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Service Tax Circular on Real Estate Overruled by Authority

AIT News Network

NEW DELHI. Vide a ruling AIT-2008-127-AAR dated 7th April 2008 in case of Hare Krishna Developers ; Authority for Advance Rulings has overruled Service Tax Circular No. 96/7/2007-ST dated 23.8.2007 related to residential construction service.

                Central Board of Excise & Customs vide  the said Circular has clarified  vide clause No. 079.01(b) as follows:

Whether service tax is liable under construction of complex

service [section 65(105)(zzzh)] on builder, promoter, developer or any such person,-

(a) who gets the complex built by engaging the services of a separate contractor, and

(b) who builds the residential complex on his own by employing direct labour?

(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.

                According to RS Sharma Advocate for the Applicant before the Authority; the interpretation given by the Authority is that the abovesaid Circular has only limited application and does not apply in those cases where the flats or residential units have been booked by the Builders and Real Estate Developers before or during the construction activity. Thus a Builder is liable to pay service tax under construction of residential complex service on sale of flats when he has booked the flats before the construction of flats and has taken the payment in installments during the construction of flats. It is only in those special cases where the constructed flat is being sold without any booking or installment payment; the benefit of Service Tax Circular will be admissible in views of the Authority which has held that the construction is being done by the Builder for the Booker and it is a case of service being provided by the Builder to the Booker.

                The Advocate had argued before the Authority that since the rights, title and interest in construction remain with the Developer as he is owner of the land; it is a case of self service and the activity can not be subjected to service tax as the service is taxable under the provisions of Finance Act 1994 only when a person provides a notified service to another person. Another contention was that the agreement is an agreement for outright sale of residential unit and there is no contract of construction between the Developer and the Booker; therefore, it can not be treated as a contract of service.

Click Here for Full Text of Ruling

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