2008 (5) TMI 18 - HC - Service Tax

Service tax not leviable on self-construction by builder; buyer advances treated as sale consideration; assessment quashed

HC held that service tax under the 'construction of complex' service does not apply where a builder/promoter undertakes construction for its own account, ... Construction of complex - commercial or industrial construction service - taxable service - service provider-service recipient relationship - registration under section 69 - circular binding on departmentConstruction of complex - commercial or industrial construction service - taxable service - service provider-service recipient relationship - registration under section 69 - Whether the petitioner-company's activity of constructing and selling flats amounts to a taxable service falling within the definitions of construction of complex or commercial or industrial construction service and thereby attracts the obligation of registration under section 69 of the Finance Act, 1994. - HELD THAT: - A combined reading of the agreement clauses shows the transaction is one of sale of immovable property: the petitioner sells flats/premises, retains title and possession until execution/registration of sale deed, and obligations such as specific performance, refund with interest and registration of sale deed point to a sale transaction (paragraph 6). The concept of 'service' requires distinct entities of service provider and service recipient; where construction is undertaken by a person for his own benefit and not for another, no service relationship exists (paragraph 31). Circular and statutory scheme treat estate builders who construct for themselves as outside taxable construction services; advances received are consideration for sale and not payment for a service to a purchaser (paragraphs 32-33, 48). The factual matrix here shows the petitioner constructs for its own purposes and sells the completed units; there is no material that petitioner undertakes construction for and on behalf of prospective allottees. Consequently the activity does not constitute a 'taxable service' within the invoked statutory definitions and the petitioner was not liable to register under section 69 on that basis (paragraphs 34-36, 48-49). [Paras 6, 31, 34, 48, 49]The constructions carried out by the petitioner-company are not taxable services under the Finance Act, 1994 and do not attract the obligation to register under section 69.Circular binding on department - service provider-service recipient relationship - Whether the departmental circulars which exclude builders undertaking construction for their own account from taxable construction services are binding on the department and operative for determining the instant controversy. - HELD THAT: - The court examined circulars (including the Central Board of Excise and Customs clarification and the Central Board of Direct Taxes circular) which state that where no other person is engaged and the builder undertakes construction by his own staff, there is no service-provider/service-recipient relationship and hence no taxable service (paragraphs 32, 37). Jurisprudence establishes that circulars issued by the Board are binding on the department and department officers cannot take a stance contrary to such instructions, though an assessee may challenge their validity before courts (paragraphs 38-47). Applying these principles, the court held the impugned departmental stance inconsistent with the circular and that the circulars are binding on the department, supporting the conclusion that the petitioner's activities do not attract service tax (paragraphs 42, 48). [Paras 32, 37, 42, 48]The Board's circulars excluding builders undertaking construction for their own account from taxable construction services are binding on the department and support the conclusion that no taxable service was provided by the petitioner.Final Conclusion: Writ petition allowed; the impugned notice directing registration under section 69 is quashed on the ground that the petitioner's activity is a sale of immovable property and not a taxable construction service, and the department's circulars excluding self-construction from taxable service are binding on the department. Issues Involved:1. Legality and validity of the notice issued under Section 69 of the Finance Act, 1994.2. Whether the petitioner-company is liable to pay service tax under the Finance Act, 1994.3. Interpretation of 'construction of complex service' under Section 65(105)(zzzh) of the Finance Act, 1994.4. Applicability of Circulars issued by the Central Board of Excise and Customs.Detailed Analysis:1. Legality and validity of the notice issued under Section 69 of the Finance Act, 1994:The petitioners challenged a notice dated March 6, 2006, issued by the Superintendent of Central Excise, which required the petitioner-company to register under Section 69 of the Finance Act, 1994, for providing 'commercial or industrial construction service/construction of complex service.' The petitioners argued that their activities were purely transactions of sale of flats/premises and not contracts for rendering any service. The court examined the clauses of the agreement for sale and concluded that the transactions were indeed for the purchase and sale of premises, not for carrying out constructional activities on behalf of the prospective buyers.2. Whether the petitioner-company is liable to pay service tax under the Finance Act, 1994:The respondents argued that the petitioner-company was providing taxable services under Section 65(105)(zzzh) of the Finance Act, 1994, and hence, required to register and pay service tax. The court noted that the petitioners did not render any taxable service and were not engaged in activities making them liable to pay service tax. The court emphasized that the petitioner-company carried out construction activities for itself and not for any other entity or person, thereby not fitting the definition of a service provider under the Finance Act, 1994.3. Interpretation of 'construction of complex service' under Section 65(105)(zzzh) of the Finance Act, 1994:The court examined the definitions provided in Section 65(105)(zzzh) and Section 65(30a) of the Finance Act, 1994, and concluded that the petitioner-company's activities did not fall within the scope of 'construction of complex service.' The court highlighted that the petitioner-company constructed buildings for itself and sold the completed flats to buyers, without rendering any service to the prospective buyers during the construction phase. The court also referred to the Central Board of Excise and Customs Circular No. 80/10/2004, which clarified that estate builders constructing buildings for themselves are not taxable service providers.4. Applicability of Circulars issued by the Central Board of Excise and Customs:The court referred to several judgments, including Commissioner of Income-tax v. Aspinwall and Co. Ltd. and K. P. Varghese v. Income-tax Officer, which established that circulars issued by the Central Board of Direct Taxes (CBDT) are binding on the department. The court noted Circular No. 332/35/2006-TRU, dated August 1, 2006, which clarified that if a builder undertakes construction work on its own without engaging any other person, there is no service provider and service recipient relationship, and hence, no taxable service is provided. The court concluded that the activities of the petitioner-company did not fall within the purview of taxable service, and the impugned notice was set aside and quashed.Conclusion:The court ruled in favor of the petitioners, setting aside the impugned notice and concluding that the petitioner-company's activities did not constitute taxable services under the Finance Act, 1994. The court emphasized that the petitioner-company's construction activities were for its own benefit and not for any other entity, thereby not fitting the definition of a service provider. The court also reinforced the binding nature of CBDT circulars on the department, further supporting the petitioners' case.