Will sale of undivided share in land and the construction of flats for individual buyers come within the ambit of service tax?

Case:- COTTON CITY DEVELOPERS PVT. LTD. VERSUS COMMR. OF C.EX. (S.T.), COIMBATORE

Citation:-2013(29) S.T.R. 396(Tri.- Chennai)

Brief Facts:-The Appellants are engaged in construction of Industrial and Commercial Buildings as also Residential Complexes. The appellants were registered with service tax department for providing such services and were paying service tax. On scrutiny of the S.T.-3 returns filed by the appellants the Revenue noticed that they had stopped paying service tax from October 2006 onwards. But it was noticed by Revenue that the appellants were executing two residential complexes namely Manchester Grand and Manchester Albatross. Since Revenue was of the view that the appellants should have paid service tax in respect of activities carried out by them in respect of the said two projects, proceedings were initiated for recovery of such tax by issuing show cause dated 17-8-2009. After due proceedings, a demand of Rs. 1,48,I7,194/- is confirmed against them along with interest and penalties for the period July 2006 to September 2009. Aggrieved by the order the Appellants have filed this appeal before the Tribunal along with a stay petition for waiver of pre-deposit of dues arising from the impugned order. The demand confirmed for this project is Rs. 1,44,63,900/-.

Appellant Contentions:-The Counsel for Appellants submits that the project Manchester Grand comprising of 108 residential units was constructed on a piece of land belonging to them. They got the flats constructed by engaging a contractor namely, M/s. Cotton City Constructions P. Ltd. The contractor had paid service tax of Rs. 1,80,00,000/- for the construction services rendered by them to the appellant. The appellant has only sold the Undivided Share (UDS) in land and also constructed flats to individual buyers. It is their argument that they have not provided any construction service to the individual buyers and hence they have not paid service tax on the project.
The Counsel for appellants rely on Circular F. No. 332/35/2006- TRU, dated 1-8-2006 item No. 1 in support of their contention. This is reproduced below :
"I have been directed to state the following relating to levy of service tax on "construction of complex" service falling under Section 65(105)(zzzh) and "commercial or industrial construction" service falling under Section 65(105) (zzq) of the Finance Act, 1994:

Issue

Legal Position

Is service tax applicable on Builder, Promoter or Developer who builds a Residential complex with the services of his own staff and employing direct labour or petty labour contractors whose total bill does not increase 4.0 lakhs in one P/Y?

In a case where the builder, promoter Or developer builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of such residential complex, the contractor shall be liable to pay service tax on the gross amount charged for the construction services provided, to the builder/promoter/developer under 'construction of complex' service falling under Section 65(105) (zzzh) of the Finance Act, 1994
If no other person is engaged for construction work and the builder/promoter/developer undertakes construction work on his own without engaging the services of any other person, then in such cases there is absence of service provider and service recipient.

The Counsel also argues that if it is considered that the appellants were providing any service then it is to individual flat owners. If that be so it should be considered that the individual flat owners have engaged the appellants to get their flats constructed. Then the activity falls within the exclusion of the definition of residential complex as given at Section 65(19) which is reproduced below :
"(91a) "residential complex" means any complex comprising of -

(i)     a building or buildings, having more than twelve residential units;
(ii)   a common area; and
(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system,
located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.

Explanation — For the removal of doubts, it is hereby declared that for the purposes of this clause,
(a)            "personal use" includes permitting the complex for use as residence by another person on rent or without consideration;
(b)            "residential unit" means a single house or a single apartment intended for use as a place of residence;"

The Counsel also argues that since the contractor has already paid taxes, demanding tax from them again amounts to double taxation of the same activity.There are other issues raised by the appellants. They contend that there can be no levy of service tax under the entry Section 65(105)(zzzh) because a new entry has been introduced with effect from 1-6-2007 under section 65(105)(zzzza). They also say that the entire facts were in the knowledge of the department and extended period of time cannot be invoked. They also rely on the stay order granted by CESTAT, Bangalore in the case of Mohitasham Complexes (P) Ltd v. CCE - 2011 (21) S.T.R. 551 (Tri.-Bang.). These issues were not argued at length because most of it has been considered by this Tribunal in the case of LCS Citymakers (P) Limited - 2012-TIOL-618-CESTAT-MAD.

Respondent Contentions:- The arguments of Revenue in the matter are that the sale deed for the sale of UDS of Land is first registered in the name of the individual buyers. Therefore the claim of the appellants that they were constructing a building in their own land is not correct. The construction activity took place on the land belonging to the individual customers and the submission of the appellant is not factually correct.

Revenue also argues that the clarification issued in Circular dated 1-8-2006 relied upon by the appellant is on the issue listed for clarification. The issue as may be seen from column (2) of the table in the circular was whether service tax applicable on Builder, Promoter or Developer who builds a residential complex with the services of his own staff and employing direct labour or petty labour contractors whose total bill does not increase 4.0 lakhs in one Previous Year. That is not the issue in this case. The clarification issued [column (3) of the said Table] is about the liability of a builder/promoter/developer who undertakes construction work on his own land for sale of built up flats. This is also not the case under consideration.
In the context of the argument regarding double taxation, once in the hands of the contractor and then in the hands of the builder/promoter Revenue relies on the decision of the Advance Ruling Authority in the case of M/s. Harekrishna Developers - 2008 (10) S.T.R. 357 (A.A.R.) and argues that the fact that the contractor was paying tax does not extinguish taxability of the service provided by the appellant.

The Revenue also argues that the exclusion in Section 65(91a) will apply only in a case where the complex as a whole is for the residential purpose of the person getting it constructed. In this case the individual is getting his residential unit constructed but the individuals are not getting the residential complex constructed and therefore the exclusion will not apply.
Revenue also points out that the decision in the case of Mohitasham Complexes (P) Ltd. is at stay stage. From the order it cannot be found to be a case where 'UDS in land was first sold and then construction was undertaken whereas in this case UDS in land is first sold and then construction done.

Reasoning of Judgment:- We have considered the submission from both parties and perused their record and we examined the case of the project Manchester Albatross. We have considered arguments on both sides. We note that the taxing entry reads as under:
(105) "taxable service" means any service provided or to be provided,
(a)
(zzzh) to any person, by any other person, in relation to construction of complex.

This entry will cover not just the activity of construction but all other activities in relation to construction of the complex. The actual construction activity is undertaken by the contractor for which he is liable to pay tax. Such activity is only an input service for providing services rendered by the appellants to the individual buyers of UDS in land, for constructing the flats. So prima facie liability arises in the hands of the appellants. But the appellants will be eligible for Cenvat credit on services provided by the contractor to the appellants if such services were billed to the appellants and paid for by them. But no clear facts on this count are coming out either from the Show Cause Notice, Adjudication Order or the pleadings. Though there is mention of payment of service tax of Rs. 1.8 crores by the contractor it is not made clear how the amount is quantified and shown to be relatable to services availed by the appellant in relation to service provided by him for which the impugned demand is confirmed. If the tax paid corresponds to the same service and amounts billed to the individual customers then the tax paid by sub-contractor cannot be more than the demand on the provider of service itself as it comes out from the facts of the case.

In the case of Manchester Albatross project they submit that this is a joint venture for construction of 27 Golf Villas with common facilities. The Appellants submits that in this case they were only a developer for identifying land and prospective buyers for the villas. The construction work was done by a contractor who paid tax on their services. Since the tax demand involved is only Rs. 3,53,294/- in this case we do not find it necessary to examine the issues raised in this case in detail at his prima facie stage.

We note that the appellant has been paying tax on such projects up to a time and then stopped furnishing information to the Department and paying tax without any intimation to the Department on the basis of their own interpretation of a Circular issued by CBE & C answering a different issue. In such a situation we do not prima facie agree with the argument that demand is time- barred.

In view of our prima facie analysis of the contentions on either side as explained above we do not consider this case to be one where pre-deposit should be waived. Considering that there are some arguable issues and some facts like the relevance of payments of service tax made by the contractor need to be verified we order the applicants to make a pre-deposit of Rs. 50 lakhs within 8 weeks from the date of order and report compliance on 11-10-2012.

Subject to such pre-deposit of balance dues arising from the impugned order is waived and its collection stayed during the pendency of appeal.

Decision:-Part Stay granted.

Comment:- The pre deposit was ordered based on the contention that payment of service tax by the contractor still needed to be verified and also other facts and arguable issues needed to be looked into in detail.

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