Selling of Plots after acquiring Development Rights not taxable either as Site Formation Service or Real Estate Agent

[Rachit Agarwal]

Supreme Court after condoning the delay dismissed the Civil Appeal Diary filed by Commissioner of Central Excise, Jaipur against the CESTAT Final Order reported in M/S ESS GEE REAL ESTATE DEVELOPERS PVT. LTD. VERSUS THE COMMISSIONER OF CENTRAL EXCISE [2019 (6) TMI 633 - CESTAT NEW DELHI]

Tribunal Held

Demand on the Developer for developing and selling the land provided by the land owner and paying part consideration to owners not sustainable as classification of service is vague.

Merely keeping of ownership rights by the owner till end for the purpose of easy transfer of title to ultimate buyer, the activity of selling plots/ land to prospective buyers on principal to principal basis after acquiring the development rights from the owner would not be taxable under category of Real Estate Agent or Site Formation Service

CESTAT Principal Bench New Delhi in case of M/S ESS GEE REAL ESTATE DEVELOPERS PVT. LTD. VERSUS THE COMMISSIONER OF CENTRAL EXCISE [2019 (6) TMI 633 - CESTAT NEW DELHI]

Transfer of Right to Develop

The Owners had represented that they were the absolute owners of the property which they intended to develop in a phased manner and that the Appellant represented to the Owners that it had the requisite expertise, skill, infrastructure and reputation in development and marketing/sale of properties. The Owners granted and assigned to the Appellant the exclusive right to develop the said property and to sell individual developed plots and the Appellant accepted such authority, permission and the right to develop the said property and to sell the developed plots in a phased manner.

Consideration Agreed

For the Plots Sold- The Owners shall receive a minimum of ₹ 400/- per sq. yards towards the land cost for residential and commercial plots.

For the Plots Remaining Unsold- Land and/or plots with or without construction remain unsold, then the same shall be divided between the Owners and the Developers equally.

Developer Scope of Work

The Appellant was required to do, execute and carry out all such acts, deeds and things necessary for completing the said project, including arranging finance towards the initial cost for infrastructure, roads, sewerage treatment. The Appellant had also to apply and obtain permission/ consent/ sanctions/ approvals for the development envisaged in the agreement and to carry out all infrastructural work, including appointment of Architects, Quantity Surveyor, RCC Consultants and other professionals in connection with the said development of the project.

Irrevocable Right to Develop and Sell the Property

In consideration of having been granted exclusive and irrevocable rights by the Owners to develop the said property and to sell individual developed plots.

Developer and Landowner to fulfill Obligations in their Own Act

The Owners and the Appellant also agreed that the Development Agreement will not be treated as a Partnership/ Joint Venture between the parties and that the Appellant had been given only the right to develop the property and that each of them had undertaken their respective obligation and have the rights specified on their own account and on principal to principal basis and not on behalf of or on account of or as agent of any of them or anyone else

Provisions of the Act Considered

1. Definition of “site formation‟ as contained in section 65(97a)
2. 65(105)(v) contemplates a service provided to any person by a real estate agent in relation to real estate
3. Real Estate Agent‟ has been defined in section 65 (88)
4. Section 65(105) of the Act defines “taxable service” to mean any service provided or to be provided under the sub-clauses of clause (105) of section 65
5. section 65A of the Act- Classification of Taxable Service

Department Contention- Developer has made Composite Supply

An assessee may provide a variety of service for a single consideration in the same contract, but even in such a case it is obligatory on the Department to find out the essential character of the service under which the liability of the assessee is proposed to be taxed.

Paragraph 8 of the show cause notice does mention that composite services were rendered by the assessee consisting of “real estate agent” and “site formation”

Order

Show Cause Notice- The show cause notice is vague as it does not specify which particular category of service was leviable to tax as it states that “service tax appears to be leviable as per the statutory provisions on real estate developed by site preparation on consideration basis”.

It is very difficult to really cull out from the show cause notice as to which particular category of service was intended to be taxed. The show cause notice should have clearly indicated whether the service of “real estate agent” or “site formation” was leviable to tax, for this is the requirement  of section 65A of the Act.

It was obligatory for the Adjudicating Authority to have specifically classified the service under which service tax was to be levied. The impugned, therefore, for this reason alone needs to be set aside.

Taxable as Real Estate Agent- Transactions are Principal to Principal

This category of service would cover services rendered by one  person as agent of another in relation to sale, purchase, leasing or renting of real estate. A service provider must, therefore, carry out an activity in the capacity of an agent of another. The Appellant in the present situation is himself selling the plots. A principal to principal transaction would, therefore, not be covered under section 65(105)(v) of the Act. The Appellant does not act an agent for any person when it is selling property to purchasers. The development and sale of property under the agreement is undertaken by the Appellant on its own and in exercise of the rights vested in the Appellant. The Appellant had to arrange the finances for the project. The execution of the conveyance deed by the Owners in favour of the purchaser is for the reason that ownership is retained by the Owners. The right to develop and sell the property is with the Appellant under the Agreement.

CBEC Circular dated 7 October 1998- The Circular clarifies that the activity of actual construction of any building carried out by builder/ developer does not attract service tax levy as it is not a service within the meaning of the term “real estate agent” or “real estate consultant”.

Taxable as Site Formation Service- Transactions are Principal to Principal

Circular dated 27 July  2005- Prior to construction of buildings, factory or any civil structure, activity of mining or laying of cables or pipes, preparation services of site formation and clearance, excavation and earthmoving or leveling are normally undertaken for a consideration to make the land suitable for such activities. Such services include blasting and rock removal rock, clearance of undergrowth, drilling and boring, overburden removal and other development and preparation services of mineral properties and sites, and other similar excavation and earthmoving services. Demolition of structures, buildings, streets or highways is also undertaken for a consideration as a preparatory activity for subsequent construction activity or for clearing the site for any other purpose. All such activities fall within the scope of this service.

M/s Radius Corporation Ltd. Versus CCE, Raipur - 2013 (9) TMI 517 - CESTAT NEW DELHI examined the scope for “site formation” services and it was observed that the contract signed for construction of the Major Ground Balancing Reservoir for raising the height of the existing reservoir would not fall under the category of “site formation”

The activity carried out by the Appellant would, therefore, not fall under “site formation.

Joint Venture/ Partnership Business- Not necessary to deal with the other submissions advanced by learned Counsel for the Appellant relating to co-venture or extended period of limitation.