Let me first present the related provision. The provision says that the Service tax liability on consideration received from Landlord where land is received from the land owner by the builder in consideration of some flats to be given later in lieu of the land (i.e. Joint Development Agreement), service tax is payable on the value of flats offered to the landlord. As soon as builder gets possession of land from land owner, it is ‘advance received’ and service tax will become payable on or before the due date next month. In such case, value of service will have to be found out on basis of value of service of identical or similar flats or on basis of cost of construction plus reasonable profit.
After reading the related provision above, you can realize that although under JD Model for a Builder it is actually a case of purchase of Land from the Land Owner and paying the price of the Land in kind (i.e. consideration paid in the form of constructed apartments) Service Tax provisions look into the transaction from the opposite direction. Service Tax provisions consider such transaction as a case of purchase of apartments by a person (Land Owner) in exchange of his land. It means that builder sells some apartments (40 apartments in our example) and instead of receiving cash from the purchaser (Land Owner) builder receives the sale consideration in the form of land. Therefore, as soon as the land is handed over to the builder it is considered as an instance of receiving advance for sale of those agreed number of apartments (40 in our example) and the builder becomes liable to pay Service Tax on that advance in the form of land.
you can refer to the judgment passed by the Mumbai High Court in the case of Maharashtra Chamber of Housing Industry and Others vs. Union of India where the High Court has upheld the constitutional validity of such provision and also clarified that it is not a case of tax on Land or building as a unit but on the construction service provided by the builder to the Land Owner.
Thanks and Regards,
CA CS B.Com