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Author : Monish Bhalla/DNA-Daily News & Analysis



We are a real estate development firm which engages a contractor to construct residential societies. Prospective buyers pay us a booking advance on these residential units. Are we liable to pay service tax even though our contractor is paying service tax on construction activities?

In a recent controversial decision by the Authority for Advance Ruling, Central Excise, Customs and Service Tax, New Delhi in the case of M/s Harekrishna Developers, Ahmadabad vides Ruling No. AAR/03(ST)/2008, in Application No. AAR/05(ST)/2007 dated 7.4.2008, it was held that Service Tax is liable to be paid by the Real Estate Developer where there is a sale of residential units after booking. They are liable to pay service tax under section 65 (105) (zzzh) of the Finance Act, 1994 under the notified taxable service of construction of a complex. This ruling has lead to a chaotic situation placing a tax axe in the hands of the service tax department.

However, as per section 96E of The Finance Act 1994, the advance ruling pronounced by the Authority under section 96D shall be binding only on the applicant who had sought it or in respect of any matter referred to in sub-section (2) of section 96C, on the Commissioner of Central Excise, and the Central Excise authorities subordinate to him, in respect of the applicant. Further, the advance ruling referred to in the sub-section shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced. Thus, in light of the said provision of the Finance Act, the said ruling has no bearing on any other real estate developer and thus the said ruling cannot be made the base for demanding any service tax.

Moreover, this issue relating to applicability of service tax on construction activities was examined in detail by the ministry of finance. The Central Board of Excise & Customs, New Delhi issued a Master Circular clarifying technical issues relating to taxation of services Vide this Circular No. 96/7/2007-S.T., dated 23-8-2007 F.No. 354/28/2007-TRU in this regards. The fundamental question as to whether service tax is liable under construction of complex service [section 65(105)(zzzh)] on the builder, promoter, developer or any such person was discussed threadbare. Two situations were examined, those who get the complex built by engaging the services of a separate contractor, and others who build the residential complex on his own by employing direct labour. It was clarified vide the said Master Circular dated 23.8.2007 that, in a case where the builder, promoter, developer or any such person builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of the said residential complex, the contractor in his capacity as a taxable service provider (to the builder/promoter/developer/any such person) shall be liable to pay service tax on the gross amount charged for the construction services under 'construction of complex' service [section 65(105)(zzzh)]. However, in the second situation, as no other person is engaged for construction work and the builder/promoter/developer/any such person undertakes construction work on his own without engaging the services of any other person then, in such cases, firstly service provider and service recipient relationship does not exist and secondly, services provided are in the nature of self-supply of services. Hence, in the absence of service provider and service recipient relationship and the services provided are in the nature of self-supply of services, the question of providing taxable service to any person by any other person does not arise. The said Ruling is in contradiction to the said Master Circular. Thus in absence of any further clarification and in light of current situation, the Real Estate Developer is not liable to pay any service tax as the contractor is already paying service tax on construction activities.

Monish Bhalla, Director, Tax-O-Legal,

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