Whether construction of residential complexes on own land and agreement to sale with prospective clients will be liable for service tax before 1.7.2010?

PJ/Case Laws/2012-13/1214

Case:-COMMISSIONER OF CENTRAL EXCISE, KANPUR Vs 1) M/s VEE AAR DEVELOPERS PVT LTD, 2) M/s PRAGATI STRUCTURES PVT LTD, 3) M/s SOCIETY BUILDERS PVT LTD.

Citation: - 2012-TIOL-1083-CESTAT-DEL

Issue: - Whetherconstruction of residential complexes on own land and agreement to sale with prospective clients will be liable for service tax before 1.7.2010?

Brief fact: - The Respondents constructed residential complexes on their land and sold the residential units in such complexes to customers. Before doing the construction activity, they entered into agreement for sale of residential units and also took advances from their prospective customers. They did not pay any service tax on the activity based on the reasoning that the building was being constructed on their own land and hence the activity of construction was for their own benefit and as such, it could not be considered as a service rendered to the prospective customers.

Revenue was of the view that such activity was undertaken for the benefit of prospective buyers against the consideration received and the respondent should have paid service tax on such activity under the heading "construction of complex" made taxable under Section 65(105) (zzzh) of Finance Act, 1994. Revenue issued show cause notices for recovery of service tax short paid for the period 16.6.05 to 25.3.06. After due proceeding, the demands were confirmed along with interest and penalty.
Aggrieved by the order, the Respondents filed appeal with the Commissioner (Appeals) who upheld the contention of the respondents that in these cases, there was no service that was being rendered by the Respondents to another parties and as such, service tax need not be paid.
Aggrieved by the order of the Commissioner (Appeals), the Revenue has filed these appeals.

Appellant Contention:- Thecontention of Appellant (Revenue) is that though the sale of the flats took place after completion, the respondents had taken advances from prospective buyers. Therefore, there was service that was being rendered to the prospective buyers. They rely on the following decisions namely:-
1. Mokha Builders & Promotors Vs CCE 2008 (10) STR 566 (Trib) = (2008-TIOL-547-
CESTAT-DEL)
2. M/s Hare Krishna Developers 2008 (10) STR 341 (AAR) = (2008-TIOL-03-ARA-ST)
3. G.S. Promoters Vs UOI 2011 (21) STR 100 (P&H) = (2010-TIOL-813-HC-P&H-ST)

Respondent Contention:- The Respondents has opposed the prayer of revenue vide submission that CBEC had clarified in its circular No.332/35/2006-TRU dated 1.8.06 and No. 19/7/07-ST date 23.8.07 that when flats were constructed on the land belonging to a builder and flats are sold after completion of construction, no service tax will be leviable. It is their contention that the ownership of the property is passed on by a sale deed only after the construction is complete. They pay stamp duty for the entire constructed value of the flats and this situation is different from a situation where undivided rights in a land are registered in the names of prospective buyers and thereafter construction is done for the benefit of land owners.

The Counsel relies on the following decision of the High Courts in the matter:-
i) Magus Construction Pvt Ltd Vs Union of India 2008 (11) STR 225 (Guj) = (2008-TIOL-321-HC-GUW-ST)
ii) Assotech Realty Pvt Ltd Vs State of UP 2007 (7) STR 129 (All) = (2007-TIOL-297 HC-ALL-CT

The Counsel also submits that the entry in Section 65(105)(zzzh) was amended by Finance Act, 2010 to add an explanation under the entry, to the effect that in case of activity of the nature that is considered in these appeals also will be covered as service. The respondents contest that the explanation causes penal consequence to the respondents and hence cannot be interpreted to have retrospective effect and the explanation can take effect only from 1.7.2010 when the said explanation was added in the said entry. The Counsel relies on the decision of Apex Court in the case of UOI Vs Martin Lottery Agencies 2009 (14) STR 593 (SC) = (2009-TIOL-60-SC-ST). The Counsel submits that since the CBEC had clarified the position that no service tax was payable, and the respondents had concluded their contracts with the buyers, relying on such clarification, the demands for service tax now being made are not justified. Therefore, he pleads that the demands may be set aside.

Reasoning of Judgment:The issue whether the said explanation had retrospective effect was not considered in the G.S. Promoters case. It was about the constitutional validity of Explanation added under 65(105)(zzzh). In the case of Mokha Builders, the issue before the Tribunal was refund of service tax already collected in such situations where Tribunal gave decision in favour of Revenue. On the issue now under consideration, the decision of the Advance Ruling Authority in the case of Hare Krishna Developers is directly on the issue and is in favour of Revenue whereas the decision of Gauhati High Court in Magus Constructions Pvt Ltd is also directly on the same issue giving a decision against Revenue. The decision of the Allahabad High Court in the case of Assotech Realty Pvt Ltd is also directly on the issue though in the matter of interpretation of works contract for the purpose of levy of VAT. Therefore this is a matter involving conflicting decisions by judicial forums. So the Tribunal decided the matter by following the hierarchy of Courts i.e. the decisions of High Courts should prevail over decision of the Tribunal and Advance Ruling Authority. Therefore Tribunal is of the view that during the impugned period, the activity in question could not be considered as service and subjected to service tax. So the appeals filed by Revenue are rejected.

Decision:- Appeals filed by Revenue are rejected

Comments:- This issue was revolving around the reality industry for a long time. The explanation entered in “residential construction” and “commercial construction” industry from 1.7.2010 and service tax was imposed on the same. But what will happen to prior transaction. Even the Board has clarified that the service tax is not applicable on such transactions. But the field formations did not agree. It resulted in this litigation. Even there are different verdicts on this issue by various authorities. But by this decision, it is clear that there is no service tax on the same. Let us hope that the department does not go in appeal and this matter is settled. Even the demand is for past period and everybody is paying tax for further period.

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PJ/Case Laws/2012-13/1214

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