Builder wins service tax dispute on residential complex construction under Tripartite Agreement before July 2010
The CESTAT Bangalore dismissed the Revenue's appeal regarding service tax levy on a builder undertaking construction of residential complex services under a Tripartite Agreement prior to 01.07.2010. The Tribunal held that the issue was no longer res integra, being covered by consistent precedents in similar cases. The builder's entitlement to cenvat credit on inputs/input services and benefits under Notification No. 1/2006-CE was upheld, following established jurisprudence including the Keerthi Estate case.
The core legal questions considered in this judgment are:
1. Whether the activity of construction of residential units under a tripartite or bipartite agreement during the period 01.04.2007 to 31.03.2008 attracts service tax under the Finance Act, 1994.
2. Whether the respondent builder/promoter is liable to pay service tax on amounts received in instalments from prospective buyers under agreements for construction of residential units before completion and full payment.
3. The applicability and interpretation of Board's Circular No. 108/2/2009-ST dated 21.09.2009 regarding taxation of construction services.
4. The significance and retrospective or prospective effect of the Explanation added to Section 65(105)(zzzh) of the Finance Act, 1994 w.e.f. 01.07.2010, which deems construction of a new building intended for sale by a builder to be a taxable service.
Issue-wise detailed analysis:
Issue 1: Liability to pay service tax on construction of residential units under tripartite/bipartite agreements during 01.04.2007 to 31.03.2008
The relevant legal framework includes Section 65(105)(zzzh) of the Finance Act, 1994, which defines taxable service as service provided "in relation to construction of complex". The term "residential complex" is defined in Section 65(91a) as a complex with more than twelve residential units along with common areas and facilities approved by competent authority. The Board's Circular No. 108/2/2009-ST dated 21.09.2009 clarifies that if the ultimate owner contracts with a promoter/builder for construction of a residential complex for personal use, such activity is not subject to service tax.
The Commissioner analyzed the agreements and found that the contract was for sale of undivided land shares and entrusting the builder to construct apartments, not a sale of constructed flats. The service provided was construction of individual residential units, not a complex exceeding twelve units as per the statutory definition. Therefore, the activity did not fall within the taxable service of "construction of complex".
The Court observed that tax liability arises only if the construction involves a complex with more than twelve residential units. The evidence showed the agreements were tripartite or bipartite contracts for construction of individual units, not the entire complex. The Board's Circular supported the view that such personal use construction contracts are excluded from service tax.
Competing arguments by the Revenue that the activity should be taxed as service since payments were made in instalments were rejected on the basis that the Circular was correctly interpreted by the Commissioner. The Tribunal noted that the issue is no longer res integra and has been decided in favor of the builder/promoter in a series of precedents.
Conclusion: The activity of construction of residential units under the agreements during the relevant period does not attract service tax.
Issue 2: Applicability of service tax on instalment payments received before completion and full payment
The Revenue contended that since payments were received in instalments before completion, the builder should be liable to pay service tax on the construction service rendered. The Revenue relied on the Board's Circular No. 108/2/2009-ST dated 21.09.2009, arguing it does not exempt such transactions.
The Tribunal referred to a series of judgments including Krishna Homes, U.B. Construction, and Keerthi Estates, which held that prior to 01.07.2010, such agreements for construction of residential units where possession was handed over after completion and full payment were not liable to service tax. The Finance Act, 2005 introduced Clause (zzzh) in Section 65(105) to tax construction of complexes, but the Explanation deeming such contracts as taxable services was added only w.e.f. 01.07.2010.
The Tribunal discussed the legislative intent and judicial precedents holding that before 01.07.2010, the builder was not liable to pay service tax on such construction contracts, even if payments were made in instalments. The Explanation was prospective and expanded the scope of taxable service to include such contracts.
The Tribunal also cited the Apex Court judgment in Larsen & Toubro Ltd. which held such agreements as works contracts, but clarified that the Government did not intend to tax these contracts as service prior to 01.07.2010.
Conclusion: Instalment payments received before completion and full payment do not attract service tax liability for the builder prior to 01.07.2010.
Issue 3: Interpretation and applicability of Board's Circular No. 108/2/2009-ST dated 21.09.2009
The Circular clarifies that if the ultimate owner contracts with a promoter/builder/developer for construction of a residential complex for personal use, such activity is excluded from service tax under the definition of "residential complex". The Commissioner relied on this Circular to hold that the respondent was not liable to pay service tax.
The Revenue argued that the Circular was not applicable as payments were made in instalments and the transaction should be treated as taxable service. The Tribunal rejected this argument, holding that the Circular was correctly interpreted and applied by the Commissioner. The Circular supports the exclusion of such contracts from service tax liability during the relevant period.
Conclusion: The Circular is applicable and supports exclusion of the respondent's activity from service tax liability.
Issue 4: Effect of Explanation added to Section 65(105)(zzzh) w.e.f. 01.07.2010
The Explanation deems construction of a new building intended for sale by a builder to be a service provided by the builder to the buyer, thus attracting service tax. The Tribunal examined the retrospective or prospective effect of this Explanation.
Relying on the judgment of the Bombay High Court in Maharashtra Chamber of Housing Industry and various Tribunal decisions, the Explanation was held to be prospective and not clarificatory. Prior to 01.07.2010, such contracts were not covered under Section 65(105)(zzzh) as taxable services.
The Tribunal reproduced relevant paragraphs from Krishna Homes and other decisions explaining that the Explanation expanded the scope of taxable service and was introduced to tax works contracts involving transfer of immovable property from 01.07.2010 onwards.
Conclusion: The Explanation is prospective and does not apply to the period prior to 01.07.2010, hence no service tax liability arises for the respondent for the relevant period.
Significant holdings include the following verbatim excerpts:
"12.9 From the above, it is clear that the agreement to sale is only in respect of the undivided portion of the land agreement for construction is between the purchaser of the undivided share of land and the builder and hence, there is no sale of flat after construction of the complex."
"12.10 Now the question is whether construction of a single residential unit is a taxable serviceRs. Tax liability arises only in respect of a complex consisting of more than 12 residential units as per the relevant provisions mentioned above."
"Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter/builder/developer... then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of 'residential complex'."
"Thus, by this explanation, the scope of the Clause (zzzh) of Section 65(105) has been expanded... the explanation expands the scope of the taxable service... and is consequently prospective."
Core principles established:
- Construction of residential units under tripartite/bipartite agreements involving sale of undivided land shares and entrusting construction does not attract service tax unless the construction involves a residential complex with more than twelve units.
- Prior to 01.07.2010, agreements for construction of residential units where possession is handed over after full payment are not taxable services under Section 65(105)(zzzh).
- The Explanation added w.e.f. 01.07.2010 is prospective and expands the scope of taxable services to include builder-to-buyer construction contracts.
- Board's Circular No. 108/2/2009-ST supports exclusion of such contracts from service tax during the relevant period.
Final determinations:
The Tribunal upheld the Commissioner's order dropping the service tax demand against the respondent for the period 01.04.2007 to 31.03.2008. The Revenue's appeal was dismissed as the respondent was not liable to pay service tax on the construction activity under the agreements during the relevant period.
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