2008 (5) TMI 18 - HC - Service Tax

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

MAGUS CONSTRUCTION PVT LTD Versus UNION OF INDIA

HC held that service tax under the 'construction of complex' service does not apply where a builder/promoter undertakes construction for its own account, ... Applicability of Service Tax on the business of development and sale of immovable properties, i.e., real estates - definition of 'construction of complex service' - whether the appellant has been working, as a 'service provider', for those persons with whom the petitioner-company enters into agreements and constructs flats for the purpose of sale to those with whom such agreements are entered into - HELD THAT:- It becomes clear that the circular, dated August 1, 2006, aforementioned, is binding on the department and this circular makes it more than abundantly clear that when a builder, promoter or developer undertakes construction activity for its own self, then, in such cases, in the absence of relationship of 'service provider' and 'service recipient', the question of providing 'taxable service' to any person by any other person does not arise at all. In the present case too, the materials placed by the writ petitioners clearly show that the construction activities, which the petitioners have been undertaking, are in respect of the petitioners' own work and it is only the completed construction work, which is sold by the petitioner-company to the buyers, who may have made agreements for sale before the construction had actually started or during the progress of the construction activity or at the end or completion of the construction activity. Any advance, made by a prospective buyer, or deposit received by the petitioner-company, is against consideration of sale of the flat/building to such prospective buyer and not for the purpose of obtaining 'service' from the petitioner-company. Thus, this writ petition succeeds and the impugned notice is hereby set aside and quashed. This writ petition shall stand disposed of. 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.