Circular No. 108/02/2009 – ST dated 29.1.2009
Imposition of service tax on Builders - regarding
Construction of residential complex was brought under
service tax w.e.f. 01.06.2005.
Doubts have arisen regarding the applicability of service tax in a case where
developer / builder/ promoter enters into an agreement, with the ultimate owner
for selling a dwelling unit in a residential complex at any stage of
construction (or even prior to that) and who makes construction linked payment.
The ‘Construction of Complex’ service has been defined under Section 65
(105)(zzzh) of the Finance Act as “any service provided or to be provided to any
person, by any other person, in relation to construction of a complex”. The
‘Construction of Complex’ includes construction of a ‘new residential complex’.
For this purpose, ‘residential complex’ means any complex of a building or
buildings, having more than twelve residential units. A complex constructed by a
person directly engaging any other person for designing or planning of the
layout, and the construction of such complex intended for personal use as
residence by such person has been excluded from the ambit of service tax.
2. A view has been expressed that once an agreement of sale is entered into with
the buyer for a unit in a residential complex, he becomes the owner of the
residential unit and subsequent activity of a builder for construction of
residential unit is a service of ‘construction of residential complex’ to the
customer and hence service tax would be applicable to it. A contrary view has
been expressed arguing that where a buyer makes construction linked payment
after entering into agreement to sell, the nature of transaction is not a
service but that of a sale. Where a buyer enters into an agreement to get a
fully constructed residential unit, the transaction of sale is completed only
after complete construction of the residential unit. Till the completion of the
construction activity, the property belongs to the builder or promoter and any
service provided by him towards construction is in the nature of self service.
It has also been argued that even if it is taken that service is provided to the
customer, a single residential unit bought by the individual customer would not
fall in the definition of ‘residential complex’ as defined for the purposes of
levy of service tax and hence construction of it would not attract service tax.
3. The matter has been examined by the Board. Generally, the initial agreement
between the promoters / builders / developers and the ultimate owner is in the
nature of ‘agreement to sell’. Such a case, as per the provisions of the
Transfer of Property Act, does not by itself create any interest in or charge on
such property. The property remains under the ownership of the seller (in the
instant case, the promoters/ builders/developers). It is only after the
completion of the construction and full payment of the agreed sum that a sale
deed is executed and only then the ownership of the property gets transferred to
the ultimate owner. Therefore, any service provided by such seller in connection
with the construction of residential complex till the execution of such sale
deed would be in the nature of ‘self-service’ and consequently would not attract
service tax. Further, if the ultimate owner enters into a contract for
construction of a residential complex with a promoter / builder / developer, who
himself provides service of design, planning and construction; and after such
construction the ultimate owner receives such property for his personal use,
then such activity would not be subjected to service tax, because this case
would fall under the exclusion provided in the definition of ‘residential
complex’.
However, in both these situations, if services of any person like contractor,
designer or a similar service provider are received, then such a person would be
liable to pay service tax.
4. All pending cases may be disposed of accordingly. 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. In case any difficulty is
faced in implementing these instructions, the same may be brought to the notice
of the undersigned.
F. No. 137/12/2006-CX.4Sd/-
(Gautam Bhattacharya)
Commissioner (Service Tax)
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