Service Tax - Construction of residential complex - No tax payable by builder/promoter prior to 1.7.2010 - Entitled for refund of Service Tax paid - Unjust enrichment hurdle overcome - CESTAT
THE CESTAT has recently delivered an order which has created a lot of hype in the real estate sector.
In Board's F. No. 332/35/2006 - TRU Dated: August 01, 2006., it was clarified that
in a case where the builder, promoter or developer builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of such residential complex, the contractor shall be liable to pay service tax on the gross amount charged for the construction services provided, to the builder / promoter / developer under ‘construction of complex' service 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 .
This created more confusion than clarity.
In Board Circular No. 108/02/2009, Dated: January 29, 2009, it was clarified:
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 .
And with effect from 01/7/10 an explanation was added to Section (105) (zzzh) as under :-
"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 authorized 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 authorized 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.]"
Now, the Law is clear that till 1.7.2010, the builder was not required to pay Service Tax, but somehow the Department sought to extend the scope of the explanation to periods prior to 1.7.2010.
In Magus Construction, , the Guwahati High Court had held that it becomes clear that the circular, dated August 1, 2006, is binding on the department and this circular makes it more than abundantly clear that when a builder, promoter or developer undertakes construction activity for its own self, then, in such cases, in the absence of relationship of ‘service provider' and ‘service recipient', the question of providing ‘taxable service' to any person by any other person does not arise at all .
Tribunal had in many orders held that Explanation to Section 65(105)(zzzh] does not have a retrospective reach. Please see RF Properties - 2013-TIOL-971-CESTAT-DEL.
Now the latest order of the Tribunal not only confirms that the explanation has no retrospective effect, but also grants refund in cases where Service Tax has been paid overcoming the hurdle of ‘unjust enrichment'.
We bring you this case today.