AUTHORITY FOR ADVANCE RULINGS, CENTRAL EXCISE, CUSTOMS & SERVICE TAX, NEW DELHI

Harekrishna Developers, In re

Justice P. V. Reddi, Chairman

A SINHA AND MRS. CHITRA SAHA, MEMBERS

RULING NO. AAR/3(ST) OF 2008

IN APPLICATION NO.AAR/5(ST) OF 2007

April 7, 2008

Section 65 of the Finance Act, 1994 - Taxable service - Applicant intends to develop a residential complex on its own land which is already earmarked - Residential units are meant for sale - If a unit is booked, it cannot be diverted to others - Actual sale of land with unit will take place on completion of construction on full payment of cost - Whether activity of building residential unit on earmarked plot and making construction as per plan, design and specifications, obtaining various permissions and providing amenities and common infrastructural facilities as contemplated by agreement with customers would undoubtedly constitute service provided or to be provided to customers by applicant within scope of sub-clause (zzzh) of section 65(105) - Held, yes - Whether construction and package services involved in activity is referable to agreement with prospective buyer and cannot be viewed in isolation and it cannot be said proposed activities tantamount to self-service and that there is no recipient of service - Held, yes - Whether, therefore, applicant-builder is liable to pay service tax in respect of proposed activity - Held, yes [Para 25]

FACTS

The applicant-firm wants to develop a residential housing complex on its own land at its own expense. The applicant will book the residential units in favour of a particular buyer after taking a token booking amount. The physical possession of the residential unit will be given to the buyer after construction is completed and full payment is received. The construction material will be bought by the applicant. A part of the said complex will be constructed by the applicant itself and rest through contractors. The applicant sought advance ruling of the authority on the questions as to whether the activity of booking the residential units to be undertaken by the applicant is a taxable service and to what extent it was liable to service tax.

HELD

The complex to be constructed by the applicant conforms to the definition of ‘residential complex’ which is, meant for sale to the prospective buyers as part of the applicant’s business activity. As explicitly laid down in clause (91a) of section 65, it does not include a complex which is constructed by a person directly engaging the services of any other person for designing or planning of the lay out, if it is meant to be used for residential purpose either by him or his lessee or a person permitted by him. Such a construction gets excluded from the purview of the residential complex and does not, therefore, fall either within the ambit of sub-clause (zzzh) or clause (ii)(c) of the Explanation to sub-clause (zzzza). In contrast, where instead of the owner of the land directly building the house with the assistance of an architect or engineer, entrusts the construction work to a contractor, there is a clear liability on the part of the contractor to pay service tax because he becomes service provider in relation to the execution of the works contract entrusted to him. [Para 9]

The plot or sub-plot on which the residential unit has to be built up and handed over to the prospective purchaser is identified and the same cannot be diverted to others so long as the purchaser is ready and willing to pay the agreed instalments of consideration. The construction on the said plot may or may not have started by the date of booking. The actual sale of land together with the constructed residential unit takes place after the completion of construction, subject, of course, to the purchaser/booker paying the sale consideration. [Para 11]

The words ‘construction of complex’ in sub-clause (zzzh) is qualified by the preceding phrase ‘in relation to’. This expression ‘in relation to’ is advisedly used by the Legislature to widen the scope and dimension of the sub-clause so as to establish a greater nexus between the construction and the services implicit in such construction. The expression ‘in relation to' is of wide import. [Para 15]

Thus, it is not merely the construction part of the activity that matters; the correlated and incidental services are all embraced within the scope of sub-clause (zzzh). [Para 16]

The whole purpose of inserting sub-clause (zzzh) in section 65(105) appears to be to bring the services in connection with the construction of residential complexes by the developers/promoters within the net of taxable services. By introducing such a specific provision and defining the term ‘residential complex', incidentally, the Legislature wanted to obviate any controversy on the point whether the services of the nature involved in proposed activity of the builder in constructing a part itself could at all fall within the scope of sub-clause (zzzza) dealing with works contract. The net of taxation is intended to be spread out so as to reach the entire gamut of complex construction activities which are part of a commercial venture. The activity of building a residential unit on an earmarked plot in the complex and making construction thereon as per the plan, design and specifications, obtaining various permissions and providing amenities as contemplated by the agreement with the customers, apart from the provision of common infrastructural facilities before handing over the building to the customers would undoubtedly constitute ‘services provided or to be provided' by the applicant. A host of facilities and amenities have to be or are contemplated to be provided under the terms of the agreement, apart from construction. Some or many of them may be common amenities which will be available to others who inhabit in the complex but they cannot be dissociated from the construction of the residential unit for the benefit of the booker/buyer. Package of services is necessarily involved in the activity viewed as a whole and that is the reason why the phrase ‘in relation to’ has been used. The fact that the ownership and possession remains with the applicant throughout the process of construction and that the constructed residential unit can only be transferred to the booker/buyer on receipt of entire sale consideration does not have a real bearing on the question whether any services in relation to the construction of complex are required to be rendered by the applicant. Undue stress should not be laid on the aspect of ownership remaining with the applicant till completion and on the element of control over construction. If such contention is to be accepted, the entire purpose of sub-clause (zzzh) will be defeated or at any rate, it may become otiose. The point of time at which the ownership gets transferred will not be determinative of the applicant's liability to pay service tax. Viewing from another angle, though in one sense, the applicant can be said to be constructing the residential unit on its own and not exactly on behalf of the booker, yet, the fact remains that the applicant does everything to honour its commitment to the customer(booker) from whom it receives valuable consideration in instalments. The construction and allied services, it must be noted, is referable to the agreement with the prospective buyer and cannot be viewed in isolation. The possibility of the booker defaulting in payments of instalments and the agreement being terminated in that event is really not material in evaluating the true nature of the transaction. [Para 18]

It is difficult to accept the contention of the applicant that the proposed activities tantamount to self-service and that there is no recipient of service. There is no legal or factual basis for such argument. [Para 19]

The engagement of sub-contractor to do a substantial part of the construction work does not absolve the applicant of the responsibility of providing services in relation to the construction of residential unit agreed to be sold to the customer ultimately. [Para 21]

In conclusion, it is, accordingly, ruled that the applicant is liable to pay service tax in respect of the proposed activity under sub-clause (zzzh) of section 65(105). [Para 25]