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Service Tax implications on Land Development Agreements between landlord and developers

Service Tax - By: - Ravi Kumar Somani - Dated:- 18-2-2016 Last Replied Date:- 16-6-2016 - In case of a Real estate and construction industry, where due to various political and economical reasons we have seen that there is a sharp downturn being noted in the sale of residential and commercial construction projects irrespective of fact that the prices of land are still reaching sky high. Therefore, in a current business and economic conditions where uncertainty prevails over everything it becomes .....

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(who undertakes the construction). Typically, in such a model, the land owner enters into an agreement with the builder, whereby, the land owner gives either land or development rights to construct or develop a residential complex to the builder and whereas the capital, construction and legal work will be carried out by the. The builder/developer, in turn, agrees to assign a portion of the constructed area, in the form of flats in favour of the land owner (Generally, in the ratio of 60:40). The .....

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developers limited enters into a Joint Development Agreement with land owner Mr. XYZ whereas in lieu of this agreement a total of 1000 residential units will be constructed by ABC ltd on the land provided by Mr. XYZ whereas 40% of the units i.e. 400 units shall be given to Mr. XYZ and rest 600 units shall be taken by ABC ltd. Both can commercially sell the units in the open market. Land owner gets 400 units of flats in lieu of the land given and Developer gets 600 units of flats in lieu of the c .....

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(i.e. a non - monetary consideration) amounts to service and whether the same is liable for service tax? If it is liable for service tax, then what shall be the value adopted for levying service tax as the consideration given in land is in non-monetary form? If the value is computed, then when shall the liability to pay service tax arises? i.e. what shall be the point of taxation? Is it at the time of transfer of development rights? Or at the time of entering into agreement or at the time of pos .....

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e same in their theatre. In the said circular, it is held that a joint venture is recognized as legal & juristic entity in the nature of partnership of constituent business entities. Further relied on Supreme Court judgment as to the meaning of joint venture wherein it was held that the expression joint venture connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly .....

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er words, where no risks and rewards are shared, they cannot be called as joint venture. In such case, the transactions between them constitute as took place between two separate persons. In the instant case, land is contributed by Mr. XYZ and the same is developed by ABC ltd. Each of them are sharing built up area and no risks and rewards are being shared. So their association to construct residential complex cannot be called as joint venture. Therefore, in view of the principles laid down in t .....

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ection 65(B)(44) of the Finance act, 1994. The relevant extract is as follows: service means any activity carried out by a person for another for consideration. In the given case, activity of construction is being carried out. Further, as the agreement is not in the nature of joint venture, therefore it can also be said that the parties to the transaction are two different persons and therefore the activity is carried out by one person for another person. Consideration is involved in the transac .....

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lex to land owners who are transferring their rights in land and getting constructed flats are liable for service tax. If it is liable for service tax, then what shall be the value adopted for levying service tax as the consideration given in land is in non-monetary form? As per Circular 151/2/2012-ST dt.10.02.2012, it has been stated that value must be determined in terms of section 67(1) read with rule 3(a) of Service Tax (Determination of Value) Rules, 2006. However, according to the Para 6.2 .....

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oked upon the matter and has recently vide its instruction issued dated 20.01.2016 has stated as under: Education Guide is merely an educational aid based on a broad understanding of a team of officers on the issues. It is neither a Departmental Circular nor a manual of instructions issued by the Central Board of Excise and Customs. To that extent it does not command the required legal backing to be binding on either side in any manner. The guide was released purely as a measure of facilitation .....

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ided by the said Board Circular dated 10.2.2012 and not the Education Guide . Therefore, by applying the principle laid down in Circular No. 151/2/2012-ST, value of such flats shall be determined in terms of Rule 3 of the Service Tax (Determination of Value) Rules, 2006 as under: the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is th .....

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sold in the ordinary course of trade to other buyers. In case the price of flat undergoes a change over the period of sale then the value of similar flat as sold nearer to the date on which the land is made available for construction should be used for arriving at the value for the purpose of tax. The same view has also been taken by board in its Circular 151/2/2012-ST dt.10.02.2012. Overall, the value in any case shall not be less than the cost of construction of the land owners share. If the v .....

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services especially between landlords and developer, there would not be any system of issue of invoices. Therefore only two of the above events would be relevant i.e. date of receipt of consideration or completion. In case of Joint development agreements, the consideration received by developer is the date on which development rights are received by him. This is generally before the project commencement date. Accordingly service tax is required to be paid by 5th/6th of the month following the q .....

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, generally developmental rights are transferred before the commencement of construction and it very is harsh to levy service tax at such a point which leads to huge cash outflows for the developers at the start of project itself. Further, it is also difficult to arrive at value at that point as the construction cost and value of sale of similar flats is unknown. Therefore, the point of taxation has been a matter of issue in this regard. To conclude, many construction companies are taking diverg .....

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i Kumar Somani) For feedback or queries write to ravi.somani03@gmail.com) - Reply By Nirav Parekh - The Reply = Dear Ravi Kumar Somani, I would like to draw your attention on the following lines of Circular No. 151 /2 /2012-ST, in regards to point of taxation in case of flats transferred to land owner in consideration of land development right. Para 2.1 sub para (B) point no. (i) Value, in the case of flats given to first category of service receiver, is determinable in terms of section 67(1)(ii .....

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