2008 (4) TMI 21 - AAR - Service Tax

Applicant Liable for Service Tax on Construction Services; Must Choose One Tax Scheme

The applicant was held liable to pay service tax under section 65 (105) (zzzza) for the services provided in Proposed Activities No. 3 and No. 4, ... Service tax is payable on the construction of residential units after selling of plots of land inside the complex as these plots can not be constituted in depended units. Applicable is liable to service tax on both the situations i.e. whether he himself execute the works contract or engage the contractor to execute the works contract. Service tax is payable under section 65(105)(zzzza). Applicant is liable to pay service tax even if the sub-contractors discharge the tax liability. Issues Involved:1. Liability of the applicant to service tax under section 65 (105) (zzzza) of the Finance Act, 1994 for Proposed Activity No. 3.2. Entitlement to deduct the value of transfer of property in goods if opting for the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.3. Liability of the applicant to service tax under section 65 (105) (zzzza) of the Finance Act, 1994 for Proposed Activity No. 4.4. Liability of the applicant to service tax under section 65 (105) (zzzza) if the sub-contractor discharges service tax liability.Detailed Analysis:Issue 1: Liability of the applicant to service tax under section 65 (105) (zzzza) for Proposed Activity No. 3The applicant, a partnership firm, plans to develop a residential housing complex in Gujarat. In Proposed Activity No. 3, the applicant will sell plots and enter into a works contract with buyers for constructing residential units. The Authority for Advance Rulings (AAR) determined that the service provided by the applicant in executing the works contract falls under section 65 (105) (zzzza) of the Finance Act, 1994. The service involves the construction of individual houses within a residential complex, which is defined as a 'residential complex' under clause (91a) of section 65. Therefore, the applicant is liable to pay service tax on these services.Issue 2: Entitlement to deduct the value of transfer of property in goods if opting for the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007The applicant contended that if service tax is leviable, they should be allowed to deduct the value of the transfer of property in goods involved in the execution of the works contract. The AAR ruled that the applicant cannot simultaneously avail the benefit of deductions under rule 2A of the Service Tax (Determination of Value) Rules, 2006, and the reduced rate under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The two methods of payment are mutually exclusive. Therefore, the applicant must choose one method of discharging duty liability.Issue 3: Liability of the applicant to service tax under section 65 (105) (zzzza) for Proposed Activity No. 4In Proposed Activity No. 4, the applicant will sell plots and enter into a works contract with buyers, but the actual construction will be carried out by another contractor. The AAR ruled that the applicant is liable to pay service tax under section 65 (105) (zzzza) for the services provided in the execution of the works contract. The service involves the construction of individual houses within a residential complex, which is defined as a 'residential complex' under clause (91a) of section 65. Therefore, the applicant is liable to pay service tax on these services.Issue 4: Liability of the applicant to service tax under section 65 (105) (zzzza) if the sub-contractor discharges service tax liabilityThe applicant argued that if the sub-contractor discharges the service tax liability, the applicant should not be liable to pay service tax. The AAR ruled that the applicant is still liable to pay service tax under section 65 (105) (zzzza) even if the sub-contractor discharges the service tax liability. The sub-contractor works under the supervision and as per the specifications of the applicant. Therefore, the applicant, as the main service provider, cannot be absolved of the obligation to pay service tax.Rulings:1. The applicant is liable to pay service tax under section 65 (105) (zzzza) for the services provided in Proposed Activity No. 3.2. The applicant must choose either the Service Tax (Determination of Value) Rules, 2006, or the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, to discharge duty liability. The two methods are mutually exclusive.3. The applicant is liable to pay service tax under section 65 (105) (zzzza) for the services provided in Proposed Activity No. 4.4. The applicant is liable to pay service tax under section 65 (105) (zzzza) for the services provided in Proposed Activity No. 4, even if the sub-contractor discharges the service tax liability.