How impartial is service tax law to partial constructions?
By Chaitanya Bhatt
Section 66E(b) of the Finance Act, 1994 enacted pursuant to the introduction of the negative list regime with effect from 1-7-2012 reads as under:
“SECTION 66E. Declared services. — The following shall constitute declared services, namely :—
(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…”
Prior to 1-7-2012, the explanation added to the taxable category of ‘commercial or industrial construction of complex service’ under the erstwhile Section 65(105)(zzq) of the Finance Act, 1994 with effect from 1-7-2010 sought to achieve the same result that the present Section 66E(b) (supra) has achieved.
A brief background that led to the advent of the above explanation to Section 65(105)(zzq) would be of relevance here. Prior to insertion of the explanation, both the department and the assessees were of the view that any amount received towards sale of immoveable property by the seller to the buyer would not be subject to the levy of service tax since transfer of property in immoveable property is not a service.
The Supreme Court in the case of K. Raheja Development Corporation v. State of Karnataka [2005 5 SCC 162], however, held that the transaction of sale of flat by the seller to the buyer would qualify as a works contract unless the agreement for sale of flat was entered into after the construction was complete. The aforesaid decision of the Supreme Court was, however, doubted in the case of Larsen & Toubro Ltd. [2008 (12) S.T.R. 257 (S.C.)] and the same was referred to the Larger Bench. Although the aforesaid decisions were concerned with the applicability of VAT, considering the fact that the decision of K. Raheja might get reversed and there would be uncertainty in such a scenario with respect to levy of service tax, a fiction by way of insertion of the above explanation was created in the service tax provisions with effect from 1-7-2010.
However, the Larger Bench of the Supreme Court in the case of L&T Limited v. State of Karnataka [2013-TIOL-46-SC-CT-LB] held that the activity of construction undertaken by the developer would be treated as a works contract from the time the developer enters into a contract with the flat purchaser. In other words, the Apex Court held that the consideration received towards portion of construction to be carried out after a unit is booked amounts to works contract only.
A view could be taken that even for the purpose of service tax, ongoing construction contracts are also in the nature of works contracts and the decision of the Larger Bench of the Supreme Court in the case of L&T Ltd. is, therefore, mutatis mutandis applicable. In other words, pursuant to the said Larger Bench decision, in respect of on-going construction contracts, service tax would be payable only on that portion of value of construction services that pertains to the period after the customer books the flat and not on all amounts received prior to receipt of completion certificate.
Contrarily, it is pertinent to note that, although construction contracts are certainly in the nature of works contracts, the service tax provisions both prior to and post 1-7-2012 always sought to levy service tax under two separate service headings viz. “construction of complex service” and “works contract service”. Further, construction contracts are more specifically covered under the taxable category of “construction of complex service” rather than ‘works contract service’. Furthermore, the decision of the Supreme Court in L&T was limited only to the VAT aspect and service tax was not discussed therein. Further, in so far as service tax is concerned, the scope and language of the explanation to construction of complex service (up to 30-6-2012) and Section 66E(b) of the Finance Act (with effect from 1-7-2012) as such make it unequivocally clear that in respect of construction contracts, all amounts received by the developer prior to receipt of occupancy certificate would be leviable to service tax.
Going further, a question arises as to whether Section 66E(b) is applicable in case of a building/complex which was intended to be constructed for oneself but subsequent to partial construction of the building/complex, such building/complex is sold off to a third party. For example, a person X is constructing a mall for himself. The construction started in August 2012 and half of the mall was constructed by April 2013. In May 2013, X decides that he does not want to continue to build the mall for himself and he decides to sell off the already constructed portion of the mall to Y for a consideration of Rs. 1 crore.
In the above illustration, would X be liable to pay the applicable service tax on the consideration of Rs. 1 crore received from Y in terms of Section 66E(b) of the Finance Act, 1994? If the answer is said to be in the affirmative, it is pertinent to note that the language of Section 66E(b) uses the term “the construction of a new building which is intended for sale”. Since X had commenced the construction activity in August 2012 and at that time, the intention of X was to build the mall for himself and not for Y, X at the time of transfer in May 2013 is only transferring the existing structure in an “as is where is” condition to Y. Y at his own discretion would decide whether to undertake further construction or not. Can it therefore be said that Section 66E(b) only covers within its ambit those situations where the builder continues the activity of construction of the building after the buyer is located and hands over the building to the said buyer only in completed form?
In the scenarios discussed above, only a clarification/circular issued by the CBEC explaining the true intent, scope and interpretation of an otherwise apparently unambiguous Section 66E(b) would change the dynamics behind the taxability of construction contracts under service tax law.
[The author is a Senior Associate, Lakshmikumaran & Sridharan, Mumbai]