Service Tax is not applicable to any builders

SERVICE TAX ON CONSTRUCTION OF RESIDENTIAL COMPLEX
SERVICES

Section 65(105)(zzzh) of the service tax Act deals with the construction of
residential complex.

The section is applicable to any service provided or to be provided to any person
by any other person in relation to construction of complex.

Construction of complex means:

Construction of a new residential complex or of a part thereof;

Completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings or any similar services;

Repairs, alterations, renovations or restoration of, or similar services in relation to, a residential complex.

The CBEC has clarified that where a builder, promoter, or the developer engages the contractor for the construction of a residential complex, then the contractor shall be liable to pay the service tax on the gross amount charged for construction services provided to the builder, promoter or the developer. However, if no contractor is engaged and the job of construction is under taken by the builder, promoter or
the developer himself, then in such cases, in the absence of the service provider and service receiver relationship, the question of providing taxable service to any person by any other person does not arise. Therefore, service tax is not leviable.

Also, as per the Ministry’s Letter F.NO 332/35/2006 – TRU, Dated- 1-8-2006, service tax is not applicable to any builder or promoter or developer or any such person engaged in the construction of residential complex, which does not employ any contractor for the construction. (As per the annexure attached).

However the Advance ruling authority in the case of M/s HAREKRISHNA DEVELOPERS Ruling No. AAR/3 (ST) 2008 dated 7/4/2008 has contradicted the view of CBEC that where no Contractor is engaged then Service Tax will not be levied.
The authority in the aforesaid judgment made the following observation.
The whole purpose of inserting sub –clause (zzzh) in section 65 (105) appears to bring the services in connection with the construction of Residential complexes by the Developers/ Promoters with the net of taxable services.
The activity of building Residential Units on an earmarked plot in the Complex and making construction thereon as per the plan, design and specification, obtaining various permission and providing amenities apart from the provision of common infrastructural facility before handing over the building to the customers would undoubtedly constitute services provided or to be provided by the applicant.
The facts that the Ownership and the possession remains with the applicant throughout the process of the construction and that the constructed residential unit can only be transferred to the booker / buyer on receipt of entire sale consideration does not have a real bearing on the question whether any services in relation to the construction of Complex are required to be rendered by the applicant.
The Advance ruling Authority has in its judgment focused on the situation where the Builder or Developer who owns the land takes up the construction work either before or after the booking from the prospective purchaser is accepted.
It is on this controversy the Advance ruling Authority has focused its attention while deciding whether there is taxable service within the meaning of sub-clause (zzzh) of section 65 (105).
The Advance ruling authority has answered to this controversy in affirmative and held that the same will be liable to Service Tax.
In this regard we are of the following view.
The decision in the Aforesaid case of M/s HAREKRISHNA DEVELOPERS is an advance Rulings which in our opinion is just view of the experts. The same will not be binding on the assessee in light of the Circular issued by the CBEC which specifically states that if no contractor is engaged and the job of construction is undertaken by the Builder, Promoter or the Developer himself then in the absence of the service provider and service receiver relationship, the question of providing taxable service does not arise and therefore service tax is not leviable.

We would further add that the circular issued by the CBEC is more binding on the revenue as compared to the advance Ruling which is just an opinion of the experts.
Thus we are of the view that service tax will not be applicable where no contractor is engaged. We would also like to conclude that in view of the fact that VAT has been levied on the sale of Flat, thus treating the same as the commodity levying service tax on the same is not justified as this will tantamount to treating the same as service.