.

CBEC has clarified vide letter in F.No.B1/6/2005-TRU, dated

27.07.2005 [ 2006 (1) STR ( c48)] ( in para 13.6) ] as follows.

“ 13.6 The taxable service is the service provided in relation to

construction of a residential complex. Service tax would be payable
only on the gross amount charged by the service provider for the
constructions service provided and it would not include the cost of land
and stamp duty paid for registration of land. However, notification
No.18/2005-ST dated 7.6.2005 provides option to avail abatement and
pay service tax only on 33% of the gross amount charged, subject to
fulfillment of conditions specified in the notification.

The builder has the option to avail the benefit of Notification

No.18/2005-ST dated 7.6.2005 that provides abatement of 67% and
pay service tax only on 33% of the gross amount charged, subject to
fulfillment of conditions specified in the notification. This notification
has been rescinded by Notification No.2/2006-ST dated 1.3.2006.
Now notification No.1/2006-ST dated 1.3.2006 has been issued
allowing abatement of 67% and pay service tax on 33% of the gross
amount.

Construction of residential complex is the taxable service as per

Section 65 (105) (zzzh) of Finance Act, 1994 and the service provider
is liable to pay service tax as per statutory provisions. It is not known
whether there was any construction agreement in this case according
to which the flat was constructed by the builder. If there was any such
agreement, then clause on tax liability must have been incorporated in
it. Service tax liability though is with the service provider, if the
agreement contains clause on separate charging and payment by the
purchaser, then we may have to pay as per agreement and service tax
law does not come into picture here.

If the flat is ready-built and sold to the purchaser on as is where is

basis, then it is pure sale and no service is involved. For attracting
service tax, it is not only necessary that service should be taxable,
there should also be a service recipient and consideration therefore. In
this case, service tax payment does not arise as at the time of
construction as there was no service recipient. If the latter is relevant
to your case, then you can contest payment of service tax as the
builder himself is not liable. Even if the amount charged does not
provide for Service tax separately, as per Section 67 of Finance Act,
1994, such amount charged will be taken as inclusive of service tax
and the service provider will be liable accordingly.

The normal practice in the infrastructure sector is that the builder or

promoter in most of the cases will entrust the work of actual
construction to sub contractor, who will do the actual construction. The
other aspect is that the builder or promoter will have an agreement
with the land owner for development of the land for which the land
owner entitled for, say, 50%, of the houses constructed. It is again a
normal practice that the builder / promoter will enter into sale deed
with the ultimate buyers both on his behalf and on behalf of the land
owner and register semi-finished dwelling with appropriate share of
land and then enter into a separate contract for finishing the said
dwelling

If the flat is ready-built and sold to the purchaser on as is where is

basis, then it is pure sale and no service is involved. For attracting
service tax, it is not only necessary that service should be taxable,
there should also be a service recipient and consideration therefore. In
this case, service tax payment does not arise as at the time of
construction as there was no service recipient. If the latter is relevant
to your case, then you can contest payment of service tax as the
builder himself is not liable. Even if the amount charged does not
provide for Service tax separately, as per Section 67 of Finance Act,
1994, such amount charged will be taken as inclusive of service tax
and the service provider will be liable accordingly.
 Service tax on construction of complex ( residential)
services has been introduced with effect from 16.06.2005
vide Notification No.15/2005-ST dated 07.06.2005.

In terms of Section 65 (30a) of Finance Act, 1994,

“ Construction of complex’ means –

(a) construction of a new residential complex or a part
thereof; or
(b) completion and finishing services in relation to
residential complex such as glazing, plastering,
painting, floor and wall tiling, wall covering and wall
papering, wood and metal joinery and carpentry,
fencing and railing, construction of swimming pools,
acoustic applications or fittings and other similar
services; or
(c) repair, alteration, renovation or restoration of, or
similar services in relation to, residential complex;

In terms of Section 65(91a), residential complex means any

complex comprising of-

(a) a building or buildings, having more than twelve

residential units;
(b) a common area, and
(c) any one or more facilities or services such as park,
lift, parking space, community hall, common water
supply or effluent treatment system,
located with a premises and the layout of such
premises is approved by an authority under any law for
the time being in force, but does not include a complex
which is constructed by a person directly engaging any
other person for designing or planning of the lay out,
and the construction of such complex is intended for
personal use as residence by such person.

Explanation – For the removal of doubts, it is hereby

declared that for the purposes of this clause, -
 (a) ‘ Personal use” includes permitting the complex for
use as residence by another person on rent or
without consideration;
(b) Residential unit means a single house or a single
apartment intended for use as a place of
residence.

In respect of this service, taxable service has been defined

as “ service provided by any person in relation to
construction of residential complex but does not includes a
complex constructed for personal use as residence.

CBEC vide Circular No.80/10/2004-ST

dated 17.09.2004 [ 2004 ( 172) ELT T3 ] has clarified that “
Estate Builders” ( i.e., who gets such construction done ) are
not covered under the ambit of these services. It is only the
hired contractors engaged by these builders who are to be
taxed. In other words service tax is leviable only on those
contractors who are engaged in construction of new
residential compexes, or completion and finishing services in
relation to such complexes or repair, alteration / renovation
or restoration of similar services in relation to residential
complexes. In otherwords, real estate builders who
construct buildings for themselves ( for their own use or for
renting or selling it) are not taxable service providers.
However, if such real estate owners hire contractor /
contractors, the payment made to such contractor would be
subjected to tax under this head.

This aspect has been made clear in the recent

circular in M.F. (D.R) Letter F.No.332/35/2006-TRU dated
1.8.2006 [ 2006 (3) STR C 75 ] given by the CBEC as such
the issue should reach finality. In terms of this circular the
relevant clarification is as follows.
Sl Issue Legal position
No
1 Is service tax applicable In a case where the builder,
on Builder, Promoter or promoter or developer
Developer who builds a builds a residential complex,
residential compex with having more than 12
the services of his own residential units, by
staff and employing engaging a contractor for
direct labour or petty construction of such
labour contractors whose residential complex, the
total bill does not contractor shall be liable to
increase 4.0 lakhs in one pay service tax on the gross
P/Y amount charged for the
construction services
provided, to the builder /
promoter / developer under
‘ construction of compex’
falling under Section 65
(105) (zzzh) of the Finance
Act, 1994.
If no other person is
engaged for construction
work and the builder /
promoter / developer
undertakes construction
work on his own without
engaging the services of
any other person, then in
such cases in the
absence of service
provider and service
recipient relationship,
the question of providing
taxable service to any
person by any other
person does not arise.
( emphasis supplied )
Service tax exemption for
 small service providers upto
an aggregate value of
taxable services of Rs. 4
lakhs provided in any
financial year vide
Notification No.6/2005-
Service Tax dated 1.3.2005
is applicable for ‘
Construction of complex ‘
service also.

In the light of above clarification the issue of

liability of service tax in the instant case is to be examined.
As for the information provided, the builder has constructed
the flats in his own land and sold the same to the
independent buyers. As such, it amounts to sale and no
service provider/ service recipient relationship exists here.

The normal practice in the infrastructure sector

is that the builder or promoter in most of the cases will
entrust the work of actual construction to sub contractor,
who will do the actual construction. The other aspect is that
the builder or promoter will have an agreement with the
land owner for development of the land for which the land
owner entitled for, say, 50%, of the houses constructed. It is
again a normal practice that the builder / promoter will enter
into sale deed with the ultimate buyers both on his behalf
and on behalf of the land owner and register semi-finished
dwelling with appropriate share of land and then enter into a
separate contract for finishing the said dwelling. Here, the
service provider / service recipient relationship clearly exists
and squarely falls into the ambit of taxable service.

However, situation is different in the present

case. Here, the land owner himself is constructing the flats
by engaging the small contractors and are being sold to the
customers as per their specifications. Hence it is to
emphatically state that in the instant case the sale of
constructed flats by the real estate owner on his own land
do not fall into the category of taxable services in the light of
above Circular. Construction and sale of flats by the Owner
as per the agreements entered with the prospective
customers in no way influence the nature of taxability of the
services.

This has also been clarified by the Hon’ble

Supreme Court in the case of M/s Raheja Development
Corporation Vs State of Karnataka [ 2005 NTC ( Vol27) -243
wherein it is held that “ that the activities undertaken by
builders for construction of flat/builder for or on behalf of
the prospective customers for consideration in case or
deferred payment is covered under the works contract and
not under sale”.

Works Contract as held by the Apex Court has

also been brought into the service tax net with effect from
11.5.2007 i.e., from the date of enactment of finance bill’
2007. Specified works contract which attract VAT / Sales tax
involving transfer of property is alone covered under these
services.

As the sale of flat in the instant case is before the

specified date of 11.5.2007, the services of owner are not
taxable on this count also. Hence, the land owner is not
taxable in either way as far as construction and sale of flats
in the instant case. When the so called services themselves
are not taxable, there is no point in demanding the service
tax on the same from the customers.