Introduction: –The amendment relating to Construction service has big implications and everyone is talking about the same. Through this article author have tried to have a deeper look into matter.
Explanation added by Budget 2010: –
In the definition of ‘Construction of Complex’ service given under Section 65 (105) (zzzh) of the Finance Act, 1994, the following explanation has been added:
“Explanation.—For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer;”;
Similarly, the following explanation has been added in taxable service of ‘Commercial or Industrial Construction service’ given in Section 65 (105) (zzq): –
“Explanation.—For the purposes of this sub-clause, the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer;”;
Thus, even the deemed service provided by a builder will fall under the service tax net by virtue of these explanations.
Non-inclusion in Work’s Contract: –
However, it is to be noted that no such explanation has been inserted in the definition of works contract service. Thus, if a service provider provides the deemed construction service under Works Contract then such deemed service will not fall under the service tax net. Only actual construction service provided by a builder will attract service tax under works contract.
This issue was also decided in Sales Tax matter in famous case of Raheja Builders. It is held in that case that such transaction is covered under works contract. Even the same situation is also pending before Apex court in another case but the Board has amended the provision before the outcome of that decision.
Some scholars have written that the non inclusion of explanation in works contract is only a clerical mistake and it will be amended soon. While others say that it has been done intentionally to see the outcome of this verdict. However, the situation is that the same explanation is not entered in works contract. Most the builders are covered under works contract and as such the service tax will not payable in such a situation. So, while comparing the service under “Commercial construction”, “Residential construction” and “works contract”, it is one more benefit to works contract service.
Explanation given by TRU Letter: –
In the TRU letter dated 27.02.2010 the Explanations inserted in the said services has been explained in the following manner:
In the definition of the taxable services ‘Construction of Complex service’ [section 65 (105) (zzzh)], and ‘Commercial or industrial construction service’ [section 65 (105) (zzq)], it is being provided 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.
Further in Annexure B to the said TRU letter, the insertion of said explanations have been explained in the following manner:
8. Service tax on construction services
8.1 The service tax on construction of commercial or industrial construction services was introduced in 2004 and that on construction of complex was introduced in 2005.
8.2 As regards payment made by the prospective buyers/flat owners, in few cases the entire consideration is paid after the residential complex has been fully developed. This is in the nature of outright sale of the immovable property and admittedly no service tax is chargeable on such transfer. However, in most cases, the prospective buyer books a flat before its construction commencement/completion, pays the consideration in installments and takes possession of the property when the entire consideration is paid and the construction is over.
8.3 In some cases the initial transaction between the buyer and the builder is done through an instrument called ‘Agreement to Sell’. At that stage neither the full consideration is paid nor is there any transfer in ownership of the property although an agreement to ultimately sell the property under settled terms is signed.
In other words, the builder continues to remain the legal owner of the property. At the conclusion of the contract and completion of the payments relating thereto, another instrument called ‘Sale Deed’ is executed on payment of appropriate stamp duty. This instrument represents the legal transfer of property from the promoter to the buyer.
8.4 In other places a different pattern is followed. At the initial stage, instruments are created between the promoter and all the prospective buyers (which may include a person who has provided the vacant land for the construction), known as ‘Sale Of Undivided Portion Of The Land’. This instrument transfers the property right to the buyers though it does not demarcate a part of land, which can be associated with a particular buyer. Since the vacant land has lower value, this system of legal instrumentation has been devised to pay lesser stamp duty. In many cases, an instrument called ‘Construction Agreement’ is parrallely executed under which the obligations of the promoter to get property constructed and that of the buyer to pay the required consideration are incorporated.
8.5 These different patterns of execution, terms of payment and legal formalities have given rise to confusion, disputes and discrimination in terms of service tax payment.
8.6 In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), 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. This would only expand the scope of the existing service, which otherwise remain unchanged.
Thus, the TRU letter clearly explains that this has been done to bring parity in tax treatment. Thus, the question can arise whether the amendment is prospective or retrospective in effect. The second clear cut position brought about is that it will expand the scope of the existing service. Now, the question here is what is role of the explanation. Whether the explanation can explain the things which are already there in the main provision? As such, it clarifies the existing provisions. As such, can it be contended that the above amendment which is clarificatory in nature will have retrospective effect? Secondly, whether the explanation can explain the provisions, whether it can neither increase nor decrease the scope of existing provisions? Thus, whether the explanation added in this provision can expand the scope of the levy?
In this regard, the Apex Court has held in case of Sulochna Amma v/s Narayanan Nair [1995(77) ELT 785 (SC)] as under:-
“It is settled law that explanation to a section is not a substantive provision by itself. It is entitled to explain the meaning of the words contained in the section or clarify certain ambiguities or clear them up. It becomes a part and parcel of the enactment. Its meaning must depend upon its terms. Sometime it would be added to include something within it or to exclude from the ambit of the main provision or condition or some words occurring in it. Therefore, the explanation normally should be so read as to harmonise with and to clear up any ambiguity in the same section. [para 8]”
On the question whether the explanation will have retrospective effect, it was held by the Apex Court in case of Cannanore Spinning and Weaving Mills v/s Collector of Customs [1978 ELT (J375)] that rule making authority has not been vested with the powers under the Central Excise and Salt Act, 1944 to make rules with retrospective effect, therefore, the retrospective effect purported to be given to the Explanation was beyond the powers of the rule making authority. Also in the case of D.G. Mahajan v/s State of Maharashtra [AIR 1977 SC 915 (p.927)], the Highest Court of India held as under: –
“It is true that the orthodox function of an explanation is to explain the meaning and effect of the main provision to which it is an explanation and to clear up any doubt or ambiguity in it. But ultimately it is the intention of the legislature which is paramount and mere use of a label cannot control or deflect such intention. It must be remembered that the legislature has different ways of expressing itself and in the last analysis the words used by the legislature alone are the true repository of the intent of the legislature and they must be construed having regard to the context and setting in which they occur. Therefore, even though the provision in question has been called an Explanation, we must construe it according to its plain language and not on any priori consideration.”
In an another decision of Hiralal Rattanlal v/s State of Uttar Pradesh [AIR 1973 S.C.1034] has held that explanation even can widen the scope of the main provision.
Thus, from above decisions, it is clear that the explanation cannot have retrospective effect. Secondly, it can widen the scope of the main provision. This will be applicable in present case also. Thus, this provision will have prospective effect. Secondly, widening the scope of this levy by this explanation is legally sustainable.
Status of Circular No. 108/ 2/2009: –
There is another aspect which has arisen due to insertion of the said ‘Explanations’. In the Circular No. 108/2/2009-ST, dated 29.01.2009, the Board had given clarification to the effect that:
Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller 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 would not attract service tax. Further, if the ultimate owner 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 after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. However, in both these 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.
Thus, any service provided by a builder while the said property is in his possession and title would be ‘self service’ and service tax will not be attracted to the same.
Now the status is that the Circular No. 108/2/2009-ST has not been rescinded yet and under the clarification issued therein, no service tax will be leviable. But the new explanation is going totally against the same. Thus, two totally different provisions have been made by the Government. An assessee can always contend that the benefit of provisions which are more beneficial to them and in this case, Circular no. 108/2/2009-ST is favouring the assessee. But the department can contend that the explanation has more value as it is part of the act. Thus, this controversy needs to be resolved.
Even before also when the circular has been issued by the Board, the departmental officers were not accepting the same and saying that it is against the law. The recent Apex Court decision is clear that the circulars which are against the provisions of law are not binding on the departmental officers. As such, even before this amendment, the litigation was going on. Thus, one clear benefit of this amendment will be that there is clarity in law that all builders are liable to service tax. But we have to wait till the enactment of this budget when this provision will be applicable.
“Personal Use”: –
The hopes are not over for the builders. The definition of “residential construction” still has the word “personal use” in the definition. Moreover, the builder can also claim exemption from payment of service tax for providing the said deemed construction services under the main act as he can claim that he is providing service to individual person for his personal use and for the same, no service tax can be levied on him.
Representation made by the Trade & Industry: –
Many representations have been made to the Central Government in this regard. The powerful realty sector lobby is representing the matter before the Government. Every newspaper is publishing the news relating to the same. They are saying that the cost of flats will increase and the realty sector, which has recovered from the recession, will not be able to absorb this additional cost. There have a strong lobby and let us see whether the service tax levy is rolled back.
The realty sector is also pleading the practical difficulties in this regard. They are saying that no builder takes the full amount on completion of the building. Even the condition is that when the completion certificate is given by authorities in this regard. This is given when the complete complex is ready. No builder will wait till that time. Even the completion certificates are issued after a long time. Thus, all the builders will be covered under the service tax in name of clarity in the provisions. Thus, a straight forward provision should be made that every builder has to pay the service tax.
Furthermore, what will happen to ongoing projects? Whether the service tax will be applicable? Till date, this explanation is not added to the statue book. It will form part when the finance bill is enacted. After that the service tax will be applicable. The work completed on that date will not be chargeable to service tax. It will be charged to service tax after that date. This will lead to confusions and litigations. As such, it is represented that the contract entered before the date of enactment should be exempt from the service tax. It is practical approach also otherwise the builder will have to pay from his pocket as the agreement has already been entered.
Conclusion: –Thus, it is clear that that the realty sector has been worst hit by this year budget. Even this was explained by us in our power point presentation on the budget. This explanation will bring every builder in ambit of service tax. The retrospective amendment of renting has added fuel to the fire. The Finance Ministry has not waited for the outcome of the verdict of Supreme Court and has proposed this amendment to nullify the impact of Delhi HC decision in case of Home solutions. Last year the Government was giving relief to this industry to come out of the recession. This year a number of taxes have been imposed on them. Let us hope that the representations have their effect and relief is granted to the industry. If this is not done then it will be great blow to industry.
CA Pradeep Jain
Sukhvinder Kaur, LLB