WIRC_-_J_B_Nagar_25-11-2011 - jb nagar cpe study circle of wirc ...

N. K. SHETH & COMPANYWIRC JOINTLY WITH J.B. NAGAR CPE STUDY CIRCLEWelcome all participants to Service Tax Intensive CourseSubject : Service Tax issues – Builders & DevelopersDate : 25 th November, 2011 (Friday)Venue : Onyx Hall, Hotel-VITS, A-K- Road, Kondivita Lane, Andheri(east), Mumbai.Faculty : CA. Naresh K. ShethE-Mail ID : nksheth@vsnl.comnksheth25@gmail.comN.K.Sheth & Company1Preamble / Scope of Presentation‣ Scope of presentation restricted to amendments made in following constructionrelated services by Finance Act, 2010 w.e.f. 01.07.2010:• Commercial or Industrial Construction [Section 65(25b) read with Section65(105)(zzq)] – Service tax on sale of under construction units.• Construction of Complex [Section 65(30a) read with Section 65(105)(zzzh)] –Service tax on sale of under construction flats / residential units.• Preferred location services [Section 65(105)(zzzzu)] – pertaining to sale offlats / units taxable w.e.f. 01.07.2010.‣ Presentation contains only relevant extract/gist of definitions in paraphrased manner‣ Faculty will deliberate on FAQs, case studies and relevant judicial pronouncementson above captioned subject.‣ For qualitative coverage of issues in time allotted, faculty will stick to the scopeprescribed.N.K.Sheth & Company 21

N. K. SHETH & COMPANYSale of Flats / Units – Jurisprudence History 1/5‣ Prevalent and general view:• Builder sales immovable property.• No service tax on sale of flats / units.‣ Sale of completed flats / units were never liable to service tax.‣ Service tax applicability on under construction flats is a subject matter of litigationand controversy.‣ For sale of under construction flats, issue is whether builder constructs the flats:• On his own account as a property seller: or• Constructs on behalf of allottees as service provider.‣ Honorable Supreme Court in case of K Raheja Development Corporation vs. Stateof Karnataka (AIR 2005 SC 2350) in context of Karnataka Works Contract Tax held:• Builder constructs flats for prospective customers and• Builder does not construct property for himself.N.K.Sheth & Company 3Sale of Flats / Units – Jurisprudence History 2/5• Builder is executing work on behalf prospective customers.• Falls under definition of Works Contract liable to Sales Tax under KarnatakaSales Tax Laws.‣ DGST’s Circular F No.V/DGST/22/AUD/MISC/10/2004 dated 16.02.2006 suggests:• Levy of service tax on sale of under construction flats / units.• No levy of service tax on flats / units sold after completion.‣ Mahakaushal Builders Welfare Association Vs. SCE [2006] 5STT 341 (MP):• Above referred DGST circular was challenged in writ petition.• High Court rejected the writ petition treating it premature on following grounds:– No assessment yet made on petitioner.– No demand is served on the petitioner.– No liability is raised on petitioner.• Merits / demerits have not been considered by High Court.N.K.Sheth & Company 42

N. K. SHETH & COMPANYSale of Flats / Units – Jurisprudence History 5/5• It is a self service for a builder and does not render any service to allottees.• Service tax not leviable on under construction flats.‣ Supreme court in special leave petition - L&T Ltd (2008-TIOL-186-SC-CT) on workscontracts tax, has referred K. Raheja’s case to larger bench for re-consideration.‣ CBEC vide Circular No. 108/02/2009 – ST dated 29.01.2009 clarified that sale ofresidential flats is not taxable on following grounds:• Construction amounts to self service.• Construction for personal use is excluded from definition of residentialcomplex.‣ K. Raheja case is still pending for review before larger bench in Supreme Court. Itis yet to take final view on applicability of VAT and service tax on sale of flats.‣ Finance Act, 2010 inserted explanation in respective category deeming sale ofunder construction flats / units as service liable to service tax w.e.f. 01.07.2010.N.K.Sheth & Company 7Amendments by Finance Act, 2010‣ An explanation is inserted in Section 65(105)(zzq):• Expands the scope of “Commercial and Industrial Construction Service ”.• Deems builders to be service provider for units sold during construction.• Makes builders liable to service tax in respect of sale of under constructionunits w.e.f. 01.07.2010.‣ An explanation is inserted in Section 65(105)(zzzh):• Expands the scope of “Construction of Complex Service” category.• Deems builders / developers to be service provider in respect of residentialflats sold during construction.• Liable to service tax on sale of under construction flats w.e.f. 01.07.2010‣ Introduction of new service category U/s 65(105)(zzzzu) w.e.f. 01.07.2010:• Provision of preferential location.• Development of Complex.N.K.Sheth & Company 84

N. K. SHETH & COMPANYCommercial Construction - Extract of Definition‣ 65(105)(zzq) - "taxable service" means :• Any service• provided• or to be provided,• to any person,• by any other person,• in relation to• Commercial or Industrial construction.‣ Applicable w.e.f. 10.09.2004N.K.Sheth & Company 9Commercial and Industrial Construction - Definition65(25b) - “commercial or industrial construction " means—‣ construction of a new building or civil structure or a part thereof; or‣ construction of pipe line or conduit‣ completion and finishing services 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‣ repair, alteration, renovation or restoration of, or similar services in relation tobuilding or civil structure, pipe line or conduit,N.K.Sheth & Company 105

N. K. SHETH & COMPANYCommercial and Industrial Construction - Definitionwhich is —(i) used, or to be used, primarily for; or(ii) occupied, or to be occupied, primarily with; or(iii) engaged, or to be engaged, primarily in,• commerce or industry, or work intended for commerce or industry,• but does not include such services provided in respect of: Roads, Airports, Railways, Transport terminals, Bridges, Tunnels Dams.N.K.Sheth & Company 11Commercial Construction – Deemed Service‣ Explanation to section (zzq) – Deemed Service :• For the purpose 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• shall be deemed to be service provided by the builder to the buyer.Except 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 timebeing in forceN.K.Sheth & Company 126

N. K. SHETH & COMPANYCommercial Construction – Deemed Service‣ Explanation only deems:• Sale of units to be a service provided by builder to buyers.• Builder to be a service provider (contractor).• Buyer to be a service recipient.‣ Once it is deemed as a service, all provisions applicable to “commercial or industrialconstruction service” category shall apply accordingly.‣ Sale of units to be used for commercial purpose are taxable.‣ Units used or to be used for non-commercial purpose are not taxable:• Units sold to organization / institutes established solely for educational,religious, charitable, philanthropic purpose.• Units sold to government.N.K.Sheth & Company 13Construction of Complex – Extract of Definition‣ 65(105)(zzzh) - "taxable service" means :• Any service• provided• or to be provided,• to any person,• by any other person,• in relation to• construction of complex.‣ Applicable w.e.f 10.09.2004N.K.Sheth & Company 147

N. K. SHETH & COMPANYConstruction of Complex – Extract of Definition‣ 65(30a) - "construction of complex" means—• construction of a new residential complex or a part thereof; or• 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• repair, alteration, renovation or restoration of, or similar services in relation to,residential complex.N.K.Sheth & Company 15Residential Complex – Relevant Extract of Definition‣ 65(91a) - "residential complex" means any complex comprising of :• building or buildings, having more than 12 residential units; common area; and• any one or more of facilities or services such as park, lift, parking space,community hall, common water supply or effluent treatment system,• located within a premises and the layout of such premises is approved by anauthority 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 layout, and the construction of such complex isintended for personal use as residence by such person.‣ “Personal use" includes permitting the complex for use as residence by anotherperson on rent or without consideration.N.K.Sheth & Company 168

N. K. SHETH & COMPANYCirculars – Construction for personal use is exempt‣ Circular No.108/02/2009-ST dated 29.01.2009 clarified that:• Sale of residential flats not liable to service tax on following grounds: Self service Personal useThe circular is still on the statute book.‣ TRU Clarification F. No. 332/16/2010-TRU dated 24.05.2010• issued after enactment of Finance Act, 2010• Residential houses constructed by National Building Construction CorporationLtd (NBCC) for residence of Central Government Officers’ is not liable toservice tax on the ground that it is intended for personal use as residence.N.K.Sheth & Company 17Residential Construction – Deemed Service‣ Explanation to section (zzzh) – Deemed Service :• For the purpose of this sub-clause,• the construction of a complex which is intended for sale,• wholly or partly,• by a builder or any person authorized by the builder• before, during or after construction• shall be deemed to be service provided by the builder to the buyer.Except 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 timebeing in forceN.K.Sheth & Company 189

N. K. SHETH & COMPANYResidential Construction – Deemed Service‣ Explanation only deems:• Sale of units to be a service provided by builder to buyers.• Builder to be a service provider (contractor).• Buyer to be a service recipient.‣ Once it is deemed as a service, all provisions applicable to “construction of complexservice” category shall apply accordingly.‣ Only services in relation to “Residential Complex” as defined U/s.65(91a) would betaxable.‣ Flat sale in building or complex having less than 12 or less units will not be taxable.‣ Sale of flat for personal use – whether liable to tax?- An arguable case.N.K.Sheth & Company 19Relevant Notifications / Order 1/2‣ Notification No.36/2010-ST dated 28.06.2010:• Advances received before 01.07.2010 towards under construction flats / unitsnot liable to service tax.• This applies to commercial as well residential construction services.• This does not apply to preferred location services category.‣ Notification No.28/2010-ST dated 22.06.2010:• Construction of residential complex under Jawaharlal Nehru Urban Mission andRajiv Awaas Yojana are exempted.N.K.Sheth & Company 2010

N. K. SHETH & COMPANYRelevant Notifications / Order 2/2‣ Service tax (Removal of Difficulty) Order 2010 dt. 22.06.2010 listed following asauthority competent to issue completion certificate:• Architect registered with the Council of Architecture constituted under theArchitects Act, 1972 (20 of 1972); or• Chartered engineer registered with the Institution of Engineers (India); or• Licensed surveyor of the respective local body of the city or town or village ordevelopment or planning authority;who is authorized to issue a completion certificate in respect of residential orcommercial or industrial complex as pre-condition for its occupation.N.K.Sheth & Company 21Deemed Service – Important Points 1/2‣ Sale of flats / units liable to service tax:• Any part of sale consideration is received before completion.• Receipt of even small amount before completion will trigger service tax liabilityfor entire sales consideration.‣ Sale of flats / units not liable to tax:• Where full consideration is received after completion.• Re-sale of the flats / units.‣ Construction of flat / unit intended for sale is liable to service tax.‣ Flats / units not intended for sale are not liable to service tax.• Building constructed for self use.• Building constructed for renting purpose.• Portion of building retained for joint venture partner / co-developer.N.K.Sheth & Company 2211

N. K. SHETH & COMPANYDeemed Service – Important Points 2/2‣ Only Builder or person authorized by him is liable to service tax.‣ The allottees / investors selling the under construction flats / units are not liable toservice tax as:• They are not rendering construction services.• They are not builders / person authorized by the builderN.K.Sheth & Company 23Builders – Calculation of Service Tax Liability‣ Service tax is payable on value of taxable services.‣ Sale of flat / commercial unit is a composite deal for transfer of rights in land andstructure. Sale value consists of land value, material cost and service cost.‣ No mechanism is provided under legislation to workout value of taxable service.‣ Notification 1/2006-ST dt. 01.03.2006 is amended w.e.f. 01.07.2010 for abatement.‣ Builders will be liable to pay service tax @ 10.30% on the abated value.Particulars Abatement Effective tax rateWhere the cost of land is not separately75% 2.575% of total valuerecovered from buyerWhere the cost of land is recovered 67% 3.40% of construction workseparately from buyer‣ Abatement is not available where builder has availed:• Benefit of Notification No.12/2003 dated 20.06.2003• Cenvat credit under Cenvat Credit Rules, 2004N.K.Sheth & Company 2412

N. K. SHETH & COMPANYValidity of Service Tax Levy on Sale of Flats/Units 1/4‣ Subject matter of taxation:• Sale of flat is transfer of immovable property – “Transfer of Property Act, 1882”.• In pith and substance, tax is levied on sale of immovable property.• Service tax is a tax on services [Section 65(105) / Section 66].• Sale of flat, not being a service transaction, service tax can not be levied.‣ Constitutional validity:• Schedule VII to the Constitution lists out the subject matter of taxation byCentral and State Governments:• List I – Union List• List II – State List• List III – Concurrent List• Entry 97 of Union list is a residuary entry which empowers Central Governmentto levy tax on items not appearing in State List or Concurrent List.N.K.Sheth & Company 25Validity of Service Tax Levy on Sale of Flats/Units 2/4• Central Government levy service tax under Residuary Entry 97.• Taxation of Immovable property falls under State List of taxation.• It, therefore, can not fall under residuary Entry 97 of Union List.• Central Government is, therefore, constitutionally incompetent to levy tax onSale of property under Residuary Entry 97 of Union List.‣ Honorable Supreme Court in the case of Bharat Sanchar Nigam Limited Vs Union ofIndia [(2006) 2 STR 161 (SC)] held as under:• Total value taxed under various legislation should not exceed transaction value• Double taxation arising out of overlapping jurisdiction of State and CentralGovernment is not permissible.• Levy of service tax on flat sale is not in consonance with law laid down bythe Supreme Court as – State Government collects stamp duty and registration fees on sale of flat.N.K.Sheth & Company 2613

N. K. SHETH & COMPANYValidity of Service Tax Levy on Sale of Flats/Units 3/4 Central Government collects service tax on sale of flat. Base value suffering tax is much higher than actual transaction value.‣ Levy is not in consonance with principle laid down by Gauhati High Court in MegusConstruction (P) Ltd Vs Union of India 2008 (11) STR 225, wherein it was held that:• Builder constructs the property on his own account.• It amounts to self service.• Allottee is a purchaser of immovable property. He is not a service recipient.• In absence of service provider and service recipient relationship, no service taxis leviable on sale of flat.‣ Absence of valuation mechanism:• Sale of flat / commercial unit is a composite deal for transfer of rights in landand structure.• Sale value consists of land value, material cost and service cost.N.K.Sheth & Company 27Validity of Service Tax Levy on Sale of Flats/Units 4/4• No mechanism is provided under legislation to workout value of taxableservice.• In absence of proper valuation mechanism, charging Section fails.- CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC).‣ Levy is not in consonance with the principle laid down by Honorable Supreme Courtin Ganon Dunkerly’s case [9 STC 353] for taxing indivisible composite contract.‣ Substantial charge is created by way of insertion of explanation. It is litigative issuewhether the scope of taxation can be increased significantly through an explanation.‣ Levy is arbitrary and discriminatory in nature. It discriminates between two classesof builders:• Builder selling the property on booking basis.• Builder selling the property after completion.N.K.Sheth & Company 2814

N. K. SHETH & COMPANYPresent Status of Litigation‣ The High Courts of all the states are flooded with writ petitions challenging the levyof service tax on sale of flats / units.‣ Honorable Bombay High Court has admitted many writ petitions. The mostprominent being writ petition filed by Maharashtra Chamber of Housing Industry(MCHI). Hearing of the above petition for final disposal is postponed by High Courtto later date with following directions:• No coercive steps shall be taken against petitioners for recovery of service taxin relation to provisions in question .• Assessment may proceed in accordance with law.‣ Honorable Madras High Court has passed similar order in writ of A P Ravi Vs Unionof India [2010-TIOL-604-HC-MAD-ST].‣ Punjab & Haryana High Court in M/s G S Promoters Vs Union of India [2010-TIOL-813] upheld constitutional validity of service tax levy on builders and developersN.K.Sheth & Company 29Implications of MCHI Interim Order‣ The order is an interim orders and not the final one.‣ Department is barred from taking coercive action against petitioners for recovery oftax till the matter is finally decided.‣ Protection of this interim order is available only to the petitioners or the members ofthe petitioner association.‣ Court has not granted general protection.‣ Non-petitioners can not take shelter of / recourse to this interim order.‣ Applicability of impugned provisions has not been stayed by the Court.‣ Liability to pay service tax under impugned provisions is still alive.‣ Even for petitioners, the assessment may proceed in accordance with law. .N.K.Sheth & Company 3015

N. K. SHETH & COMPANYPreferred Location – Section 65(105)(zzzzu)‣ Any Service Provided or to be provided to a buyer,‣ by a builder (including his authorized person) of:• a residential complex• or a commercial complex‣ for providing preferential location• “preferential location” would mean any location having extra advantage whichattracts extra payment over and above the basic sale price.‣ or development of complex,but does not include services covered under :• Management , Maintenance and repair category (zzg),• Commercial or Industrial Construction (zzq),• Residential Construction Service Category (zzh)• and in relation to parking place.N.K.Sheth & Company 31Preferential Location Services – Coverage 1/2‣ TRU Clarification No.334/1/1010-TRU dated 26.02.2010• Prime or preferential location charges such as: Sea facing flat / units Park facing flat / units Corner flat / units Higher floors flat / units Vastu appraised flat / units; Lucky numbers flat / units• Internal or external development charges collected for: Development / maintenance of park Laying sewerage pipe lines; Laying water pipe lines Providing access roads Fire fighting installation charges; Power backup charges• Excluding amount collected on behalf of statutory authorities.N.K.Sheth & Company 3216

N. K. SHETH & COMPANYPreferential Location Services – Coverage 2/2‣ Specific exclusion• Management, maintenance or repair falling U/s. 65(105)(zzg).• Commercial or Industrial Construction falling U/s. 65(105)(zzq).• Construction of complex falling U/s. 65(105)(zzzh).• Amount received towards parking space.‣ If complex is not a residential complex as defined U/s.65(91a), services rendered inrespect of unit in such a complex is not liable to service tax.‣ Commercial as well as residential units are covered.‣ Under construction as well as completed flats / units are covered.‣ Builder is not entitled to any abatement.‣ Effective tax rate would be 10.30%.‣ Debatable issue – amount received by builder is a part of sale consideration of flat /unit, taxable under “Construction Category” and not under this category,N.K.Sheth & Company 33FAQs‣ Please refer to case studies No. 1 & 2.‣ What are service tax implications in redevelopment project?‣ Stamp duty valuation of units is higher by 20% than agreement value. What are theservice tax implications?‣ Where the builder collects cash component (unaccounted consideration) from thecustomer, what are the implications in terms of service tax, interest, penalty andprosecution?‣ Who is liable to bear service tax, builder or buyer?‣ In case where builder fails to pay service tax, whether authority can recover it fromthe buyers?‣ In case where builder pays service tax with interest, whether interest can berecovered from buyers?N.K.Sheth & Company 3417

N. K. SHETH & COMPANYFAQs‣ Whether adjustment or refund of service tax is permissible on cancellation ofallotment / deal?‣ Where builder recovers value of land separately, whether abatement can be claimedon amount charged for structure?‣ Whether buyer of the flat / office can claim CENVAT credit of service tax paid?‣ Whether builder can claim CENVAT credit of input service tax against service taxliability on sale of flats / units?N.K.Sheth & Company 35Case Study 1 – Service tax on sale of commercial unitsFacts Matrix:‣ The occupation certificate for ground floor was received on 28.02.2010.‣ The completion certificate for entire project is received on 12.08.2010.‣ The project (with exception of ground floor) was completed to the extent of 80% on30.06.2010.UNITSSOLDAGREEMENT /ALLOTMENTDATEVALUEPROGRESSPAYMENT DUETILL 30.06.2010PAYMENT RECEIVED25 10.03.2009 25 Cr Nil On agreement execution (25 Cr)5 Allotment Letter 5 Cr Nil On commencement of the Project[2008-09] ](5 Cr)10 on 30.06.2009 10 Cr 10 Cr Before 30.06.2010 (9Cr)GroundFloorOn 15.07.2010 (1 Cr)N.K.Sheth & Company 3618

N. K. SHETH & COMPANYCase Study 1 – Service tax on sale of commercial unitsUNITSSOLDAGREEMENT /ALLOTMENTDATEVALUEPROGRESSPAYMENT DUETILL 30.06.2010PAYMENT RECEIVED20 07.05.2010 25 Cr 20 Cr Before 30.06.2010 (12 Cr)Cheque received on 30.06.2010(3 Cr) [Deposited on 05.07.2010]01.07.2010 to 12.08.2010 (5 Cr)On 30.08.2010 (5 Cr)1 15.06.2010 1.5 Cr 1 Cr Entire amount paid by 6 post dated of Rs25 Lakhs to be deposited over six months.10 01.07.2010 15 Cr Nil On 30.08.2010 (15 Cr)10 05.08.2010 20 Cr Nil 05.08.2010 (16 Cr)13.08.2010 (4 Cr)19 30.08.2010 38 Cr Nil Full payment received on execution of theagreement‣ Will it make any difference if this were to be a ‘residential complex’?N.K.Sheth & Company 37Case Study 2 – Preferred Location ServicesSR NO PARTICULARS AMOUNT(Rs.)1 Society Membership Fees 12 Share Capital Contribution 2503 Electricity meter deposit 10,0004 Water meter deposit 5,0005 Society formation charges 10,0006 Contribution towards construction of Swimming pool 10,00,0007 Contribution towards or one time members fees for Club 7,51,0008 Allotted parking space in stilt 5,50,0009 Allotted parking space in open compound 1,00,00010 Advance towards maintenance and Municipal taxes till formation of society 3,60,000What are the service tax implications of above referred receipts by builder?N.K.Sheth & Company 3819

N. K. SHETH & COMPANYWords of Caution‣ Views expressed are the personal views of faculty based on his interpretation oflaw.‣ Application of various provisions and its implications will vary on facts of the caseand law prevailing on relevant time.‣ Participants / Members are advised to take cognizance of above while applying thecontents of this presentation to specific case / issue.‣ This educational meeting is arranged with a clear understanding that neither Facultynor WIRC / Study Circle will be responsible for any error, omission, commissionand result of any action taken by a member / participant or anyone on the basis ofthis presentation.N.K.Sheth & Company 39THANK YOUN.K.Sheth & Company 4020