Construction after Sale of Plot in Complex liable to service tax

AIT New Network

NEW DELHI. Authority for Advance Rulings(Central Excise, Customs & Service Tax) vide a ruling AIT-2008-128-AAR has decided significant issues relating to service tax on construction of a residential house after sale of plot in a complex. 

The applicant is a  developer of  a residential housing complex in Gujarat. The proposed activities nos. 3 & 4 involve sale of plots of land inside the complex belonging to the applicant, to prospective buyers who will also enter into a works contract with the applicant for the construction of residential units. While in activity no.3 the applicant himself will execute the works contract and construct a residential house, in case of activity no 4, the applicant will further enter into a works contract with other contractors who will be constructing the residential houses, The applicant sought advance ruling en the following questions of law under section 96-C of the Finance Act, 1994:-

"1.           Whether the applicant is liable to service tax under section 65 (105) (zzzza) of the Finance Act, 1994 under the notified taxable service of execution of works contact in case of Proposed Activity No.3?

2.             If the answer to Question No.1 is in affirmative, whether the applicant is entitled to deduct the value of transfer of property in goods involved in the execution of said works contract if the applicant opts for payment of service tax at the rate of 2 per cent under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 as notified vide notification no.32/2007-Service Tax dated 22.05.2007. (The next part of the question beginning with the phrase "in other words" is omitted as unnecessary).

3.             Whether the applicant is liable to service tax under section 65 (105) (zzzza) of the Finance Act, 1994 under the notified taxable service of execution of works contract in case of Proposed Activity No.4?

4.             Whether the applicant is liable to service tax under section 65 (105) (zzzza) of the Finance Act, 1994 under the notified taxable service of execution of works contract in case of Proposed Activity No.4, even when the petty contractors discharge service tax liability under the notified taxable service of execution of works contract?"

Contention of Applicant:

The works contracts which attract service tax under this head are outlined in (a) to (e) of (ii) of the Explanation to (zzzza). The applicant contended that since the works contract in activities 3 & 4 involves construction of a new building, such an activity can only be covered under (ii) (b) in the above Explanation. The said classification i.e., (b) covers "construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry" Since the new building proposed to be constructed in the course of the execution of the works contract is a residential one, and is not for the purpose of commerce or industry, such a works contract will not fall under (b) and therefore will not attract service tax. The applicant further stated that a works contract for construction of a new building for residential purposes is also not covered under any of the remaining classifications in (ii) of the Explanation to (zzzza). The classification (c) which covers "construction of a new residential complex or a part thereof” is not applicable in applicant's case as the works contract is for construction of an individual residential unit and not for construction of a residential complex. The applicant adds that construction of a new residential building, whether located inside the complex or outside should be treated equally for the purpose of levy of service tax. Since a works contract for construction of a new residential building outside the complex is not leviable to service tax, it would not be correct to impose such a levy simply because the residential unit is located within a complex. No service tax, according to the applicant, is therefore leviable in respect of the works contracts involved in activities 3 & 4.

                With regard to the activity no. 4, it was stated that when the contractor who executes the works contract on behalf of the applicant is paying service tax on the execution of the works contract, no liability to pay service tax can be fastened on the applicant as its activity does not come within the definition and scope of service tax under section 65 (105) (zzzza).

Observations of the Authority:

                As per the draft of the works contract submitted, it is clear that such contracts will be for construction of individual houses on sub-plots located within the plot owned by the applicant and on which the applicant proposes to develop a residential housing project. As per the applicant's own narration, the residential project to be constructed on this plot would have at least 12 residential units, a club house and other common facilities and the layout of the project would be got approved by the prescribed authority under the relevant law in force. Such a project constructed as per activities 3 & 4 squarely conforms to the definition of a "residential complex" given in clause (91 a) of section 65, and the individual houses constructed get covered under the definition of a "residential unit" contained therein. Execution of the works contract thus involves construction of a part of a new "residential complex" and is covered by (c). One plea put forward by the applicant is that since the works contract with the buyers of the plots was for construction of individual houses and not for construction of a residential complex as such, the works contract cannot be classified under (c) of (ii) of Explanation in (zzzza). This plea cannot be accepted. A perusal of the draft of the works contract indicates that this contract is not for construction of a house on any plot of land but on a land which is located within the perimeters of the bigger plot located at Survey No.2/1, Moje Nana Chiloda, Gandhinagar. This plot is owned by the applicant and he proposes to build thereon a complete residential complex comprising of not merely individual residences but also a club and other common facilities which will be used by all the residents of the complex. When the buyer of the sub-plot enters into a works contract, such a contract is not for the construction of an isolated house, but for one which will make available to the buyer, all the facilities such as a club house etc. provided for by the residential complex. Individual houses built through the works contract, therefore, have to be viewed as parts of a residential complex rather than as stand alone houses. Thus the expression "or a part thereof" occurring in clause (c) of (zzzza) of section 65 (105) squarely applies.

                In the course of the hearing, the applicant has referred to the provisions of section 65A of the Finance Act to claim that classification of the works contract in activities 3 & 4 under classification (c) in (ii) of the Explanation in section 65 (105) (zzzza) has to be ruled out. They state that as per this section, if a taxable service is, prima facie, classifiable under two or more sub clauses of clause (105) of section 65, then the classification which occurs first amongst the sub clauses which equally merit consideration, is the appropriate classification for the taxable service. Since in the applicant's case the works contract appears to be equally classifiable under (b) and (c) of (ii) of Explanation to sub clause (zzzza), the correct classification is (b) which occurs prior to (c) and therefore classification as a "new residential complex or a part thereof" referred to in (c) has to be ruled out. This argument of the applicant is not valid. Section 65A is applicable when a taxable service is prima facie classifiable under two or more sub clauses of clause (105) of section 65. This is not the situation in the instant case where the service provided in relation to execution of a works contract is clearly classifiable in sub clause (zzzza) of clause (105) of section 65 and there is no other sub clause where this service could be classified. Section 65A cannot be pressed into service for determining the further categorization under the said sub clause (zzzza). The works contract of activities 3 & 4 are also not covered by (d) & (e) of (ii) of Explanation of (zzzza). The works contract of activities 3 & 4 are held to be covered under (c) of (ii) of (zzzza) in section 65 (105) and the questions posed at serial nos. 1 and 3 have to be answered in the affirmative.

Ruling of the Authority:

(1)           The applicant is liable to pay service tax under section 65 (105) (zzzza) of the Finance Act, 1994 on the services provided by them in the course of execution of the works contract referred to in activity no. 3.

(2)           While discharging duty liability on the service provided in the course of execution of works contract in activity no. 3, the applicant can choose either of the alternative methods of payment i.e. under the Service Tax (Determination of Value) Rules, 2006 as amended by Notification no.29/2007-ST dt.22.5.2007 or under the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007. The above two routes of payment are mutually exclusive.

(3)           The applicant is liable to pay service tax under section 65 (105) (zzzza) of the Finance Act, 1994 on the services  provided by them in the course of execution of the works contract referred to in activity no. 4.

(4)           The applicant would be liable to pay service tax under section 65 (105) (zzzza) of the Finance Act, 1994 on the services provided in the course of execution of works contract referred to in activity 4 even when the applicant sub contracts the construction work to another contractor who discharges his service tax liability. However, no views are expressed on the quantum of tax liability in such a situation.

(Click here for full text of Ruling AIT-2008-128-AAR)

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