Service Tax on Real Estate Transactions
In this world nothing can be said to be certain, except death and taxes.
- BENJAMIN FRANKLIN, letter to Jean Baptiste Le Roy, Nov. 13, 1789
The paper representative of the topic. Readers are advised to carefully refer the
text of the provisions of the Act, Rules, Notifications and Circulars.
I. Constitutional Background
1. Service tax is levied by the Union Government. The union derives its
power to levy tax on services by way of entry no.97 to List I of the VII
Schedule to the Constitution of India.
2. Entry No. 97 reads as follows – Any other matter not enumerated in List II
or List III including any tax not mentioned in either of those lists.
3. By the 88th Amendment Act to the Constitution of India, the Central
Government introduced article 268A to specifically provide power to the
Union to levy service tax. In addition, entry no.92C was inserted in List I to
Sch VII which reads as follows – Taxes on services.
4. However both article 268A and entry no. 92C have not yet been notified
and service tax is still being levied under entry no. 97 to List I of the VII
Schedule r/w article 246(1) of the Constitution of India.
II. Services Covered Under Real Estate Services
1. Period Prior to 1.7.12:
a. Real Estate Agency Service - S.65(105)(v)
b. Erection, Commissioning & Installation Service – S.65(105)(zzd)
c. Commercial or Industrial Construction Service – S.65(105)(zzq)
d. Residential Complex Construction Service – S.65(105)(zzzh)
e. Site Formation & Clearance, Excavation, Earthmoving &
Demolition & Such other Service – S.65(105)(zzza)
f. Renting of Immovable Property Service – S.65(105)(zzzz)
g. Works Contract Service – S.65(105)(zzzza)
h. Preferential Location Service – S.65(105)(zzzzu)
2. Period Post 1.7.12 – Negative Tax Regime
a. The following services have been specifically declared as a service
U/s 66E:
i. Renting of Immovable Property Service – S.65E(a)
ii. Construction Service – S.65E(b)
iii. Service Portion in the Execution of Works Contract –
S.65E(h)
b. The taxable services mentioned U/s 65(105) (i.e. prior to 1.7.12),
other than the aforesaid declared services would fall within the
ambit of service U/s 65B(44) and hence continue to be taxable
post 1.7.12.
III. Commercial or Industrial Construction Services
1. Construction of commercial buildings/ civil structures was made exigible
to tax from 10.9.04 u/s 65(105)(zzq) by the Finance Act, 2004 (No.2) Act
under the heading ‘construction service’.
2. Board Circular No. F No. B2/8/2004-TRU dt.10.9.04, while clarifying the
scope of Commercial and Industrial Construction services stated at para
13.2 as follows:
The leviability of service tax would depend primarily upon whether the
building or civil structure is ‘used, or to be used’ for commerce or industry.
The information about this has to be gathered from the approved plan of
the building or civil construction. Such constructions which are for the use
of organizations or institutions being established solely for educational,
religious, charitable, health, sanitation or philanthropic purposes and not
for the purposes of profit are not taxable, being non-commercial in
nature. Generally, government buildings or civil constructions are used for
residential, office purposes or for providing civic amenities. Thus,
normally government constructions would not be taxable. However, if
such constructions are for commercial purposes like local government
bodies getting shops constructed for letting them out, such activity would
be commercial and builders would be subjected to service tax.
3. The definition of commercial or industrial construction service u/s
65(105)(zzq) is no longer effective from 1.7.12 (as per Notification
No.20/12-ST dt.5.6.12). The definition of Construction Service as declared
U/s 66E(b) would apply post 1.7.12.
4. Section 66E(b) reads as follows “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”. Thus construction for non-commercial purposes like
educational, religious, charitable, health, sanitation or philanthropic
purposes would be taxable unless specifically excluded from the charge
of service tax U/s 66D (i.e. negative list) or explicitly exempted by the
Central Government (Mega Exemption Notification – 25/12 ST
dt.20.6.12).
IV. Construction of Residential Complex Services
5. Construction of Residential Complexes was made amenable to service tax
from 16.6.05 by Notification No.15/05-ST dt.7.6.05 u/s 65(105)(zzzh) of
FA,94. “Construction of complex” has been defined under clause (30a) of
section 65 of the Finance Act, 1994. ‘Residential complex” has been
defined under clause (91a) of section 65 of the Finance Act, 1994.
6. The Board in letter F.No. B1/6/2005-TRU dt.27.7.05 clarified that this
service would generally cover construction services in respect of
residential complexes developed by builders, promoters or developers.
That such residential complexes are normally constructed after obtaining
approval of the statutory authority for their layout. That for the purpose
of levy of service tax, residential complex means, (i)
a building or buildings located within a premises;
(ii)
total number of residential units within the said premises are
more than twelve;
(iii)
having common area;
(iv)
having common facilities or services; and
(v)
layout of the premises has been approved by the appropriate
authority.
7. It was specifically clarified in para 13.4 of the Circular that residential
complex having only 12 or less residential units would not be taxable.
Similarly, residential complex constructed by an individual, which is
intended for personal use as residence and is constructed by directly
availing services of a construction service provider, is also not covered
under the scope of the service tax and not taxable. (Since it is specifically
excluded from the definition of residential complex u/s 65(91a)).
8. Nonetheless the definitions of taxable service u/s 65(105)(zzzh),
construction of complex u/s 65(30a) and residential complex u/s65(91a)
are no longer effective from 1.7.12 since section 65 has been made
ineffective by Notification No.20/12 ST dt.5.6.12.
9. Further as per S.66E(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 has
been declared as a service.
10.Hence construction of Residential complex is amenable to service tax post
1.7.12 unless the entire consideration is received after issuance of
completion certificate by competent authority.
11.The discerning reader would notice that while residential complex having
less than 12 unit would not be exigible to tax prior to 1.7.12, mere
construction of a building (i.e. one unit), complex (i.e. two and more than
two units) would be exigible to tax from 1.7.12. A casual perusal of
negative list would reveal that no construction of any kind has been
included in the negative list u/s 66D. Hence the exemptions provided in
Mega Exemption Notification No.25/12-ST dt20.6.12 (Entry Nos.12, 13 &
14), Abatement provided in Notification No.26/12-ST dt.20.6.12 (Entry
No.12) would be worth its weight in gold for the construction industry.
The author would hasten to add that conditions mentioned in the
Exemptions and Abatement Notifications should be strictly adhered too
and followed while availing the benefit thereat.
V. Construction Linked Payments
12.Broadly two business models were used at the time construction of
residential complex services was ushered into tax.
a. Under the first business model, an agreement to sell the flat will be
entered into and the consideration would be received in
instalments. Conveyance deed would be registered and executed in
the name of the purchaser after completion of construction and
possession of flat is handed over to the buyer.
b. Under the second business model, the undivided share of land
(UDS) with or without a semi-finished structure would first be sold
to the flat buyer, which is a transaction of sale of immovable
property. Further, a construction agreement would be entered to
construct the flat of specified description between the builder and
purchaser.
13.Upon introduction of Residential Complex service, arguments were
advanced by Builders that where a buyer makes construction linked
payment after entering into agreement to sell, the nature of transaction
is not a service but that of a sale. Where a buyer enters into an agreement
to get a fully constructed residential unit, the transaction of sale is
completed only after complete construction of the residential unit. Till the
completion of the construction activity, the property belongs to the
builder or promoter and any service provided by him towards
construction is in the nature of self service. It was also argued that even if
it is taken that service is provided to the customer, a single residential unit
bought by the individual customer would not fall in the definition of
‘residential complex’ as defined for the purposes of levy of service tax and
hence construction of it would not attract service tax.
14.The Board clarified in para 3 of Circular No.108/2/2009 ST dt.29.1.09 as
follows:
a. 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 (first business model).
b. 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’ (second business model).
c. 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.
15.Since construction linked payment before execution of sale deed
amounted to self-service, the legislature introduced an explanation below
the definition of taxable services u/s 65(105)(zzzh) – residential complex
service and 65(105)(zzq) – commercial or industrial construction service
w.e.f. 1.7.10 that unless the entire consideration is received after the
completion of construction (i.e. after the issuance of completion
certificate by the competent authority), the activity of construction would
be ‘deemed’ to be a taxable service provided by the developer to the
ultimate customer.
16.The explanation referred above, deeming the performance of service is
extracted hereunder for ease of reference:
For the purpose 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.
17.The constitutional validity of the aforesaid explanation was agitated in
Maharashtra Chamber of Housing Industry V. UOI, (2012) 34 STT 384
(Bom.) and also in G.S. Promoters V. UOI, (2011) 30 STT 268 (P & H).
However the Honourable High Courts upheld the constitutional validity of
the aforesaid explanations. Thus construction linked payments are
taxable w.e.f. 1.7.10. It may be worthwhile for the reader to note that the
Central Government has exempted all advances received by the Builders/
Developers under commercial/ industrial construction and construction
of residential complex prior to 1.7.10 vide notification no.36/2010-ST
dt.28.6.10.
18.Vestings of the aforesaid explanation/ decision is found in negative
regime also post 1.7.12. A perusal of the aforesaid definition u/s 66E(b),
which is in vogue specifically states that except where the entire
consideration is received after issue of completion certificate by the
competent authority, the construction activity would be treated as a
service (hence it has been declared as a service). Therefore construction
linked payment received by a builder/ developer from intending buyer of
flat would tantamount to service and attract service tax.
VI. Exemptions
19.Notification No.25/12-ST dt.20.6.12 (Mega Exemption Notification)
provides the following exemptions relating to construction Industry:
Entry No.12
Services provided to the Government, a local authority or a governmental
authority by way of construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance, renovation, or alteration of
(a) a civil structure or any other original works meant predominantly
for use other than for commerce, industry, or any other business or
profession; - omitted w.e.f. 1.4.15
(b) a historical monument, archaeological site or remains of national
importance, archaeological excavation, or antiquity specified under the
Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24
of 1958);
(c)
a structure meant predominantly for use as (i) an educational, (ii) a
clinical, or (iii) an art or cultural establishment; - omitted w.e.f. 1.4.15
(d) canal, dam or other irrigation works;
(e) pipeline, conduit or plant for (i) water supply (ii) water treatment,
or (iii) sewerage treatment or disposal; or
(f)
a residential complex predominantly meant for self-use or the use
of their employees or other persons specified in the Explanation 1 to
clause 44 of section 65B of the said Act; - omitted w.e.f. 1.4.15
Entry No.13
Services provided by way of construction, erection, commissioning,
installation, completion, fitting out, repair, maintenance, renovation, or
alteration of,(a) a road, bridge, tunnel, or terminal for road transportation for use
by general public;
(b) a civil structure or any other original works pertaining to a scheme
under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas
Yojana;
(c)
a building owned by an entity registered under section 12AA of the
Income tax Act, 1961(43 of 1961) and meant predominantly for religious
use by general public;
(d) a pollution control or effluent treatment plant, except located as a
part of a factory; or
a structure meant for funeral, burial or cremation of deceased;
Entry No.14
Services by way of construction, erection, commissioning, or installation
of original works pertaining to,(a) an airport, port or railways, including monorail or metro; - words
‘airport, port omitted w.e.f. 1.4.15’
(b) a single residential unit otherwise than as a part of a residential
complex;
(c)
low-cost houses up to a carpet area of 60 square metres per house
in a housing project approved by competent authority empowered under
the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry
of Housing and Urban Poverty Alleviation, Government of India;
(d) post-harvest storage infrastructure for agricultural produce
including a cold storages for such purposes; or
(e) mechanised food grain handling system, machinery or equipment
for units processing agricultural produce as food stuff excluding alcoholic
beverages;
20.The astute reader would observe that exemption under entry no.13 is
provided only to government and governmental authority (as defined in
Notification No.25/12). No such restriction are observed in entry no.14 &
15. Further in entry no.15, we would note that exemption is not provided
to completion, fitting out, repair, maintenance, renovation or alteration
services, which are exempted under entry no. 13 and 14.
VII. Joint Development Agreement
21.Before we delve into the service tax aspects of JDAs, the term “joint
venture” must be understood first to ascertain if the JDAs entered into
between Builders and the Landlords are in the nature of joint ventures.
22.The term Joint Venture is defined as follows in the various Law Lexicons:
a. Among the acts or conduct which are indicative of a joint venture,
no single one of which is controlling in determining whether a joint
venture exists, are: (1) joint ownership and control of property; (2)
sharing of expenses, profits and losses, and having and exercising
some voice in determining division of net earnings; (3) community
of control over, and active participation in, management and
direction of business enterprise; (4) intention of parties, express or
implied; and (5) fixing of salaries by joint agreement. – Corpus Juris
Secundum (Vol. 48A pages 314-315)
b. It connotes a legal entity in the nature of a partnership engaged in
the joint undertaking of a particular transaction for mutual profit or
an association of persons or companies jointly undertaking some
commercial enterprise wherein all contribute assets and share
risks. It requires a community of interest in the performance of the
subject matter, a right to direct and govern the policy in connection
therewith, and duty, which may be altered by agreement, to share
both in profit and losses (Black's Law Dictionary; Sixth Edition, p.
839).
c. A joint venture is an association of two or more persons to carry
out a single business enterprise for profit. - Words and Phrases,
Permanent Edition, P.117, Vol. 23
d. A joint venture is to be distinguished from a relationship of
independent contractor, the latter being one who, exercising an
independent employment, contracts to do work according to his
own methods and without being subject to the control of his
employer except as to the result of the work, while a joint venture
is a special combination of two or more persons where, in some
specific venture, a profit is jointly sought without any actual
partnership or corporate designation – American Jurisprudence
[2nd Edition, Vol.46 pages 19, 22 and 23]
e. The Apex Court in Fakir Chand Gulati V. Uppal Agencies Pvt Ltd.,
perused an agreement “termed as Joint Development Agreement”
between a builder and a landlord with the following covenants:
1. That the agreement (i.e. JDA) shall not be deemed to
constitute a partnership between the owner and the
builder
2. The land-owner is specifically excluded from management
and is barred from interfering with the construction in any
manner
3. Builder has the exclusive right to appoint the Architects,
contractors and sub-contractors for the construction
4. The Builder is entitled to sell its share of the building as it
deemed fit, without reference to the land owner
5. The builder undertakes to the landowner that it will
construct the building within 12 months from the date of
sanction of building plan and deliver the owner's share to
the land owner.
6. The Builder alone is responsible to pay penalties in respect
of deviations and for payment of compensation under the
Workmen's Compensation Act in case of accident
f. The Apex Court held that the basic underlying purpose of the
agreement is the construction of a house or an apartment in
accordance with the specifications, by the builder for the owner,
g.
h.
i.
j.
k.
l.
the consideration for such construction being the transfer of
undivided share in land to the builder and grant of permission to
the builder to construct two floors. Such agreement whether called
as a `collaboration agreement' or a `joint-venture agreement', is
not however a `joint-venture.
The Supreme Court further held that the important aspect is the
availment of services of the builder by the land-owner for a house
construction (construction of owner's share of the building) for a
consideration. To that extent, the land-owner is a consumer, the
builder is a service-provider.
The author in addition to the above, draws the attention of the
readers to the fact that an agreement shall not be construed as a
joint venture:
1. If there is no community of interest or common/joint
control in the management,
2. If there is no sharing of profits and losses
3. If there is no principal – agency relationship
Having dealt with the meaning of Joint Venture, the time is now
ripe to discuss the issue of valuation and point of taxation in cases
where landlords enter into agreements with builders wherein the
landlords transfer (say 60%) of their land in return for say (40%)
share in total flats constructed (60: 40 Ratio)
Undoubtedly the landlord has transferred his capital asset and is
liable for capital gains. However the landlord would be receiving
40% of the flats to be constructed. In that sense the landlord is the
service receiver and the builder the service provider. The quantum
of consideration is the moot point. However all the conditions laid
down under the charging section 66B r/w definition of service u/s
65B(44) are satisfied for the levy of service tax.
As per proviso to Rule 3 of Point of Taxation Rules, 2011 (POTR for
short), the point of taxation in case of advance is the date of receipt
of advance.
As regards valuation, section 67, has been amended w.e.f. 18.4.06
so as to include ‘consideration not wholly or partly in money’
(S.67(1)(ii)) i.e. consideration in kind also for the purpose of
quantifying service tax. Further section 67(1)(iii) states that where
the consideration is not ascertainable, the value shall be
determined in the prescribed manner (i.e. as per the Service Tax
Valuation Rules – In this case Rule 3 of Valuation Rules.)
m. The Board has clarified in Circular No.151/2/2012-ST dt.10.2.12
that:
1. Value in the case of flats given to landlords, is determinable
in terms of section 67(1)(iii) read with rule 3(a) of Service
Tax (Determination of Value) Rules, 2006, as the
consideration for these flats i.e., value of
land/development rights in the land may not be
ascertainable ordinarily.
2. Accordingly, the value of these flats would be equal to the
value of similar flats charged by the builder/developer from
other buyers.
3. In case the prices of flats/houses undergo a change over the
period of sale (from the first sale of flat/house in the
residential complex to the last sale of the flat/house), the
value of similar flats as are sold nearer to the date on which
land is being made available for construction should be
used for arriving at the value for the purpose of tax.
4. Service tax is liable to be paid by the builder/developer on
the ‘construction service’ involved in the flats to be given
to the land owner, at the time when the possession or right
in the property of the said flats are transferred to the land
owner by entering into a conveyance deed or similar
instrument (eg. allotment letter).
5. In case of Joint Development Model, land owner and
builder/developer join hands and may either create a new
entity or otherwise operate as an unincorporated
association, on partnership /joint / collaboration basis, with
mutuality of interest and to share common risk/profit
together. The new entity undertakes construction on
behalf of landowner and builder/developer
VIII. Valuation For Construction Service
23.As per S.66B, which is the charging section, ‘service tax is levied on the
provision of service or agreeing to provide service’. Further, service, which
is defined U/s 65B(44) excludes any activity which constitute merely
‘transfer of title in goods or immovable property’. In addition to the
above, as per section 67, ‘the gross amount charged for provision of
service’ is the value for the purpose of charging service tax. Hence,
conceptually value attributable to transfer of title in goods and
immovable property would not form part of value of service.
24.Be that as it may, benefit of abatement has been provided to service
providers under Notification No.26/12-ST dt.20.6.12 (as amended),
subject to the conditions below:
“12. Construction of a complex, building,
civil structure or a part thereof,
intended for a sale to a buyer,
wholly or partly, except where entire
consideration is received after
issuance of completion certificate by
the competent authority,-
(i) CENVAT credit on inputs
used for providing the
taxable service has not been
taken under the provisions
of the CENVAT Credit Rules,
(a) for a residential unit satisfying 25 2004;
both the following conditions,
(ii) The value of land is
namely :(i) the carpet area of the unit is
less than 2000 square feet; and
included in the amount
charged from the service
receiver
(ii) the amount charged for the
unit is less than rupees one
crore;
(b)
for other than the (a) above.
30
IX. Works Contract
25.Works Contract service was first made acquainted to service tax w.e.f
1.6.07 by Notification No.23/2007-ST by Finance Act, 1994 u/s
65(105)(zzzza). In the opinion of the author, a reading of State of Madras
V. Gannon Dunkerely & Co Ltd., [1958] 9 STC 353 (SC), The 61st Law
Commission Report, The 46th Amendment to the Constitution, Builders
Association of India V. Union of India, 1989 (2) SCC 645 would immensely
help the readers in understanding works contract conceptually.
26.Typically every works contract involves an element of sale of goods and
provision of service. In terms of Article 366 (29A) of the Constitution of
India transfer of property in goods involved in execution of works contract
is deemed to be a sale of such goods. It is a well settled position of law,
declared by the Supreme Court in BSNL’s case [2006 (2) S.T.R. 161 (S.C.)],
that a works contract can be segregated into a contract of sale of goods
and contract of provision of service.
27.It may be pointed out that prior to insertion of clause (29A) in article 366
of the Constitution defining certain categories of transactions as ‘deemed
sale’ of goods, the position of law, as declared by the Supreme Court in
Gannon Dunkerley’s case (AIR 1958 S.C. 560) was that a works contract
was essentially a contract of service and no sales tax could be levied on
goods transferred in the course of execution of works contract. It is only
after the constitutional amendment that VAT or sales tax is leviable on
such goods. The remaining portion of the contract remains a contract for
provision of service.
28.Be that as it may, post 1.7.12, ‘service portion in the execution of works
contract’ has been declared as a service u/s section 66E(h). The term
‘works contract’ itself is specifically defined u/s 65B(54) of the Act. The
said definition of works contract is extracted hereunder for ready
reference:
“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 purposes of carrying out construction,
erection, commissioning, installation, completion, fitting out, repair,
maintenance, renovation, alteration, of any moveable or immovable
property or for carrying out any other similar activity or a part therefore
in relation to such property.
29.The major point of distinction between the erstwhile definition of works
contract (prior to 1.7.12 i.e. S.65(105)(zzzza)) and the present definition
(post 1.7.12 i.e. S.65B(54)), which is in vogue is that the new definition is
more or less aligned with the definition of works contract found in local
sales tax acts. Most importantly, the new definition now includes within
its ambit works contract relating to goods i.e. moveable property which
hereto was absent prior to 1.7.12.
30.Further, the Apex Court in M/s. Larsen & Toubro Limited & Anr V. State of
Karnataka & Anr., (civil appeal no. 8672 of 2013, arising out of SLP (C) No.
17741 of 2007), while giving a decision under sales tax relating to works
contract held as follows in para 101 of its judgment:
a. For sustaining the levy of tax on the goods deemed to have been
sold in execution of a works contract, three conditions must be
fulfilled: (one) there must be a works contract, (two) the goods
should have been involved in the execution of a works contract and
(three) the property in those goods must be transferred to a third
party either as goods or in some other form.
b. For the purposes of Article 366(29-A)(b), in a building contract or
any contract to do construction, if the developer has received or is
entitled to receive valuable consideration, the above three things
are fully met. It is so because in the performance of a contract for
construction of building, the goods (chattels) like cement, concrete,
steel, bricks etc. are intended to be incorporated in the structure
and even though they lost their identity as goods but this factor
does not prevent them from being goods.
c. Where a contract comprises of both a works contract and a transfer
of immovable property, such contract does not denude it of its
character as works contract. The term “works contract” in Article
366 (29-A)(b) takes within its fold all genre of works contract and is
not restricted to one specie of contract to provide for labour and
services alone. Nothing in Article 366(29-A)(b) limits the term
“works contract”.
d. Building contracts are species of the works contract.
e. A contract may involve both a contract of work and labour and a
contract for sale. In such composite contract, the distinction
between contract for sale of goods and contract for work (or
service) is virtually diminished.
f. The dominant nature test has no application and the traditional
decisions which have held that the substance of the contract must
be seen have lost their significance where transactions are of the
nature contemplated in Article 366(29-A). Even if the dominant
intention of the contract is not to transfer the property in goods
and rather it is rendering of service or the ultimate transaction is
transfer of immovable property, then also it is open to the States to
levy sales tax on the materials used in such contract if such contract
otherwise has elements of works contract. The enforceability test
is also not determinative.
g. A transfer of property in goods under clause 29-A(b) of Article 366
is deemed to be a sale of the goods involved in the execution of a
works contract by the person making the transfer and the purchase
of those goods by the person to whom such transfer is made.
h. Even in a single and indivisible works contract, by virtue of the legal
fiction introduced by Article 366(29-A)(b), there is a deemed sale of
goods which are involved in the execution of the works contract.
Such a deemed sale has all the incidents of the sale of goods
involved in the execution of a works contract where the contract is
divisible into one for the sale of goods and the other for supply of
labour and services. In other words, the single and indivisible
contract, now by Forty-sixth Amendment has been brought on par
with a contract containing two separate agreements and States
have now power to levy sales tax on the value of the material in the
execution of works contract.
i. The expression “tax on the sale or purchase of goods” in Entry 54 in
List II of Seventh Schedule when read with the definition clause 29A of Article 366 includes a tax on the transfer of property in goods
whether as goods or in the form other than goods involved in the
execution of works contract.
j. Article 366(29-A)(b) serves to bring transactions where essential
ingredients of ‘sale’ defined in the Sale of Goods Act, 1930 are
absent within the ambit of sale or purchase for the purposes of levy
of sales tax. In other words, transfer of movable property in a works
contract is deemed to be sale even though it may not be sale within
the meaning of the Sale of Goods Act.
k. Taxing the sale of goods element in a works contract under Article
366(29-A)(b) read with Entry 54 List II is permissible even after
incorporation of goods provided tax is directed to the value of
goods and does not purport to tax the transfer of immovable
property. The value of the goods which can constitute the measure
for the levy of the tax has to be the value of the goods “at the time
of incorporation of the goods in works” even though property
passes as between the developer and the flat purchaser after
incorporation of goods.
X. Valuation of Works Contract
31.Valuation mechanism for Works Contract has been prescribed by Rule 2A
of Service Tax Valuation Rules, 2006. Kindly note that Rule 2A starts with
the words ‘Subject to Section 67’. Hence Valuation u/r 2A is subservient
to section 67 and not overriding the valuation section.
32.Rule 2A provides two methods of valuation – under clause (i) or clause (ii).
Under Method one (clause (i)), the value of materials is reduced from the
gross amount charged to arrive at the value of service. However in the
opinion of the author, this method can be exercised only when the
assessee has paid sales tax has been paid/ is payable on the actual value
of goods sold (explanation (c) to clause (i)). Hence in the opinion of the
author, assessees who have opted for composition scheme under sales
tax are ineligible for the aforesaid method of valuation under service tax.
In addition to the above, about eight items specifically mentioned in
explanation (b) to clause (i) have to be added/ included.
33.As per sub-rule (i) of the said Rule 2A the value of the service portion in
the execution of a works contract is the gross amount charged for the
works contract less the value of transfer of property in goods involved In
the execution of the said works contract.
Gross amount includes
Labour charges for
execution of the works
Gross amount does not include
Amount paid to a subcontractor for labour
and services
Value of transfer of property in
goods involved in the execution of
the said works contract.
Note :
Charges for planning,
designing and architect’s As per Explanation (c) to the said
fees
sub-rule (i), where value added tax
Charges for obtaining on or sales tax has been paid or
payable on the actual value of
hire or otherwise,
property in goods transferred in
machinery and tools
used for the execution of the execution of the works
contract, then such value adopted
the works contract
for the purposes of payment of
value added tax or sales tax, shall
be taken as the value of
Cost of consumables
such as water,
electricity, fuel, used in
the execution of the
works contract
Cost of establishment of
the contractor relatable
to supply of labour and
services and other
similar expenses
relatable to supply of
labour and services
Profit earned by the
service provider
relatable to supply of
labour and services
property in goods transferred in
the execution of the said works
contract.
Value Added Tax (VAT) or sales tax,
as the case may be, paid, if any, on
transfer of property in goods
involved in the execution of the
said works contract
34.In the opinion of the author, works contract valuation under method two
(i.e clause (ii)) would be available to an assessee only after exhausting the
method provided under clause (i). The author is of the said opinion due to
the specific wordings under clause (ii).
35.Nonetheless, As per clause (ii), value of the service portion of works
contract, where value has not been determined under clause (i), shall be
determined in the manner explained in the table below Where works contract
Value of the service
is for...
portion shall be...
(A)
execution
of
forty per cent of the total
original works
amount charged for the
works contract
(B)
seventy per cent of the
(i) maintenance or
total amount charged
repair
or
including
such
gross
reconditioning
or
amount
restoration
or
servicing of any goods;
or
(ii) maintenance or
repair or completion
and finishing services
such as glazing or
plastering or floor and
wall
tiling
or
installation
of
electrical fittings of
immovable property
36.As per the Explanation 1(b) to clause (ii) of rule 2A of the said Rules ‘total
amount’ referred to in the second column of the table above would be
the sum total of gross amount charged for the works contract and the fair
market value of all goods and services supplied in or in relation to the
execution of works contract, under the same contract or any other
contract, less (i) the amount charged for such goods or services provided
by the service receiver; and (ii) the value added tax or sales tax, if any,
levied to the extent they form part of the gross amount or the total
amount, as the case may be.
37.The manner of arriving at the ‘total amount charged’ is explained with
the help of the following example pertaining to works contract for
execution of ‘original works’.
S.
No.
Notation
Amount (in
Rs.)
1
Gross amount received excluding taxes
95,00,000
2
Fair market value of goods supplied by
the service receiver excluding taxes
10,00,000
3
Amount charged by service receiver for 2
5,00,000
4
Total amount charged (1 +2-3)
5
Value of service portion(40% of 4 in case
of original works)
1,00,00,000
40,00,000
38.A very important point to be noted is that when works contract service is
valued as per Rule 2A, the Cenvat Credit on inputs is not available.
However the cenvat credit on input services and capital goods would be
available to the service provider.
39. As regards exemption to works contract, entry no.29(h) of Notification
No.25/12-ST provides exemption to a sub-contractor providing services
by way of works contract to another contractor whose works contract is
exempt.
XI. Point of Taxation for Construction Services/ Works Contract relating to
Construction
40.Service tax was exigible to tax on receipt basis upto 30.6.11. With the
central legislature determined to usher in GST, there was a compelling
need to tax service on accrual basis since tax on goods i.e. excise duty and
sales tax were already being taxed on accrual basis. Hence the Central
Government issued Point of Taxation Rules, 2011 in exercise of its rule
making power under section 94(2)(a) and 94(2)(hhh) of the Act vide
Notification No.18/2011 ST dt.1.3.11 (as amended).
41.The term ‘Point of Taxation’ has been defined under rule 2(e) of the Point
of Taxation Rules (‘POTR’ for short) as ‘the point in time when a service
shall be deemed to have been provided’.
42.‘Continuous supply of service’ (‘CSS’ for short) deserves a mention in the
context of this discussion. CSS (as amended) has been defined under Rule
2(c) of the POTR as ‘any service which is provided, or to be provided
continuously or on recurrent basis, under a contract, for a period
exceeding three months with the obligation for payment periodically or
from time to time, or where the Central Government, by a notification in
the Official Gazette, prescribes provision of a particular service to be a
continuous supply of service, whether or not subject to any condition’.
43.The words ‘on a recurrent basis’ was added to the definition of CSS by
Notification No.4/12 ST dt.17.3.12. Telecommunication service and
‘service portion in the execution of works contract’ have been notified as
a CSS by the Central Government vide Notification No.38/2012 ST
dt.20.6.12.
44.Generally since the construction contracts are entered into for a period of
24 months, construction contracts also fall under the ambit of Continuous
Supply of Service. Hence both construction service and works contract
service fall within the ambit of Continuous Supply of Service.
45.Rule 3 of POTR, 2011 determines the point of taxation. Proviso to Rule 3
provides the Point of Taxation relating to CSS. In case of continuous supply
of service, the provision of the whole or part of the service is determined
periodically on the completion of an event in terms of a contract. The
point in time, which requires the receiver of service to make any payment
to service provider, the date of completion of each such event as specified
in the contract shall be deemed to be the date of completion of provision
of service
46.A discussion about the point of taxation of construction contracts would
be incomplete without a mention of the ratio laid down in Builders
Association of India V. UOI, (1989) 73 STC 370 (SC). The Apex Court
observed that
In Hudson's Building Contracts (8th edition) at page 362 it is stated thus:
"The well-known rule is that the property in all materials and fittings, once
incorporated in or affixed to a building, will pass to the freeholder
quicquid plantatur solo, solo cedit. But once the builder has affixed
materials, the property in them passes from him, and at least as against
him they become the absolute property of his employer, whatever the
latter's tenure of or title to the land. The principle was shortly and clearly
stated by Blackburn J. in Appleby v. Reyers [1867] L.R. 2 C.P. 651 at p. 659:
Materials worked by one into the property of another become part of that
property. This is equally true whether it be fixed or movable property.
Bricks built into a wall become part of the house, thread stitched into a
coat which is under repair, or planks and nails and pitch worked into a ship
under repair, become part of the coat or the ship. ‘Ordinarily unless there
is a contract to the contrary in the case of a works contract the property
in the goods used in the construction of a building passes to the owner of
the land on which the building is constructed, when the goods or materials
used are incorporated in the building’.
47.If the invoice is issued by the service provider within 30 days of the
deemed completion of service, as per Rule 4A of Service Tax Rules, 1994,
the point of taxation is the date of invoice. If the service provider fails to
issue the invoice within 30 days of deemed completion of service, the POT
is the date of deemed completion of service. discern
48.However the author hastens to bring to the notice of the astute reader
that explanation to Rule 3 providers that ‘wherever any advance by
whatever name known, is received by the service provider towards the
provision of taxable service, the point of taxation shall be the date of
receipt of each such advance’. Hence if any advance is received by the
service provider before providing any service, the POT is the date of
receipt of advance and not either the deemed completion of service or
date of issue of invoice.
XII. Renting of Immovable Property Service
49.Renting of Immovable Property Service was the cause of lot of heart burn
to many. Renting of immovable property service was made liable to
service tax w.e.f. 1.6.07 u/s 65(105)(zzzz). The Delhi High Court initially
held Renting of Immovable property per se was not liable to service tax in
Home Solution Retail India Ltd V. UOI, 2009 (14) STR 433 (Del) and that
activities in relation of renting was exigible to service tax. The Central
Government retrospectively amended the definition of taxable service of
renting by Finance Act 2010 w.e.f. 1.6.07, vide Notification No.24/2010 ST
dt.22.6.10, making renting per se as a taxable service. On a writ appeal
against the said amendment making renting per se taxable,
retrospectively, the Honourable Delhi High Court in Home Solution Retail
(India) Ltd V. UOI, 2011 (24) STR 129 (Del) held that renting of immovable
property per se amounted to service since premises taken for commercial
purpose facilitates/ promotes commerce and business thereby adding
value element and overruled the contrary decision taken earlier. The High
Court further held that legislature can legislate retrospectively to cure a
deficiency. The High Court held in para 71 of its order that It is well settled
in law that it is open to the legislature to pass a legislation retrospectively
and remove the base on which a judgment is delivered. The matter is now
pending decision before the Honourable Supreme Court of India.
50.In view of the litigation, the legislature in its wisdom has included ‘Renting
of Immovable Property’ as one of the Declared Service U/s 66E. Hence
service tax is payable on renting post 1.7.12. Post 1.7.12.
51. Renting has been defined U/s. 65B as “allowing, permitting or granting
access, entry, occupation, usage or any such facility, wholly or partly, in
an Immovable property, with or without the transfer of possession or
control of the said immovable property and includes letting, leasing,
licensing or other similar arrangements in respect of immovable
property’.
52.Though renting of immovable property has been declared as a service u/s
66E, services by way of renting of residential dwelling for use as residence
has been included in the negative list u/s 66D and hence would not be
liable to service tax. In addition to the above, the renting of certain
following other kinds of immovable property also find mention in the
negative list:
a. Renting of vacant land, with or without a structure incidental to its
use, relating to agriculture.
b. Renting out of any property by Reserve Bank of India
c. Renting out of any property by a Government or a local authority
to a non-business entity.
Bibliography:
1. Taxation of Services: An Education Guide by Tax Research Unit, CBEC,
Department of Revenue, Ministry of Finance, Government of India, New Delhi.