Construction of Flats by Developers - is this activity a Works Contract liable to Sales Tax / Service Tax? "

In K. Raheja Development Corporation v. State of Karnataka (Reported in 2006 TMI -493 - Supreme Court -  Service Tax), the honorable Supreme Court has affirmed the decision of Karnataka High court and held that the construction of flats by a developer was in the nature of Works Contract and accordingly liable to Sales Tax (Work Contract Tax). 

In view of this decision, BOARD and Director General of Service Tax (DGST) had issued clarification regarding applicability of service tax on construction service. (See Circular F. No. 332/35/2006 - TRU dated 1-8-2006 andG.G.S.T. Letter F. No. V/DGST/22/Audit/Misc/1/2004, dated 16-2 -2006) 

The clarification issued by the board & DGST and stand taken by the department, thereafter, has created more ambiguity. 

Now, in view of recent decision of the honorable High Court of Allahabad, in the matter of M/s Assotech Realty Pvt. Ltd. (Reported in 2007 -TMI - 1440 - HIGH COURT, ALLAHABAD - Service Tax), we have to see that to what extent this  ambiguity has been resolved.

In its decision, honorable High Court of Allahabad has held that the activity in question is not in the nature of works contract and not subject to sales tax. 

A careful study of the decision of the Honorable Allahabad High Court, reveals the both the cases were identical in terms of major facts and circumstances except few. The unique fact (as identified by the HC) that has contributed to these opposite rulings is as follows: 

K Raheja Development Corporation were constructing the units for and on behalf of the persons who has agreed to purchase the flats. 

 Assotech Realty Pvt. Ltd. was constructing the flats not for and on behalf of the prospective allottees but otherwise.

Works contract classification: conflicting rulings alter whether developer-led flat construction attracts indirect tax liability nationwide. The Supreme Court in K. Raheja held developer construction done for and on behalf of purchasers is a works contract liable to sales tax, prompting administrative clarifications; the Allahabad High Court in Assotech reached the contrary finding because the developer there did not construct for or on behalf of prospective allottees, creating divergent tax characterisations.