2008 (4) TMI 18 - AAR - Service Tax

Court rules applicant liable for service tax on activities related to construction under Finance Act, 1994

The court ruled in favor of the Revenue, holding that the applicant is liable to pay service tax in respect of the proposed activities 1 and 2 under ... Taxable service in relation to construction of complex - taxable service in relation to execution of works contract - in relation to (wide nexus and scope) - classification of taxable services under section 65A - service provider-service recipient relationship - self-supply / selfserviceTaxable service in relation to construction of complex - in relation to (wide nexus and scope) - service provider-service recipient relationship - Whether the applicant's proposed activities (activity No.1) attract service tax as a taxable service in relation to construction of a residential complex. - HELD THAT: - The Authority held that services connected with constructing and delivering identified residential units under the submitted agreement fall within the phrase 'in relation to construction of complex' and thus constitute taxable services. The expression 'in relation to' is of wide import and brings within the sub-clause not only construction per se but correlated and incidental services forming a package (construction according to approved plans, supervision, obtaining permissions, provision of common infrastructure and amenities) referable to the agreement with the purchaser. Ownership remaining with the applicant until full payment, and the fact that construction may be undertaken by the applicant itself, do not negate the existence of a service relationship with the booker; the element of consideration received under the agreement and the services rendered for the benefit of the purchaser establish a service provider-service recipient relationship. Consequently, the activity as a whole is a taxable service under the construction-of-complex provision. [Paras 14, 15, 16, 18, 19]Answered in the affirmative; proposed activity No.1 is liable to service tax under the taxable service relating to construction of complex.Taxable service in relation to construction of complex - taxable service in relation to execution of works contract - classification of taxable services under section 65A - Whether the applicant's proposed activity No.2 (where construction is carried out through contractors/sub-contractors under the applicant's supervision) attracts service tax and whether subcontracting alters the applicant's liability. - HELD THAT: - The Authority found no material difference between activities 1 and 2. Engagement of contractors or sub-contractors to carry out substantial construction does not absolve the applicant of the responsibility to provide services in relation to the construction of the residential unit to the booker. The applicant remains a service provider vis-a-vis the buyer. Applying the rules of classification, the service is appropriately classifiable under the construction-of-complex sub-clause; that classification stands even if the activity could prima facie fall under the more general works-contract description, in view of the preference for the more specific description under section 65A when multiple sub-clauses are attracted. The Authority did not decide on the subcontractor's separate liability to pay service tax. [Paras 21, 24, 25]Answered in the affirmative; proposed activity No.2 is liable to service tax under the taxable service relating to construction of complex, and subcontracting does not remove the applicant's liability.Self-supply / selfservice - service provider-service recipient relationship - Whether the isolated act of 'booking' (as framed) requires a separate ruling on liability to service tax. - HELD THAT: - The Authority observed that the applicant's formulated question on 'booking' was imprecise if construed narrowly; the real question sought was whether the broader sequence of booking, construction on an identified plot and transfer on receipt of consideration attracts service tax. Having answered that the proposed activities attract service tax under the construction-of-complex provision, a separate ruling confined to the mere act of booking was unnecessary. [Paras 22]No separate answer given; the question on booking is unnecessary in view of the affirmative rulings on activities 1 and 2.Final Conclusion: The Authority for Advance Rulings ruled that the applicant's proposed activities 1 and 2 are taxable services under the provision relating to construction of a residential complex and that service tax is therefore payable by the applicant in respect of those activities; the separate question on mere booking need not be answered. Issues Involved:1. Taxability of booking residential units under section 65(105) of the Finance Act, 1994.2. Liability of service tax under section 65(105)(zzzh) for construction of complex in proposed activity No.1.3. Liability of service tax under section 65(105)(zzzh) for construction of complex in proposed activity No.2.Detailed Analysis:Issue 1: Taxability of Booking Residential UnitsThe applicant questioned whether the activity of booking residential units is a taxable service liable to service tax under section 65(105) of the Finance Act, 1994. The judgment clarified that the question, as framed, lacks clarity and is confined to the first step of 'booking' the residential unit but not the series of activities that follow the booking and entering into the agreement. The court concluded that the proposed activities 1 and 2 undertaken in accordance with the terms of the draft agreement attract service tax liability under section 65(105)(zzzh) of the Finance Act, 1994. Therefore, it was unnecessary to give a separate ruling on this question.Issue 2: Liability of Service Tax for Construction of Complex in Proposed Activity No.1The applicant contended that it is not providing any 'taxable service' within the ambit of section 65(105) of the Act, arguing that it is developing the residential complex on its own land, utilizing its own material, and the ownership and possession remain with the applicant until the unit is handed over upon completion and receipt of the entire consideration. The applicant relied on CBEC's circular no. 96/7/2007-ST and the decision in Assotech Realty case.The Department argued that the construction and allied activities amount to 'service in relation to the construction of residential complex' under sub-clause (zzzh) of section 65(105). The court held that the words 'construction of complex' in (zzzh) are qualified by the phrase 'in relation to,' which is of wide import, and includes correlated and incidental services. The court noted that the whole purpose of inserting sub-clause (zzzh) was to bring services in connection with the construction of residential complexes by developers/promoters within the net of taxable services. The court concluded that the applicant is liable to pay service tax under sub-clause (zzzh) of section 65(105) for proposed activity No.1, as the activities constitute 'services provided or to be provided' by the applicant.Issue 3: Liability of Service Tax for Construction of Complex in Proposed Activity No.2The court noted that there is no material difference between proposed activity No.1 and No.2, except that in activity No.2, the applicant will be sub-contracting the work. The applicant remains accountable to the bookers/buyers and is a service provider vis-`a-vis the buyer. The engagement of sub-contractors does not absolve the applicant of the responsibility of providing services in relation to the construction of residential units agreed to be sold to the customer. The court concluded that the applicant is liable to pay service tax under sub-clause (zzzh) of section 65(105) for proposed activity No.2 as well.Conclusion:The court ruled in favor of the Revenue, holding that the applicant is liable to pay service tax in respect of the proposed activities 1 and 2 under sub-clause (zzzh) of section 65(105) of the Finance Act, 1994. The first question was not specifically answered as it was deemed unnecessary. The judgment emphasized the comprehensive nature of the term 'in relation to' and the intent of the legislature to include all correlated and incidental services within the scope of taxable services related to the construction of residential complexes.