. CBEC has clarified vide letter in F.No.B1/6/2005-TRU, 27.07.2005 [ 2006 (1) STR ( c48)] ( in para 13.6) ] as follows.

dated

“ 13.6 The taxable service is the service provided in relation to construction of a residential complex. Service tax would be payable only on the gross amount charged by the service provider for the constructions service provided and it would not include the cost of land and stamp duty paid for registration of land. However, notification No.18/2005-ST dated 7.6.2005 provides option to avail abatement and pay service tax only on 33% of the gross amount charged, subject to fulfillment of conditions specified in the notification. The builder has the option to avail the benefit of Notification No.18/2005-ST dated 7.6.2005 that provides abatement of 67% and pay service tax only on 33% of the gross amount charged, subject to fulfillment of conditions specified in the notification. This notification has been rescinded by Notification No.2/2006-ST dated 1.3.2006. Now notification No.1/2006-ST dated 1.3.2006 has been issued allowing abatement of 67% and pay service tax on 33% of the gross amount.

Construction of residential complex is the taxable service as per Section 65 (105) (zzzh) of Finance Act, 1994 and the service provider is liable to pay service tax as per statutory provisions. It is not known whether there was any construction agreement in this case according to which the flat was constructed by the builder. If there was any such agreement, then clause on tax liability must have been incorporated in it. Service tax liability though is with the service provider, if the agreement contains clause on separate charging and payment by the purchaser, then we may have to pay as per agreement and service tax law does not come into picture here. If the flat is ready-built and sold to the purchaser on as is where is basis, then it is pure sale and no service is involved. For attracting service tax, it is not only necessary that service should be taxable, there should also be a service recipient and consideration therefore. In this case, service tax payment does not arise as at the time of construction as there was no service recipient. If the latter is relevant to your case, then you can contest payment of service tax as the

builder himself is not liable. Even if the amount charged does not provide for Service tax separately, as per Section 67 of Finance Act, 1994, such amount charged will be taken as inclusive of service tax and the service provider will be liable accordingly. The normal practice in the infrastructure sector is that the builder or promoter in most of the cases will entrust the work of actual construction to sub contractor, who will do the actual construction. The other aspect is that the builder or promoter will have an agreement with the land owner for development of the land for which the land owner entitled for, say, 50%, of the houses constructed. It is again a normal practice that the builder / promoter will enter into sale deed with the ultimate buyers both on his behalf and on behalf of the land owner and register semi-finished dwelling with appropriate share of land and then enter into a separate contract for finishing the said dwelling

If the flat is ready-built and sold to the purchaser on as is where is basis, then it is pure sale and no service is involved. For attracting service tax, it is not only necessary that service should be taxable, there should also be a service recipient and consideration therefore. In this case, service tax payment does not arise as at the time of construction as there was no service recipient. If the latter is relevant to your case, then you can contest payment of service tax as the builder himself is not liable. Even if the amount charged does not provide for Service tax separately, as per Section 67 of Finance Act, 1994, such amount charged will be taken as inclusive of service tax and the service provider will be liable accordingly.

Service tax on construction of complex ( residential) services has been introduced with effect from 16.06.2005 vide Notification No.15/2005-ST dated 07.06.2005. In terms of Section 65 (30a) of Finance Act, 1994, “ Construction of complex’ means – (a) construction of a new residential complex or a part thereof; or (b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or (c) repair, alteration, renovation or restoration of, or similar services in relation to, residential complex; In terms of Section 65(91a), residential complex means any complex comprising of(a) a building or buildings, having more than twelve residential units; (b) a common area, and (c) any one or more facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system, located with a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the lay out, and the construction of such complex is intended for personal use as residence by such person. Explanation – For the removal of doubts, it is hereby declared that for the purposes of this clause, -

(a) (b)

‘ Personal use” includes permitting the complex for use as residence by another person on rent or without consideration; Residential unit means a single house or a single apartment intended for use as a place of residence.

In respect of this service, taxable service has been defined as “ service provided by any person in relation to construction of residential complex but does not includes a complex constructed for personal use as residence. CBEC vide Circular No.80/10/2004-ST dated 17.09.2004 [ 2004 ( 172) ELT T3 ] has clarified that “ Estate Builders” ( i.e., who gets such construction done ) are not covered under the ambit of these services. It is only the hired contractors engaged by these builders who are to be taxed. In other words service tax is leviable only on those contractors who are engaged in construction of new residential compexes, or completion and finishing services in relation to such complexes or repair, alteration / renovation or restoration of similar services in relation to residential complexes. In otherwords, real estate builders who construct buildings for themselves ( for their own use or for renting or selling it) are not taxable service providers. However, if such real estate owners hire contractor / contractors, the payment made to such contractor would be subjected to tax under this head. This aspect has been made clear in the recent circular in M.F. (D.R) Letter F.No.332/35/2006-TRU dated 1.8.2006 [ 2006 (3) STR C 75 ] given by the CBEC as such the issue should reach finality. In terms of this circular the relevant clarification is as follows.

Sl No 1

Issue Is service tax applicable on Builder, Promoter or Developer who builds a residential compex with the services of his own staff and employing direct labour or petty labour contractors whose total bill does not increase 4.0 lakhs in one P/Y

Legal position In a case where the builder, promoter or developer builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of such residential complex, the contractor shall be liable to pay service tax on the gross amount charged for the construction services provided, to the builder / promoter / developer under ‘ construction of compex’ falling under Section 65 (105) (zzzh) of the Finance Act, 1994. If no other person is engaged for construction work and the builder / promoter / developer undertakes construction work on his own without engaging the services of any other person, then in such cases in the absence of service provider and service recipient relationship, the question of providing taxable service to any person by any other person does not arise. ( emphasis supplied ) Service tax exemption for

small service providers upto an aggregate value of taxable services of Rs. 4 lakhs provided in any financial year vide Notification No.6/2005Service Tax dated 1.3.2005 is applicable for ‘ Construction of complex ‘ service also. In the light of above clarification the issue of liability of service tax in the instant case is to be examined. As for the information provided, the builder has constructed the flats in his own land and sold the same to the independent buyers. As such, it amounts to sale and no service provider/ service recipient relationship exists here. The normal practice in the infrastructure sector is that the builder or promoter in most of the cases will entrust the work of actual construction to sub contractor, who will do the actual construction. The other aspect is that the builder or promoter will have an agreement with the land owner for development of the land for which the land owner entitled for, say, 50%, of the houses constructed. It is again a normal practice that the builder / promoter will enter into sale deed with the ultimate buyers both on his behalf and on behalf of the land owner and register semi-finished dwelling with appropriate share of land and then enter into a separate contract for finishing the said dwelling. Here, the service provider / service recipient relationship clearly exists and squarely falls into the ambit of taxable service. However, situation is different in the present case. Here, the land owner himself is constructing the flats by engaging the small contractors and are being sold to the customers as per their specifications. Hence it is to

emphatically state that in the instant case the sale of constructed flats by the real estate owner on his own land do not fall into the category of taxable services in the light of above Circular. Construction and sale of flats by the Owner as per the agreements entered with the prospective customers in no way influence the nature of taxability of the services. This has also been clarified by the Hon’ble Supreme Court in the case of M/s Raheja Development Corporation Vs State of Karnataka [ 2005 NTC ( Vol27) -243 wherein it is held that “ that the activities undertaken by builders for construction of flat/builder for or on behalf of the prospective customers for consideration in case or deferred payment is covered under the works contract and not under sale”. Works Contract as held by the Apex Court has also been brought into the service tax net with effect from 11.5.2007 i.e., from the date of enactment of finance bill’ 2007. Specified works contract which attract VAT / Sales tax involving transfer of property is alone covered under these services. As the sale of flat in the instant case is before the specified date of 11.5.2007, the services of owner are not taxable on this count also. Hence, the land owner is not taxable in either way as far as construction and sale of flats in the instant case. When the so called services themselves are not taxable, there is no point in demanding the service tax on the same from the customers.