applicant. The timing of transferring ownership would not determine liability to pay tax. Although from one angle, the applicant can be said to be constructing unit on its own and not exactly on behalf of the booker, the fact remains that honouring of commitment to booker is done from where valuable con-sideration is received in instalments. Construction and allied services is referable to the agreement and cannot be viewed in isolation. Possibility of booker terminating is not material for evaluating true nature of transaction. The authority contended that correct classification of the activity was ‘construction of residential complex’ and it was difficult to accept the contention that it was a self-service and there was no recipient of service, as such argument ‘had no basis, whereas the words used in the construction of construction service ‘in relation to’ were of wide import and a greater nexus was established by these words between the construction and services implicit in such construction. Thus, not merely construction was relevant, but correlated and incidental services were all embraced within the scope of (zzzh).
Further, AAR found force in contention of the Departmental Representative that the Allahabad High Court in Assotech (supra)’s case making distinction from K. Raheja’s case (supra) was not valid and the ratio of the Supreme Court was not correctly appreciated by the learned Judges. However, it was stated by AAR that this alternative contention of the Revenue need not be gone into.
Accordingly, it was ruled that applicant was liable to pay Service Tax for the proposed activity in both the scenarios under the category of ‘construction of residential complex’ service.
