Service Tax on Sale of Flat

[Submitted by CA. Shivani Shah,
Kolkata, West Bengal]

July 4, 2008

2008-TIOL-321-HC-GUW-ST -
Magnus Construction Pvt. Ltd. Vs. Union of India

The Petitioners are real estate agents being engaged in the business of development and sale of immovable property. They were issued a notice by the Superintendent of Central Excise, whereby they were asked to get them self registered under section 69 of the Finance Act, 1994 inasmuch as the Petitioner has been providing commercial or industrial construction service/construction of complex service.

The nature of activities of the Petitioners may be summarized as follows:

• Construct buildings and sells premises/flats in such buildings
• During the course of development of such property and construction of buildings thereon and also after completion of such construction, to enter into flat purchase agreements with various premises/flat purchasers
• Under the above, to allot and sell flat/premises, in such buildings, to the purchasers.

The Petitioners pleaded that the transaction entered into by it is a transaction of sale of flats/premises and the consideration is payable to it in installments as per the terms of the agreement. It was also put forth that:

• The terms of the agreement are, usually, co-related to the extent and the stage of the development of the constructional work
• The agreement for sale of such flats is stamped as sale of flat/premises for the entire consideration
• Before accepting money as advance payment or deposit out of the sale price, the Petitioner enters into an agreement for sale, which is registered
• The agreement contains various details and price including area of the flat, the price of the flat (the price of common areas and facilities being shown separately) and various other facilities concerning the flat
• For the purposes of carrying out construction work of the buildings, the Petitioner engages various contractors for obtaining construction related services to the Petitioner. The Petitioner also engages contractors who supply labour
• The Petitioners also carry out part of the constructional activities. However, they carry out such constructional activities for themselves and for their own purposes and not for anyone else.

It was further put forth by the Petitioner that the transaction between it and the flat purchasers is purely a transaction for sale of the flat/premises and cannot be treated as a contract for rendering of service.

• On certain occasions, instead of purchasing the land from the owners, the Petitioner enters into agreements with the owners of the land, being development agreement
• Under such agreements, the Petitioner becomes entitled to construct a building on the land and sell the flats, which may be constructed thereon
• The Petitioner acquire all the rights, title, interest and advantages of the owners including the entitlement to sell, transfer, deal with, dispose of all the premises and areas in the building or structures to be constructed by the Petitioner. The Petitioner is given the right to enter upon the land, to raise constructions thereon and sell flats constructed on such land
• Even after execution of such agreements, the constructional activities, carried out by the Petitioner, are mostly through other persons working as external contractors

The critical question that thus arose in the instant case was whether the Petitioner has been working, as a service provider, for those persons with whom it hast entered into agreements and constructs flats for the purpose of sale to those with whom such agreements are entered into?

On perusal of the facts of the case, the High Court observed as follows:

"A combined reading of the various clauses of the agreement for sale makes it abundantly clear that the transaction between the Petitioner, on the one hand, and the flat purchaser, on the other, is that of purchase and sale of premises and not for carrying out any constructional activities on behalf of the prospective buyers. What the Petitioner sells is, thus, the flat/premises and the entire transaction is nothing, but sale and purchase of immovable property. The flat purchasers are entitled to seek specific performance of the contract and there is an obligation, on the part of the Petitioner, to refund any part of money received together with interest if possession is not handed over to the prospective buyers in time. There is also an obligation, on the part of the Petitioner, to register sale deeds and agreements. Even the registering authorities concerned treat these documents as agreements for sale/purchase of flats/premises inasmuch as the consideration is for sale and not for carrying out constructional activities. Stamp duty is, therefore, levied on the sale consideration."

The High Court further observed that:

"In the light of the various statutory definitions of "service", 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 use/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".

Under the Finance Act, 1994, "service tax" is levied on "taxable service" only and not on "service provider. A service provider" is only a means for deposit of the service tax to the credit of the Central Government. Although the term "service receiver" has not been defined in the Finance Act, 1994, the "service receiver" is a person, who receives or avails the services provided by a service provider.

Prior to the amendment of the Finance Act, 1994, in the year 2005, the Central Board of Excise and Customs, vide Circular No. 80/10/2004, dated 17/09/2004, clarified that "estate builders, who construct buildings/premises for themselves (for their own use, renting it out or for sale thereof subsequently) are not covered within ambit of the construction services.
The clarification offered under the abovementioned circular, shall be applicable even after amendment of the Finance Act, 2005, whereby "construction service" includes construction of "residential complex". Thus, construction of "residential complex" has also been brought within the purview of "service tax" and what kind of activities for residential complex" would attract "service tax" would have to be understood in the light of the clarification, which the circular aforementioned offers.

The Board has also, vide Circular No. 332/35/2006- TRU, dated 01/08/2006 clarified that if no person is engaged for construction work and the builder/promoter/developer undertakes construction work on its own without engaging the services of any other person, then, in such cases, in the absence of a relationship of "service provider" and service recipient, the question of providing taxable service to any person by any other person does not arise.

Also, it is a well-established fact that the Departmental Circulars are binding in nature and have to be abided by if not specifically withdrawn. Thus, the Circular dated 01/08/2008 makes it explicitly clear that when a builder, promoter or developer undertakes construction activity for its own self, then, in such cases, in the absence of relationship of "service provider" and "service recipient, the question of providing taxable service to any person by any other person does not arise at all.

In the instant writ also the Petitioners made a strong case in proving that they if at all are undertaking any construction activity, it is for their ownself. Further, it is only after the completed construction work, the Petitioner sells the flats to the buyers, who may have made agreements for sale before the construction had actually started or during the progress of the construction activity or at the end or completion of the construction activity. Also, that any advance, made by a prospective buyer, or deposit received by the Petitioner, is against consideration of sale of the flat/building to such prospective buyer and not for the purpose of obtaining service from the Petitioner.
The writ was thus allowed.

(The views expressed above are strictly personal)

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