The circular, dated August 1, 2006, aforementioned, is binding on the department and this circular makes it more than abundantly clear that when a builder, promoter or developer undertakes construction activity for its own self, then, in such cases, in the absence of relationship of “service provider” and “service recipient”, the question of providing “taxable service” to any person by any other person does not arise at all. In the present case too, the materials placed by the writ petitioners clearly show that the construction activities, which the petitioners have been undertaking, are in respect of the petitioners’ own work and it is only the completed construction work, which is sold by the petitioner-company to the buyers, who may have made agreements for sale before the construction had actually started or during the progress of the construction activity or at the end or completion of the construction activity. Any advance, made by a prospective buyer, or deposit received by the petitioner-company, is against consideration of sale of the flat/building to such prospective buyer and not for the purpose of obtaining “service” from the petitioner-company.
IN THE HIGH COURT OF GAUHATI
Writ Petition (C) No. 2615 of 2006.
Magus Construction Pvt Ltd
Vs
Union of India
I. A. Ansari J.
Date of Judgment: 15th May, 2008.
J U D G M E N T
Per I. A. Ansari J :
1. By making this application under article 226 of the Constitution of India, the petitioners, who claim that petitioner No. 1 is a private limited company, engaged in the business of development and sale of immovable property, i.e., real estate, have impugned a notice, dated March 6, 2006 issued by respondent No. 3, namely, Superintendent of Central Excise, to the petitioner, whereby the petitioner-company has been asked to get itself registered under section 69 of the Finance Act, 1994 (hereinafter referred to as, “the Finance Act, 1994”), inasmuch as the petitioner-company has been, according to respondent No. 3, “providing commercial or industrial construction service/construction of complex service”. The petitioners challenge the very authority of respondent No. 3 to issue the notice, which stands impugned in the present writ petition, the case of the petitioners being, in brief thus : Petitioner No. 1 is a private limited company engaged in the business of development and sale of immovable properties, i.e., real estates. The petitioner-company constructs buildings and sells premises/flats in such buildings. During the course of development of such property and construction of buildings thereon and also after completion of such construction, the petitioner-company enters into “flat purchase agreements” with various premises/flat purchasers, whereunder the petitioner-company allots and sells flat/premises, in such buildings, to the purchasers. The said transaction is a transaction of sale of flats/premises and the consideration is payable to the petitioner-company in instalments as per the terms, which may be mutually agreed upon, though the terms of the agreement are, usually, co-related to the extent and the stage of the development of the constructional work. The agreement for sale of such flats is stamped as sale of flat/premises for the entire consideration. Before accepting money as advance payment or deposit out of the sale price, the petitioner-company enters into an agreement for sale, which is registered. The agreement contains various details and price including area of the flat, the price of the flat (the price of common areas and facilities being shown separately) and various other facilities concerning the flat, etc. For the purposes of carrying out construction work of the buildings, the petitioner-company engages various contractors for obtaining construction related services to the petitioner-company. Thus, in their various projects, the petitioners have engaged reputed contractors. The petitioners, at times, engage contractors, who supply labour. Sometimes, the petitioners carry out part of the constructional activities. However, the petitioners carry out such constructional activities for themselves and for their own purposes and not for any one else. The transaction between the petitioners and the flat purchasers is purely a transaction for sale of the flat/premises and cannot be treated as a contract for rendering of service of any nature whatsoever. On certain occasions, instead of purchasing the land from the owners, the petitioners enter into agreements with the owners of the land, such agreements being popularly known as “development agree ment”. Under such agreements, the petitioners become entitled to construct a building on the land and sell the flats, which may be constructed thereon. The petitioners acquire all the rights, title, interest and advantages of the owners including the entitlement to sell, transfer, deal with, dispose of all the premises and areas in the building or structures to be constructed by the petitioners. The petitioners are given the right to enter upon the land, to raise constructions thereon and sell flats constructed on such land. Even after execution of such agreements, the constructional activities, carried out by the petitioners, are mostly through other persons working as external contractors. In any case, such constructional/developmental activities are carried out by the petitioners for themselves and for their own benefits and not for any other entity or person.
2. The respondents have resisted the writ petition by filing an affidavit, their case being, briefly stated, as under :
(i) As per the definition of “construction of complex service”, appearing in section 65(105)(zzzh) of the Finance Act, 1994 (as amended), since the petitioner-company is providing service to its clients, the service, so provided by them, is taxable under “service tax”. Hence, the petitioner-company is required to get, as per section 69 of the Finance Act, 1994 read with rule 4 of the Service Tax Rules, 1994 (in short, “the said Rule”), as amended, registered so as to pay the “service tax”.
(ii) The activities undertaken by the builders for construction of flats/buildings, for and on behalf of prospective buyers, for consideration of cash or deferred payment is covered under “works contract” and not “sale”. Although it has been stated by the petitioners that the agreements, signed between the petitioner-company and the prospective purchaser of the flat/building, are termed as “deed of agreement for sale of flat and land”, the fact remains that such agreements are of “works contract” and, hence, the petitioner-company is required to get itself registered and pay “service tax”.
(iii) The petitioner-company agrees that it accepts money as advance or deposit on the basis of agreements for sale. Such an agreement contains various details, price, the area of the flat, the common areas and amenities/facilities that will be available in the flat. Thus, the agreement, in such a case, is basically an agreement for construction of the flat as per specifications contained in the agreement.
(iv) The petitioner-company admits that it has to enter into agreement for sale before accepting money as advance or deposit. If it be so, the agreement is signed before the buildings are made. At that time, the buildings/flats are to be found only in the specifications of the agreements. Whatever name the agreements may bear, the saleable products/things are not made/produced/constructed at the time of making of the agreement. A non-existent thing cannot be sold against consideration. Hence, con struction is the essential and immediate obligation of the petitioner-company and that too, according to the specifications/dictation of the second party within the stipulated period of time. Thus, the petitioner-company has been rendering/providing service of construction of complex to the parties in compliance with the agreements against the advances received by, or deposits made with, the petitioner-company.
(v) The definition of “construction of complex service”, as given in section 65(105)(zzzh) of the Finance Act, 1994, is wide enough to include estate builders, such as, the petitioner-company.
(vi) The agreement is executed between the petitioner-company and the prospective buyers before the commencement of the works of the flat/building or prior to the completion of the work of the relevant flat or building. Thus, the agreement signed between the petitioner-company and the prospective buyers is nothing, but works contract and, as such, the petitioners are liable to pay “service tax”. The transaction between the petitioner-company and the prospective buyers is purely transaction for construction as per specifications in the agreements for sale. The very fact that the petitioner-company receives advances/deposits and gets the agreement registered makes the petitioner-company work for and on behalf of the prospective buyers.
3. I have heard Dr. A. K. Saraf, learned Senior Counsel, for the petitioners and Mr. H. Rahman, learned Assistant Solicitor General, appearing on behalf of the respondents.
4. The moot question, which the present writ petition has raised, is this : whether the petitioner-company has been working, as a “service provider”, for those persons with whom the petitioner-company enters into agreements and constructs flats for the purpose of sale to those with whom such agreements are entered into ?
5. In order to ascertain the exact nature of work, which the petitioner-company has been carrying on, a careful scrutiny of the relevant clauses of the agreement, which the petitioner-company enters into with prospective buyers, is necessary. One of such agreements for sale of the flats has been annexed to the writ petition. Some of the relevant clauses of the agreement for sale are extracted below :
“1. That the first party agrees to sell and the second party agrees to purchase the flat described in Schedule B along with the proportionate and undivided share of land for a total sale of price of Rs. 7,86,500 (rupees seven lacs eighty six thousand five hundred only) which shall be paid by the second party to the first party as per the payment Schedule below :
