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Service tax liability is to be determined with reference to the criterion whether there is a service provider and service recipient.
February, 25th 2014
                           2013 (4) ECS (206) (Tri ­ Chen)

              CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
                        SOUTH ZONAL BENCH, CHENNAI

                                       Jain Housing

                                          Versus

                          Commissioner of Service Tax, Chennai

               Application Nos. ST/S/354 ­ 356/12 in ST/448 ­ 450/12


                                              Date of Hearing: 29.7.2013
                                              Date of Decision:29.7.2013

PRESENT :

Smt. Radhika Chandrashekar, Advocate          For the Appellant

Shri K. S. V. V. Prasad, JC (AR)               For the Respondent

CORAM :

Hon'ble Shri P.K. Das, Judicial Member
Hon'ble Shri Mathew John, Technical Member

      MISC ORDER NO. 41959 ­ 41961/2013


      "Service tax liability cannot be determined based on what the applicant
      calls itself, whether as a builder, a developer, a promoter etc. the liability is
      to be determined with reference to the criterion whether there is a service
      provider and service recipient. When UDS is sold the person to whom UDS
      is sold becomes the legal owner of UDS. The facts that there is an
      agreement giving possession to the applicant to do construction activity
      cannot be interpreted to mean that the applicant continued to be the owner
      of the land. Applicant's right to diminished to the extent UDS is sold. The
      clause in the agreement for construction creates a lien on the land sold in
      favour for the applicant who advances money for construction, if
      necessary. In most cases money is collected in advance from the buyers of
      UDS. But if there is no buyer for certain flats at initial stage or any buyer
      defaults on payment of installments, the applicant had to advance his
      money to carry on the construction activity. In such situation the lien only
      him to take possession of land and sell it to another person. This clause
      cannot be interpreted to mean that the initial transfer was not complete."
      [Para 22]


Per Mathew John. Mr. :

1.    The applicant is engaged in the business of Construction of Residential
      Complexes and the applicant registered for payment of service tax. On
      investigations conducted by Revenue, it appeared to the Revenue officers that
      the applicant had not paid appropriate service tax on different projects executed
      by them during the period Apr 06 to June 10. Three Show Cause Notices issued
      in this regard have been adjudicated by a common order confirming a tax
      demand of Rs. 11,21,54,460/- towards service tax and Rs. 7,11,365/- towards
      Cenvat credit denied. Further there is demand for interest. Penalties are also
      imposed. Aggrieved by the order, the applicant has filed these three appeals
      before the Tribunal along with stay petitions which are presently under
      consideration in this proceeding.

2.    Arguing for the appellant, the Counsel submits that the impugned construction
      was done on land of the applicant and hence applicant was doing activities for its
      own benefit and there were no service provider and service recipient in this case
      and hence demand for service tax is not sustainable. The Counsel submits that
      the applicant has to be considered as a "Developer" of Housing project of CBEC
      has clarified vide Circular 108/02/2009 dated 29.01.2009 and Circular
      334/3/2010 dated 26.10.2010 and 151/2/2012 ­ ST dated 10.02.2012 that there
      was no liability on Developers to pay service tax. She submits that this position
      changed only from 01.07.2010 when a new explanation was added in section 65
      (105) (zzzh) of Finance Act, 1994, defining the relevant taxable service, and the
      demands in the present appeals relate to periods prior to that date.

3.    She did not contest the fact that the applicant's model of business was to first
      enter into agreements with prospective buyers of flats for sale of Undivided
      Shares (UDS) of land which were first registered in the name of the buyers.
      Thereafter, construction was undertaken by the applicant and payments were
      collected from the buyers of UDS in installments depending on the progress in
      construction. On completion of construction and on receipt of full payment for the
      cost of construction, the constructed flats were handed over. No registration was
      done with local authorities for sale of the flat. She pointed out that majority of the
      flats constructed are not yet sold. But the demand relates to cases where UDS
      was sold and then construction undertaken and consideration received for such
      construction.
4.   The points contested by the Ld. Counsel are that even after UDS is sold, the
     applicant continued to be in possession of the land for the purpose of
     construction and the buyers of UDS had no right to interfere with the activity of
     construction. Further she pointed out that as per the terms in the contract if any
     buyer of UDS defaults in payment of any installment towards construction of the
     building the applicant had the right to take back possession of land and sell it to
     any other prospective buyer. So for all practical purpose the land continued to
     belong to the applicant and hence there was no service being provided to
     anybody else and there could be no levy of service tax, according to the counsel.

5.   Further the Ld. Counsel submits that out of 4252 flats constructed only 843 flats
     have been sold. She argues that at least for the unsold flats it is very clear that
     there was no service receiver. Further because of the fact that the flats
     constructed could not be sold because of the slump in the markets, the applicant
     is facing acute financial constraints in making any pre ­ deposit.




6.   She points out that an explanation has been added on 01.07.2010 in section 65
     (105) (zzzh) defining the relevant taxable service to the effect that even in a
     situation where the land is in the possession of the developer and money is taken
     for construction of flats to be sold there is a service involved. She argues that this
     explanation could have only prospective effect. She relied on the decision of
     CCE vs. Skynet Builders, Developers, Colonizers (2012) 27 STR 388. She
     argues that this would imply that prior to 01.07.2010 no service tax could be
     demanded from developers.

7.   She also argues that the activity involved supply of material and labour and
     therefore the contract could be vivisected only from 01.06.2007 when the entry
     under section 65 (105) (zzzza) for "works contract" was introduced in Finance
     Act, 1994.

8.   She relies on the following decisions:

     (i)     Commissioner of Income Tax Vs. M/s Sanghvi and Doshi Enterprises ­ in
             TC (A) Nos. 581 and 582 of 2011 decided Hon 'ble Madras High Court on
             01.11.2012;

     (ii)    CST Vs. Shrinandnagr ­ IV Co ­ op. Society Ltd (2011) 23 STR 439;

     (iii)   Mohitasham Complex (P) Ltd. vs. CCE ­ (2010) TIOL 1750

9.    The decision in the case of Sanghvi and Doshi Enterprises (supra) was
     canvassed at length to argue that as per the decision the business risk of
      constructing the residential complex was on the applicant and hence the
      applicant should be considered as a developer. Then she relies on the
      clarification of CBEC to argue that a developer need not have paid any service
      tax.
10.   She also pleaded that the demand is partly time barred because the Show Cause
      Notice dated 24.03.2010 covered the period 01.04.06 to 30.09.08, SCN dated
      15.07.2010 covered the period 01.10.08 to 30.09.09. and SCN dated 15.02.2011
      covered period from 01.10.2009 to 30.06.2010. She argues that in view of the
      circulars issued by CBEC the appellant was under the bonafide belief that
      developers need not pay service tax.

11.   The Ld. Counsel pleaded that the case may be admitted without any pre ­
      deposit.

12.   Opposing the prayer of the Counsel, the Ld. A.R. for Revenue submits that the
      applicant simultaneously executed two agreements ­ one to sell UDS in land and
      another to do construction activity. Once UDS in land is sold, the applicant is not
      the legal owner of the land sold. In respect of construction done for the
      customers to whom UDS is sold there is a relationship of service provider and
      service recipient between applicant and the person to whom UDS is sold. The
      fact that there was no registration for sale of flat clearly demonstrates that
      construction was a service rendered to the persons who brought the land.

13.   The Ld. A.R. submits that the various clarifications issued by CBEC and quoted
      by the Counsel are only to the effect that where someone constructs flats on his
      land and sells constructed flat there is no service involved. In such a case the
      registration with local authorities is done for sale of flat and not for sale of UDS.
      The facts that there is proof of sale of land and registration thereof with local
      authorities and there is no registration done for sale of flat are clinching proof that
      there was a relationship of service provider and service recipient between
      applicant and the persons to whom UDS was sold. He submits that the question
      whether there service tax liability would arise in situations of the type under
      consideration was examined by the Tribunal in the case of LCS City Makers Vs.
      CST Chennai ­ 2013 (30) STR 33 (Tri. ­ Che.) and the issue is decided in favour
      of revenue.

14.   The Ld. A.R. further points out that the issue before the Hon'ble Madras High
      Court in the case of Sanhvi and Doshi Enterprises (Supra) was whether a
      developer of land was eligible for deduction from income earned under 80IB of
      Income Tax Act, 1961. In that case, three parties were involved. A land owner
      (Hotel Mullai Pvt Ltd.), a property Developer (Sanghvi and Doshi Enterprises, the
      appellant therein) and prospective buyers of land (all taken together as one party
      for discussion). In this case only two parties are involved. The applicant and the
      buyers of UDS (all buyers taken together as one party). So the facts are different.

15.   Further the question before the Hon'ble High Court was whether on the facts and
      circumstances of the case, the Tribunal was right in not giving and finding any
      finding about the difference between developers, builders and construction
      contractors to claim deduction u/s 80 IB of the Income Tax Act.

16.   The relevant part of section 80 IB (10) read as under :

                  "The amount of deduction in the case of an undertaking developing
                  and building housing projects approved before the 31st day of March,
                  2008 by a local authority shall be hundred per cent of the profits
                  derived in the previous year relevant to any assessment year from
                  such housing project if,....."

17.   The Court decided that in the case land owner was to get Rs. 11,51,94,000/- as
      per the agreement between the land owner and the developer. The job of finding
      buyers for the UDS and also collecting money for construction was on the
      developer. Revenue had argued that the appellant therein was only a developing
      and not doing "developing and building". The court observed that when such a
      project starts there may not be identified buyers for all flats to be constructed and
      the risk due to such situation was on the developer ad not on the land owner.
      Since the business risk was with the appellant therein the Court decided that the
      appellant therein was eligible to get the deduction from income as per the
      provisions of section 80 IB (10) and not the land owner who just sells his land for
      a fixed consideration. He submits that the issue to be decided in this case is
      whether there is a relationship of service provider and service recipient and not
      whether the applicant was taking any business risk.

18.   The Ld. A.R. also points out that demand has been confirmed only in respect of
      cases where UDS was sold and consideration for construction received and
      where there was no registration with local authorities for sale of constructed flats.

19.   The Ld. A.R. points out that although the applicant took out registration in the
      year 2005, the applicant was not paying tax and filling returns. It was only after
      considerable investigation that data required to issue Show Cause Notice could
      be unearthed. From their own arguments it is clear that they were aware of the
      legal provisions but only mis ­ interpreting circulars and not disclosing
      information relevant for issue of show cause notice. So he argues that the
      extended period is correctly invoked.
20. He further points out that Construction of Residential complex became taxable from 16.06.2005. Article 366 (29A) of Constitution of India permitted bifurcation of material and service in a composite contract. The scheme of levy provided relief under notification 15/2004 ­ ST and subsequent notification 01/2006 ­ ST to avoid taxation of material value. In the present demand also abatement for value of materials is given and tax is demanded on the value of services only. The new entry for "works contract" provided only for a few method for determining the quantum of levy and this new entry cannot make the earlier entry ultra virus the Constitution. In fact both entries at 65 (105) (zzzh) and section 65 (105) (zzzza) make use of the same expressions as defined in section 65 (30a) and section 65 (91a). So the argument that the activity can be taxed from 01.06.2007 only is not correct. 21. He submits that this bench has been consistently calling for 50% of the tax demanded as pre ­ deposit in such cases and the same type of order may be passed in this case also. 22. We have considered arguments on both sides. Service tax liability cannot be determined based on what the applicant calls itself, whether as a builder, a developer, a promoter etc. The liability is to be determined with reference to the criterion whether there is a service provider and service recipient. This is the essence of the clarifications issued by CBEC. When UDS is sold the person to whom UDS is sold becomes the legal owner of UDS. The facts that there is an agreement giving possession to the applicant to do construction activity cannot be interpreted to mean that the applicant continued to be the owner of the land. Applicant's right is diminished to the extent UDS is sold. In the case of residential complex constructed nobody gets full title to the land. Right of each buyer is subject to the right of others. The clause in the agreement for construction creates a lien on the land sold in favour for the applicant who advances money for construction, if necessary. In most cases, money is collected in advance from the buyers of UDS. But if there is no buyer for certain flats at initial stage or any buyer defaults on payment of installments, the applicant had to advance his money to carry on the construction activity. In such situation the lien only him to take possession of land and sell it to another person. This clause cannot be interpreted to mean that the initial transfer was not complete. The taking over is a separate transaction arising because of subsequent financial transactions and conditions attached to such transactions. So we are not prima facie in agreement that the land continued to belong to the applicant and therefore, there was no service provider and recipient. 23. The decision in the case of Sanghvi and Doshi Enterprises was not in the context of service tax liability and on the issue whether there is a relationship of service provider and service recipient in facts of the type being considered in this appeal. At any rate in this appeal the dispute is only about cases where UDS was sold and then construction done. When UDS is sold and construction is undertaken for the person to whom UDS is sold the construction activity is done for a consideration specified in an agreement and the question of business risk gets diminished except in cases of default. Such default is more or less like non receipt of payment for any service done and there is hardly any new aspect to be considered. 24. The other issues raised by the Ld. Counsel are already decided against the applicant in the case of LCS city Makers. That is, the Tribunal held the view that construction of residential complex was taxable under section 65 (105) (zzzh) prior to 01.06.2007. 25. The decision in the case of Srinandha Nagar ­ IV Co ­ operative society was when a co ­ operative society does construction activity for its members whether there is any service involved. This is not the issue involved in this case. In the case of Mohitasam Complexes (P) Ltd., the flats were constructed and sold. The model followed was not one of selling UDS and then constructing the flats. So these decisions prima facie are not applicable to the facts of the case. 26. At this stage we do not see much merit in the argument regarding time bar because there was no adequate disclosure from the applicant to the department. 27. Considering the discussions above and also the financial hardship pleaded by applicant and also the Revenue interest, we order the applicant to make a pre ­ deposit of Rs. 4,50,00,000/- (Rs. Four crore Fifty lakhs only) within 8 weeks and report compliance on 10.10.2013. Subject to such deposit, pre ­ deposit of balance dues is waived for admission of appeal and its collection stayed during the pendency of the appeal. (Operative part pronounced in Court on 29.07.2013)
 
 
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