Circular clarification

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CA Suresh Choudhary

CA Suresh Choudhary (Querist)
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02 February 2009 Can any body clarify the Service Tax circular No.108/02/2009 Dt. 29.01.2009

Arbind Aggarwal

Arbind Aggarwal (Expert)
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03 February 2009 This can be compared with a stimulus package. The clarification given by the Board on 29.1.2009 is historic and will be a boon to the real estate sector in no less magnitude than the interest rate cut on home loans. Hopefully, the clarification will also put an end to the confusion in the minds of the builders, revenue officers and most importantly, the flat buyers.

Construction of complex service (the statutory name for construction of buildings with more than 12 flats) has a chequered history. There is view that there is no service involved and it amounts to sale of flats. In fact, the Department had issued a circular earlier on similar lines vide Circular 96/7/2007-ST, Dated : August 23, 2007 by brining the concept of self service by clarifying that

(a) In a case where the builder, promoter, developer or any such person builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of the said residential complex, the contractor in his capacity as a taxable service provider (to the builder/promoter/developer/any such person) shall be liable to pay service tax on the gross amount charged for the construction services under ‘construction of complex' service [section 65(105)(zzzh)].

(b) If no other person is engaged for construction work and the builder/promoter/developer/any such person undertakes construction work on his own without engaging the services of any other person, then in such cases,-

(i) service provider and service recipient relationship does not exist,

(ii) services provided are in the nature of self-supply of services.Hence , in the absence of service provider and service recipient relationship and the services provided are in the nature of self-supply of services, the question of providing taxable service to any person by any other person does not arise.

But, when a case came up before the Authority for Advance Rulings, in the case of M/s Harekrishna Developers - [2008-TIOL-03-ARA-ST], revenue argued against its own Circular dated 23.8.2007 and got a favourable answer to the question framed that undertaking the construction on an identified plot and handing over the constructed unit to the customer on receipt of the entire consideration is a taxable service. The revenue distinguished the above circular on the ground that:

The clarification issued by the Deptt . of Revenue (TRU), Ministry of Finance in its circular dated 23/8/07 does not endure to the benefit of the applicant as the Circular details a case where the residential complex is constructed by a builder/developer on his own and on completion thereof the transaction is entered into with the buyer resulting in the sale of an already constructed unit.

Then came the famous Magus Construction (P) Ltd case [2008-TIOL-321-HC-GUW-ST] where the Guwahati High Court held that the sale of flats cannot be taxed under construction service.

Now, with the new Circular, things will be more clear, since it has been amply clarified that only the services of contractors who undertake the construction of flats and who provide various incidental services like design etc are taxable, but no service tax is leviable on the sale of flats to the ultimate buyer, notwithstanding the ruling by the Authority for advance ruling. (Then why did they vehemently oppose this argument of the applicant before the Authority For Advance Ruling?)

In between there was a tamasha created by the DGST , wherein he relied on a Supreme Court Judgement in Raheja Development Corporation Vs State of Karnataka [2005-TIOL-77-SC-CT] and held that Service Tax was payable. He even issued an ultimatum to the Board.
Having given this Circular, the Board should also graciously accept the Gauhati High Court order and should not contemplate filing any appeal. Otherwise, the purpose of this circular will be defeated.

We should not look a gift horse in the mouth. Though one of our eminent authors has not taken kindly to the Board Circular (see our ST se GST Tak), let's not bother whether the Board is right or wrong – the fact is they have given a clarification favourable to the trade and let us gratefully accept it. Whatever be the legal intricacies, the fact is that the Government has the right to tax or not to tax and why should we worry if they decide not to tax a particular activity?

Twist in the Tale: In the whole country there is now only one assessee who is liable to pay Service Tax on this activity - Harekrishna Developers.

In an apparent reference to the Harekrishna case of Advance Ruling, the Board Circular states, “ Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only.”