CA Bimal Jain
In a tri-partite construction business model, there are 3 parties involved viz. the land owner, the builder/developer and the contractor.Typically, in such a model, the land owner enters into an agreement with the builder,whereby, the land owner gives either land/development rights (to construct/develop a residential complex and sell flats/houses of such complex to buyers) to the builder. The builder/developer, in turn, agrees to assign a portion of the constructed area, in the form of flats in favour of the land owner. The remaining flats are sold by the builder/developer to various buyers. The builder/developer receives consideration for the construction service provided by him, from two categories of service receivers:
(i) From landowner, in the form of land /development rights; and
(ii) From other buyers, normally in the form of money
Education Guide Vs. CBEC Circular:
The issues of valuation of the construction service provided by the builders/developer to the land owner and the relevant date for payment of Service tax on such transaction has been a matter of debate since long, more particularly because of the contradiction of views as expressed in the Para 6.2.1 of the Education Guide on the Service Tax dated June 20, 2012 released by the Central Board of Excise and Customs (“CBEC”or “the Board”) [“the Education Guide”] viz-a viz clarification issued vide CBEC Circular No. 151/2/2012-ST dated February 10, 2012 (“Board Circular No. 151”).
On one hand, the Board Circular No. 151, postpones the liability of Service tax till the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (eg. allotment letter). Relevant extract of the Circular No. 151 is reproduced hereunder:
“Value is determinable in terms of section 67(1)(iii) read with rule 3(a) of Service Tax (Determination of Value) Rules, 2006, as the consideration for these flats i.e., value of land / development rights in the land may not be ascertainable ordinarily. Accordingly, the value of these flats would be equal to the value of similar flats charged by the builder/developer from the second category of service receivers. In case the prices of flats/houses undergo a change over the period of sale (from the first sale of flat/house in the residential complex to the last sale of the flat/house), the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (eg. allotment letter)..”
However, Para 6.2.1 of the Education Guide provides that value ofconstruction services provided to such land owner will be the value of the land when the sameis transferred and the point of taxation will also be determined accordingly. Relevant extract of the Education Guide is reproduced hereunder:
“6.2.1 What would be the liability to pay service tax on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights and to other buyers. If payable, how would the services be valued?
…..Construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/ developers even for the flats given to the land owner….
Value, in the case of flats given to first category of service receiver will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.”
Manifestly, there is clear contradiction between the Board Circular No. 151 and the Education Guide which left the matter of discharging Service tax liability on the flats given to land owner, a subjective issue.
Based on the recommendation of High Level Committee set up by Ministry of Finance, the TRU Instruction F.No. 354/311/2015-TRU dated January 20, 2016(“the Instruction”)has clarified that in valuing the services of construction provided by a builder/developer to a landowner, who transfers his land/development rights to builder, for getting, in return, constructed flats/dwellings from builder/developer, the Service tax assessing authorities should be guided by the Board Circular No. 151 and not the Education Guide.
The Instruction further explains as under:
To view the full Instruction, please click on the link below:
(Author can be reached at Email: firstname.lastname@example.org)