levy of service tax on construction of flats by builders
Issue of classification of service whether work contract or construction of complex service:-
The assessee is engaged in construction of a complex having common area, parking space, swimming pool, airconditioned gym, community hall, separate lounge for staff at stilt level, garden, park and common elevators intended for sale to prospective buyers. The assessee has entered into agreement with prospective buyers for sale of proposed under construction flats/tenements including undivided share of land having the above facilities(Literature enclosed as Annexure ‘A’). The agreement to sell contains the value of land, cost of construction and administrative charges to be collected from the buyer in a phased manner till the completion of construction of flat and ultimate registry of the deed of conveyance. The assessee have classified their service under ‘Work Contract Service’ and discharging their service tax liability @12.36% on the value @40% of the works contract amount as declared in the agreement to sell in terms of Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006 (as amended).
Definition of Work Contract Service-
Sec.65(B) (54) "works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;
Sec.66(E) (b) 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, except where the entire consideration is received after issuance of completion-certificate by the competent authority. Explanation.—For the purposes of this clause,—
(I) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:— (A) architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or (B) chartered engineer registered with the Institution of Engineers (India); or (C) licensed surveyor of the respective local body of the city or town or village or development or planning authority; (II) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure.
66F. Principals of interpretation of specified descriptions of services or bundled services:-.
(2) Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.
(3) Subject to the provisions of sub-section (2), the taxability of a bundled service shall be determined in the following manner, namely:––
(a) if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character;
(b) if various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax. Explanation.— For the purposes of sub-section (3), the expression "bundled service" means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.’;
The classification of the service under ‘Work Contract Service’ appears to be inappropriate, wrong and against the provisions of Finance Act, 1994 on the following ground:-
A) Basic difference between “Construction of Residential Complex” and Works Contract. Residential Complex service: As per definition and classification of “Construction of Residential Complex” service, it covers complex comprising of a building or buildings, having more than twelve residential units (amended w.e.f. from 01.07.2012 having more than one residential unit), a common area; and any one or more of facilities or services such as park, lift, parking space etc. and also may include sale of undivided portion of Land.
Works Contract: This service not include sale of undivided portion of Land and not excluding service tax liability if whole payment is received after completion.
Hence ,there is basic difference between both the service and both activity can not be treated at par for service tax matter. Only when the activity of Construction having no characteristic viz. sale of un-divided portion of land coupled with construction of more than one residential unit, common premises, infrastructure and amenities etc , the same can be covered under Works Contract otherwise not.
B) As per Section 66E(b) of the Finance Act, relevant for classification of service, activity of booking of under construction flats falls under “Construction of Complex”, a declared service. Section 66F(2) of the Finance Act, 1994(w.e.f. 01.07.12): Where a service is capable of differential treatment for any purpose based on its description, the most specific descriptttion shall be preferred over a more general descriptttion. As per guideline provided in Section 66F (w.e.f. 01.07.12), as the Service of “Construction” is one of the various activities mentioned in the “Works Contract Service”,however, under Sec.66E(b) “Construction of Complex intended for sale to a buyer, wholly or partly” is a declared service and hence more specific (and different from works Contract due to differences as discussed in A above). The nature and characteristic of the activity of the service being provided by the assessee exactly matches the description of service given under Sec.66E(b) the same is liable to be classified accordingly in terms of Sec.66F(2) of the Act.
C) Classification as “Construction of Complex” is proper as per Common Parlance Test as held in various judgments. Also, there are various judgments wherein it is held that classification should satisfy common parlance test, which are re-produced below. Commr. of C.Ex.,New Delhi Vs Connaught Plaza Restaurant (P) Ltd [2012(286) ELT 321(S.C.)]: Classification - Common parlance test - It is extension of general principle of interpretation of statutes for deciphering mind of law maker - It is attempt to discover intention of legislature from language used by it, keeping in mind, that language is at best imperfect instrument for expression of actual human thoughts - In absence of statutory definition in precise terms, it is construction of words, entries and items in taxing statutes in terms of their commercial or trade understanding, or according to their popular meaning - It operates on standard of average reasonable person who is not expected to be aware of technical details of goods - It is construction in sense that people conversant with subject-matter of statute, attribute to it - Rigid interpretation in terms of scientific and technical meanings is to be avoided - However, when legislature has provided a statutory definition of particular entry, word or item in specific, scientific or technical terms, then, interpretation ought to be in accordance with that meaning and not according to common parlance. [paras 18, 31] Similar views is taken in case of Gopalanand Rasayan Vs State Of Maharashtra [2011 (263) E.L.T. 381 (Bom.)] and Sanmar Electronics Corporation Limited Vs Union of India [2010 (252) E.L.T. 332 (Mad.)]
D) Nowhere in the definition of ‘Work Contract’ any reference of residential complex has been made from which it can be construed that ‘construction of complex intended for sale to a buyer, wholly or partly except where the entire consideration is received after issuance of completion-certificate by the competent authority’ is not covered under the definition of Work Contract service as defined at Sec.65(B)(54) of the Act. The above is covered under the definition of declared service given under Sec.66E(b) of the Act.
In view of above, the activity of the taxable service being rendered by the assessee will appropriately be classified under Sec.66E(b) of the Act. There are two options for discharge of liability viz. (A)Option 1: The S.Tax can be discharged on the gross amount received from service receiver @ 12.36% / 14% / 14.5% as applicable in terms of Sec.67 of the Act. (B)Option 2: The S.Tax can be discharged at the abated value of 25% / 30% if the value of land is included in the gross amount received subject to non availment of cenvat credit on inputs only.