The Authority for Advance Rulings, New Delhi in the case of Harekrishna Developers, STO 2008 AAR 87 observed that the activity of building a residential unit on an earmarked plot in the Complex and making Construction thereon as per the plan, design and specifications, obtaining various permissions and providing amenities, apart from the provision of common infrastructural facilities before handing over the building to the customers would undoubtedly constitute services provided or to be provided.
The fact that the ownership and possession remains with the applicant throughout the process of Construction and that the constructed residential unit can only be transferred to the booker/buyer on receipt of entire sale consideration does not have a real bearing on the question whether any services in relation to the Construction of complex are required to be rendered by the applicant.
This was nothing less than a tsunami for those in the real estate sector. Immediately the CBEC came to the rescue of the builders and once again a particular lobby was favoured at the cost of Revenue. Today the cards have changed and the Budget 2010 bring back the old memories. The definition of the Construction services has been suitably amended. The Ministry feels that payment made by the prospective buyers/flat owners, in few cases the entire consideration is paid after the residential complex has been fully developed.
This is in the nature of outright sale of the immovable property and admittedly no service tax is chargeable on such transfer. However, in most cases, the prospective buyer books a flat before its construction commencement/completion, pays the consideration in instalments and takes possession of the property when the entire consideration is paid and the construction is over.
In some cases the initial transaction between the buyer and the builder is done through an instrument called ‘Agreement to Sell’. At that stage neither the full consideration is paid nor is there any transfer in ownership of the property although an agreement to ultimately sell the property under settled terms is signed. In other words, the builder continues to remain the legal owner of the property. At the conclusion of the contract and completion of the payments relating thereto, another instrument called ‘Sale Deed’ is executed on payment of appropriate stamp duty. This instrument represents the legal transfer of property from the promoter to the buyer.
Further according to the North block different pattern is followed at different places. These different patterns of execution, terms of payment and legal formalities have given rise to confusion, disputes and discrimination in terms of service tax payment. At the initial stage, instruments are created between the promoter and all the prospective buyers (which may include a person who has provided the vacant land for the construction), known as ‘Sale Of Undivided Portion Of The Land’.
This instrument transfers the property right to the buyers though it does not demarcate a part of land, which can be associated with a particular buyer. Since the vacant land has lower value, this system of legal instrumentation has been devised to pay lesser stamp duty. In many cases, an instrument called ‘Construction Agreement’ is parrallely executed under which the obligations of the promoter to get property constructed and that of the buyer to pay the required consideration are incorporated.
Now, in order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly. This would only expand the scope of the existing service, which otherwise remain unchanged.