Service Tax Circular on applicability of service tax on activities carried out by builders / promoters / developers

Brief Background

Construction of building complexes, having more than twelve residential units is subject to service tax under the category of „Construction of Complex Services.? In the past, various views have been expressed on the applicability of the service tax in cases where an agreement of sale is entered into between the builder and the buyer of a unit in a residential complex, as mentioned below:

• A view that by virtue of the agreement of sale, the buyer becomes the owner of the unit and the activity of construction undertaken after entering into an agreement of sale becomes a service classifiable under the category of „Construction of Complex Services.?
• A view that any construction activity undertaken even after entering into agreement to sell does not result in provision of service but the transaction remains that of sale of immovable property. The sale transaction is complete only after the construction of the residential unit is completed and the construction activity undertaken by the builder should be regarded as services provided to oneself.

In this context, the CBEC has issued the subject circular to clarify the levy of service tax in a case where the promoter / builder / developer enters into an agreement with the buyer for selling a dwelling unit in a residential complex at any stage of construction and also makes construction linked payments.

The clarification:

The CBEC has clarified as under vide Service Tax Circular No.108/02/2009 Dt. 29th January 2009 as under:

1. As per the provisions of the Transfer of Property Act, initial agreement between promoter / builder / developer and the buyer in the nature of an „agreement to sell? does not create any interest in or charge on such property.

The promoter / builder / developer remains the owner of the property till the completion of construction and full payment of agreed consideration upon which a sale deed is executed. It is only after the execution of the sale deed that the ownership gets transferred to the ultimate buyer of the unit.

Therefore, any service provided by the promoter / builder / developer in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently not attract service tax.

2. Further, if the buyer enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and the buyer receives such property for his personal use, then such activity would also not be liable to service tax. This is in view of the specific exclusion under the definition of residential complex, whereby „residential complexes,? which are constructed by a person directly engaging any other person for designing or planning of the layout, and the construction is intended for personal use as residence by such person, are excluded.

3. However, in both the above situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.

It has also been specifically clarified that any contrary decision by the Advance Ruling Authority in a specific case would have limited application to that case only.