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CA Pradeep Jain, CA Preeti Parihar,CA Neetu Sukhwani


“This is a court of law, young man, not a court of justice.”… This phrase by Oliver Wendell Holmes, Jr. is remembered by every person who loses in court of law despite being genuine and working in boundaries of law. The sole reason of losing is the language contained in legal provisions where lacunas are inbuilt, eventhough unintentional, yet causes pains to genuine taxpayers. At the time these loopholes are bridged, much of the people have already suffered, mentally and financially, with no fault at their end. This piece of articulation is about one such lacuna contained in the service tax law and having vital impact on the real estate sector.

Existing scenario:-

List of declared services has been prescribed under section 66E wherein clause (b) includes construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, as a declared service except where the entire consideration is received after issuance of completion certificate by the competent authority. This provision co-relates to the definition of service which specifically excludes –

(a)  “an activity which constitutes merely,-

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner;….”

Reading the above exclusion clause from the definition of service with the clause (b) of section 66E, indicates that no service tax is leviable in the circumstances when entire consideration is received after completion certificate/Occupancy certificate by the competent authority as then it would amount to mere ‘sale’ of the immovable property.

Practices prevailing in real estate sector:-

As already indicated in the clause (b) of section 66E, there are two types of practices that prevail in the construction sector – one is where a flat is booked by probable buyer beforehand and the consideration is received in piecemeal alongwith the various stages of construction. The second case is where the entire consideration is received only after the receipt of completion certificate by the competent authority. The first case is but obvious a service that is already listed as declared service as the builder/construction company and probable buyer are two different persons where one person carries out construction service on behalf of other; where the buyer, service and consideration all are identifiable at the time of entering into contract. However, in the second case, the builder/construction company and owner are the same, no other person is involved; thus it cannot be the service. When the construction is done completely, there turns out to be an immovable property and when it is transferred, it is deemed as sale of immovable property which is specifically excluded from the definition of service. As such, the sale of immovable property is not at all a service as per section 65A (44) of the Finance Act.

Legal provisions:-

W.e.f. 1.4.2011, the definition of ‘exempted service’ in rule 2(e) of the Cenvat Credit Rules, 2004 was amended and the amended definition is as follows:

“Exempted services means taxable services which are exempt from the whole of service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken.

Explanation- For the removal of doubts, it is hereby clarified that ‘exempted services; includes trading.”

Thus, the definition of exempted service includes the trading activity. When it comes to construction sector, builders have been treating the trading of flats as an exempted service, accordingly, the Cenvat credit is availed and the credit proportionate to Trading activity is reversed under rule 6(3) of the Cenvat Credit Rules, 2004. This is the general practice in the real estate sector.

Is trading of “flats” an exempted service?

Though the definition of exempted service specifically includes the term “trading”, it is worthwhile to discuss here the definition of term “trading”:-

  • As per Macmillan Dictionary, trading is “the activity of buying and selling goods”
  • As per The Free Dictionary by Farlex, trading means “To engage in buying and selling for profit.”
  • As per The Oxford Dictionary, trading means “to buy and sell goods and services:”

In view of above definitions, it is clear that trading normally means buying and selling of goods. Further, “goods” has the meaning assigned to it in clause (7) of section 3 of the Sale of Goods Act, 1930 which reads as follows

“goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

Thus, trading will cover only purchase and sale of movable properties. Relating this term to the construction sector, trading of flats (being an immovable property) will not be covered in the definition of exempted services. Even if we accept it for the sake of argument also, that trading of flats is covered in exempted service, then too, it will include “purchase and sale” of flats; “construction and sale” of flats will not be covered. Thus, even the liberal interpretation of term “trading” will also exclude majority of the real estate sector where the most common practice is to construct the flats and sale them. Trading of flats is very rare by the builders. So, now coming to the moot question – Whether the practice adopted by the builders “availing the Cenvat credit and reversing proportionate credit attributable to trading of flats” is correct in view of existing legal provisions? Definitely not…

Recollecting the existing provisions:-

The definition of service as given in section 65A (44) of the Finance Act specifically excludes “the activity that constitutes merely a transfer of title in goods or immovable property, by way of sale, gift or in any other manner”. Thus, there is a specific provision inserted in service tax law w.e.f. 1.7.2012 wherein any transfer in title of immovable property has been specifically excluded from the definition of “service”. Thus, the sale of an immovable property is not at all a “service”.

When any activity is not a “service”, obviously it cannot be an “output service”.

Going further, Cenvat Credit is allowed on those services which fall in the definition of “input service”.

The definition of input service as given in rule 2(l) of the Cenvat Credit Rules, 2004 starts as follows:-

“Input service” means any service, —

(i) used by a provider of output service for providing an output service; or…………”

Thus, to be an input service, the service availed should be used for providing an “output service”. In the given case, the trading/selling of flats is not a “service”, thus, it cannot be an output service. Therefore, the services availed for constructing the flats in respect of which entire consideration is received after receipt of completion certificate, cannot be termed as “input services” as these are not used for providing an “output service”. When the services pertaining to sale of flats are not the “input services”, credit cannot be availed at all. As such, the question of reversing the credit does not arise at all since the provisions of Cenvat Credit Rules, 2004 are not at all applicable.

Sale or service – uncertainty at the time of incurring the construction expenses:-

The builder undertakes the construction of the whole building having different flats therein. All the material, labour and other expenses are incurred by the builder in lumpsum. However, the agreements in respect of the flats can be at various stages like – at the time of bhoomi-poojan, during the various phases of construction or after completion of construction. Thus, at the time of incurring the expenditure, it is normally not known whether it will amount to provision of service or sale of immovable property, in respect of a particular flat. Also, irrespective of the fact that there are two types of contracts while construction of an apartment – one amounting to service and other amounting to sale; the builder has to incur all the expenses related to construction uniformly for all the flats.

What can be the remedy?

To be very honest, there is no feasible remedy to this problem in our view.

At the time of incurring the expenses or availing the service, it is not known that it being used for providing an “output service” or it is being used for construction of flats which will be sold after receipt of completion certificate. Thus, there is only one option, either not to avail the Cenvat credit at all until the construction of entire building is over and thereafter avail only the proportionate credit. Obviously, no prudent man will do so as the liability of service tax has already arisen on him as per Point of Taxation Rules, 2011 at the time of booking of even a single flat by the prospective buyer. Thus, non availment of Cenvat credit at all until completion of construction is in-fact not an option at all for a prudent man. Also, even if one holds courage to opt for this, the availment of proportionate credit on input services will become a cumbersome job as almost each and every invoice will have to be considered and proportionate credit will be taken. Further, there is no such provision in the Cenvat Credit Rules, 2004 to bifurcate the service tax amount shown in the invoice and avail a part thereof. Thus, department will definitely object on it. So far as practice prevailing in real estate sector at present is considered, it is totally not sustainable in view of existing legal provisions as sale of flats is not a service at all, thus, no credit can be availed in respect of services availed for it. So, at present, there is no remedial action for this loophole tightening the neck of the builders.

Good bye words:-

The government has extended the facility of Cenvat credit alongwith abatement in order to encourage the service providers. However, this unintentional lacuna is withholding this benefit and the poor builders are being overburdened from both the sides. On the one side there is open invitation to litigation and on the other side there is huge increase in cost of the projects. Such a suffering to one of the highest revenue generating sector is, of course, not the intention of the lawmakers. But whether or not intentional, the language of legal provisions is more often literally interpreted by the Revenue officers, which results into nothing but another round of litigation; subsequently followed by the amendment in genuine cases. However, at the time any amendment/clarification comes, most of the service providers have already suffered a huge mental and monetary harassment. Awaiting for an amendment soon, writing a new history in the service tax law… else the poor builders will be left by thinking over the verdicts of Oliver Wendell Holmes, Jr. – “This is a court of law, young man, not a court of justice.”

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June 2024