Punjab and Haryana High Court in the case of G.S. Promoters v. Union of India reported in MIT-2010-574-HC] upheld the constitutionality of the levy of service tax on the deemed service while selling residential complex by builder to buyer.

Amendment made vide Finance Act 2010 in relation to construction of complex service

An Explanation was added to the definition of taxable service of ‘construction of complex service’ whereby construction of a residential complex intended for sale by the builder before or during or after construction is deemed to be a service provided by the builder to the buyer;

No service tax is leviable if entire payment for the property is paid by the buyer after completion of the construction evidenced by the certification by the local authorities;

Thus service tax has been levied on any construction of residential complex where consideration is received prior to obtaining completion certificate by creating a deeming fiction.

The Bombay High Court had granted an interim protection to the petitioners in a similar petition challenging the constitutional validity, by staying recovery of service tax

Question before the Court:- Whether the Explanation to the taxable service of ‘construction of complex’ service was constitutional?

Decision of the Hign Court

The petitioner contended that the Explanation widens the scope of the levy by including a sale of property. It was further argued that if the builder does not undertake the construction activity, then the builder cannot be considered as a service provider in relation to a service recipient.

The petitioner relied on the decision of the Gauhati High Court in Magus Constructions [2008 (11) STR 225] wherein the High Court held that when a person constructs for himself and thereafter sells the property, there cannot be any service in the absence of a service provider in relation to a service recipient.

The High Court held that the activity sought to be subjected to tax would be presumed to be constitutional unless there is any encroachment in the field of the State Legislature.

The High Court further held that there was no argument raised that there was any encroachment on the power of the State Legislature except that the levy under challenge was on the element of sale of immovable property.

The High Court after relying extensively on the ratio laid down in a plethora of Supreme Court judgments held that whether or not service is involved has to be viewed not only from the perspective of the builder but also the service recipient (buyer).

The High Court while finally upholding the constitutionality of the Explanation held that the Explanation seeks to tax service in relation to construction which is present even when the construction is carried or when the construction is carried out and before the flat is sold.

Comments:- The decision of the High Court is likely to cause additional hardship to the already downcast real estate or its customers. It would be interesting to observe the stance of the other High Courts across India where similar writ petitions challenging the constitutional validity of the Explanation are pending.

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  1. srs says:

    there are about 100 people those who have purchased the appartments have paid the service tax to the service tax Department through the developer in 2007-08 & 2008 – 09, based on the demand given by the developer. The developer also has deposited the service tax to the government. Later, there was a clarification through a Govt. circular that the service tax in connecting with the construction of residential complex is not applicable. Based on this service tax position prior to 1st july 2010 reg, there is a clarification which i could able to find out thru website issued by Commissioner of Central Excise, Pune-III, Trade Facility No. 1/2011, dated 15-2-2011 stating that

    With effect from 1-7-2010 (the Finance Act, 2010), an explanation has been inserted below sub-clause (zzzh) of section 65(105) to clarify that unless the entire consideration for the property is paid after the completion of construction (i.e. after issuance of completion certificate by the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly .
    And he clarifies that:
    (a) Where services of construction of Residential Complex were rendered prior to 1-7-2010 no Service Tax is leviable in terms of para 3 of Boards Circular number 108/02/2009-S.T., dated 29-1-2009. The Service of Construction of Residential Complex would attract service tax from 1-7-2010. Despite no service tax liability, if any amount has been collected by the builder as “Service Tax” for Services rendered prior to 1-7-2010, the same is required to be deposited by the builder to the Service tax department. Builder can not retain the amount collected as Service Tax.
    (b) For services rendered after 1-7-2010 for which payment has been or is made after 1-7-2010, service tax is leviable and builder is liable to deposit the service tax to the service tax department. The only exception to this is provided within the parenthesis () in the “Explanation” in para 3.
    (c) For services rendered after 1-7-2010 for which payment was made prior to 1-7-2010, service tax has been exempted by the Govt. based on documentary evidence vide notification no. 36/2010-S.T., dated 28-6-2010 as amended. Therefore, this benefit can be availed by builders on the basis of documentary evidence.

    Commissioner of Central Excise, Pune-III, Trade Facility No. 1/2011, dated 15-2-2011

    In this situation where the service tax refund case stands for.

    I have made severe follow-up pn 2-3 occassions since no one ready to give any help let me know what needs to be done, to get back this service tax refund.

    Please help


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September 2021