Service Tax on Construction of Residential Complexes - Analysis of Ruling delivered by Authority for Advance Rulings "

In its Ruling dated 7-4-2008 (Reported in 2008 -TMI - 3610 - AAR), the authority has delivered said:

1. The activity of booking the residential units to be undertaken by the applicant is a taxable service liable to service tax under the provisions of section 65 (105)

2. The impugned activity is taxable under clause (zzzh) as ""Construction of Complex"".

3. The impugned activity is not taxable under clause (zzzza) as ""Works Contract"".

4.  Since there is no material difference in the scope of taxable service where the builder / developer construct the building himself of he get such building constructed through contractor by sub-contracting the construction work. 

This ruling is a surprise for everyone and has long term implications. We have studied the reactions in the field and analyzed the matter with due respect to AAR.

1. Many people think that the appellant has committed a mistake by making an application before the AAR since the matter was already covered by the TRU 's letter F. No. B1/16/2007- TRU dated the 22nd May, 2007 and Circular No 96/7/2007-ST dated 23/8/07. But we do not agree with these arguments. It is the assessee, who faces the music of the departmental rigidness. Everybody now that usually department ignores the directions of the board and raises demand on the different grounds. So, there is no harm if someone approaches AAR to get Advance Ruling. Further, in the past we have seen many instances in which the appellant was not satisfied the ruling and approached the honorable SC and get the final solution. On the other side, everyone should appreciate the fact that the vital question of applicability of service tax on the construction activity would be solved by the honorable SC if the appellant decides to appeal against the ruling.

2. From the bare reading of the ruling, whiling awarding ruling against the appellant and in favor of revenue, the Authority did not find the argument of the revenue, on the issue of classification, relevant. Department itself wanted to classify the service under the category ""works contract (zzzza). In paragraph 23 of the ruling, it is stated that,

""Arguments were advanced before us on the point whether the proposed activities 1 and 2 could fall under sub-clause (zzzza) which makes the services in relation to the execution of a works contract exigible to service tax. The alternative contention raised by the Department has given rise to these arguments……………….Though we find some force in this contention of the Departmental Representative, we do not want to dilate on this point…."".

3. While classifying the service, AAR invoked the provisions of Section 65A of the Finance Act, 1994. Paragraph 24 of the Ruling states:

""We have already expressed the view that the service in question can be appropriately classified under sub-clause (zzzh). That classification will stand irrespective of the fact whether the service could also brought within the ambit of sub-clause (zzzza). That is the result which follows whether we apply the rule laid down in clause (a) or clause (c) of sub section (2) of section 65A""

The provisions of Section 65A are specific and in terms of sub-section (2), clause (C) can be applied only in exception circumstances where classification can not be done in accordance with the matter stated in clause (a). Therefore, the decision on the issue of classification on the basis of combined reading of clause (a) and (c) is seems to be arguable and can be challenged before the Apex Court.

4. The authority has emphasized the term ""in relation to"" to the maximum extend but did not find due force to apply the land mark decision of Apex Court in Raheja Development Corporation Vs. state of Karnataka (Reported in 2006 -TMI - 493 - Supreme Court)  in which the honorable Supreme Court has held the impugned activity as ""Works Contract"". Since the activity in question is in the nature of ""Works Contract"", the more specific category could have been decided as (zzzza) and not (zzzh).

5. Despite the above, we believe that the question could have been framed in a better way for getting the desired ruling. 

Further, one can underling the force behind the arguments and findings of the AAR that allotment and sale of residential units before construction will be subject to Service Tax. In the ruling it is stated that:

""It is clear from the preamble part of the Agreement that the plot or sub-plot on which the residential unit has to be built up and handed over to the prospective purchaser is identified and the same cannot be diverted to others so long as the purchaser is ready and willing to pay the agreed instalments of consideration. It admits of no doubt that the construction on the said plot may or may not have started by the date of booking. It is also clear that the actual sale of land together with the constructed residential unit takes place after the completion of construction, subject, of course, to the purchaser/booker paying the sale consideration."" - [Paragraph 11]

""………..We do not think that the point of time at which the ownership gets transferred will be determinative of the applicant's liability to pay service tax. Viewing from another angle, though in one sense, the applicant can be said to be constructing the residential unit on its own and not exactly on behalf of the booker, yet, the fact remains that the applicant does everything to honour its commitment to the customer(booker) from whom it receives valuable consideration in instalments. The construction and allied services, it must be noted, is referable to the agreement with the prospective buyer and cannot be viewed in isolation. The possibility of the booker defaulting in payments of instalments and the agreement being terminated in that event is really not material in evaluating the true nature of the transaction."" - [Paragraph 18] 

(For full text of ruling - visit 2008 -TMI - 3610 - AAR),