Does Construction of Flats (Residential Complexes) attract Service Tax

[Dr. Sanjiv Agarwal]

Real estate development companies engage in construction of flats (residential complexes) and selling them to buyers by way of registration. Whether the payment received against such sale consideration either as advance prior to registration or at the time a registration shall be liable to service tax is a question being asked by various service providers.

The activities under question involve construction of residential complex and sale thereof. Assuming that the definition of residential complex is satisfied, section 65( 105) (zzzh) defines taxable service to mean any service provided or to be provided to any person, by any other person in relation to construction of complex. U/s 65(30 a) ,  "construction of complex" means construction of a new residential complex or a part of thereof , or completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fitting and other similar services, or repair, alteration, renovation or restoration of, or similar services in relation to, residential complex.

It may be noted that the taxability arises only when a service is rendered. If one builds or undertakes an activity for self or where no service provider is involved, no question of taxability will arise. The taxable event is not the buying or selling of a residential complex but rendering services in relation to such complex.

The service is taxable only when it is provided by one person to another person. Outright sale of flats and not covered but only provision of services are covered. CBEC had clarified vide Circular No 332/35/2006- TRU dated 1.8.2008 that 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 in the 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 in the absence of service-provider — service-recipient relationship, the question of providing taxable service to any person by any other person does not arise.

In Re Harekrishna Developers 2008 -TMI - 3610 - AUTHORITY FOR ADVANCE RULINGS, the advance ruling has answered the question of whether the activity of booking the residential unit as per agreement for consideration undertaken is a taxable service liable to pay of service tax under Clause (zzzh) of Section 65(105). It has been ruled that booking and construction of residential units with own labour is a taxable activity.

On Board clarification vide para no. 79.01 of Circular No. 96/7/2007-ST dated 23.8.2007 regarding non taxability of construction work undertaken without engaging services of any other person, AAR has ruled that the clarification covers the situation of outright sale of a residential flat after the construction with construction being done without any agreement with buyer. The recipient of service is not in the picture at all at any stage of construction. The developer and the buyer come face to face after the entire process of construction is complete and the building ready for occupation is offered for sale in such a situation, it cannot be said that any services were extended by the developer to the buyer. The relationship between the developer and the buyer is purely one of seller and buyer.

Gauhati High Court has in Magus Construction Pvt Ltd & Another v Union of India 2008 -TMI - 4479 - HIGH COURT OF GAUHATI  as held that an  assessee engaged in constructing flats, selling them through and title passing to the purchase only on such registration, any advance or deposit made by purchases was against sale consideration of the flat/building and not against any service rendered by the assessee, hence assessee was not rendering "commercial and industrial construction service/ construction of complex service" and notice for registration and payment of tax was liable to be quashed and set aside .

In Green View Land & Buildcon Ltd v CCE Chandigarh 2008 -TMI - 3605 - CESTAT, NEW DELHI, where assessee had self constructed the flats without engaging any contractor or service provider and then ready built flats were sold, and where demand was confirmed  based on DGST Circular dated 16.2.2006, tribunal remanded the matter to be decided in view of Circular No 96/7/2007 dated 23.7.2008 clarifying that no service tax was payable in absence of service provider - receiver relationship

It can, therefore, be said that construction of flats and sale  thereof may not be a taxable service under the category ' construction of complex' service. This has been also affirmed legally.