JUNE 24, 2014

By Naval Kant Jha

In the matter of levy of Service tax on Builders and Developers one of the most important issues that crops up with amazing regularity is the liability of Service Tax on Built units given to the Land owners in lieu of transfer of the land/development rights.

It is a common practice that the land owner in a land deal or in transfer of development right to the builders, demands for certain constructed area apart from cash. Similar situation arises in a Joint Venture agreement/firm/AOP also when such partners/persons (mostly land owners) apart from the profit sharing, settle for Built units for their contribution of land.

Since, the Builders/Developers provide construction service to the land owner/partners/persons such transaction attracts service tax w.e.f. 01/07/2010. Under negative list regime also, the activity continues to be remain taxable as per declared list of services, defined under Section 66E.

However, the valuation of the construction service provided by the Builders and Developers to the land owner and the relevant date of payment of Service Tax on such transaction particularly in case of change in price of flats over a period of time appears to be grey area and clarity is required on the same.

The CBE & C has issued clarifications through Circular No. 151/2/2012-ST dated 10 TH February 2012 on the subject matter and which is extracted below:-

Para 2.1

“(B)Valuation :

(i)    Value, in the case of  flats given to first category of service receiver, is  determinable in terms of section 67(1)(iii) read with rule 3(a) of Service Tax (Determination of Value) Rules, 2006, as the consideration for these flats i.e., value of land / development rights in the land may not be ascertainable ordinarily. Accordingly, the value of these flats would be equal to the value of similar flats charged by the builder/developer from the second category of service receivers. In case the prices of flats/houses undergo a change over the period of sale (from the first sale of flat/house in the residential complex to the last sale of the flat/house), the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to  be paid by the builder/developer  on the ‘construction service' involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument(eg. allotment letter)”.

From the above clarification, the following can be inferred:-

1. Taxable value in case the price of flats given to land owner undergo change over the period of time would be the value of similar flats as are sold nearer to the date on which land is being made available for construction.
   
2. Service tax is required to be paid at the time when the possession or right in the property of the said flats are transferred to the land owner.

Now, we may apply the said clarification to the following common situation: - A Builder has entered into development agreement with the landowner in August 2010 and accordingly land was made available to them for construction. The Builder agreed to give five built units to the landlord apart from some amount of cash. Due to some reason the construction started in 2012 and Builder had taken first booking thereafter @Rs. 8,000/- sq.ft. Since at the time when land was made available for construction (in August 2010) there was no sale of flats to other buyers, there being no construction, the “nearer price” was not available. The entire complex was constructed in 2013 and subsequently, as agreed, the builder handed over the five units to the land owner. Since the transaction became taxable from 01.07.2010 the Builder has to pay the Service Tax, however, in the meantime the market rate of the flats in the locality has risen from Rs.6000/- sq.ft in 2010 to Rs.8,000/- sq.ft in 2012.

In the prevailing circumstances the question that arise are -

++ Whether the value for service tax can be taken as Rs. 6000/- sq.ft i.e. the rate prevalent in the locality and being the actual consideration at the time of transfer of development right or Rs.8,000/- i.e. the enhanced rate on which the Builder sold flat to his first client?

++ What would be date of payment of service tax? &

++ Whether the date of handing over the flat under a conveyance deed can be treated as relevant date of payment of service tax and, if yes, then what is the legal provision under service tax law to support such scenario?

I have sought to answer the above issues thus -

• The valuation methodology suggested in the Circular dated 10.02.2012 does not hold good nor is supported by provisions of Section 67(1)(iii) of the Finance Act 1994 read with Rule 3(a) of Service Tax (Determination of Value) Rules, 2006, as far as the present scenario is concerned. Nearer to the date of transfer of land (August 2010), the builder had not sold any flat, therefore, could he consider rate as Rs. 6000/- sq.ft. i.e. the rate prevalent in the locality for the purpose of service tax valuation, on the ground that this might be the consideration actually received by them in lieu of land/transfer of development right ? - In my opinion, the tax administrators may not accept such value because Rule 3(a) of Service Tax (Determination of Value) Rules, 2006 provides for treating such amount as value only when similar service is provided by the service provider to other recipients. In the circumstances, the department may insist for rate of Rs. 8000/- sq.ft as value of taxable services being the amount charged by the same builder to provide similar service to other recipients. Thus, this remains to be a debatable and disputable issue. However, it could have been overcome by applying some optional method such as prescribing base rate (value) in form of ready reckoners adopted by various state governments for the purpose of stamp duty. Alternately, the value can also be prescribed as the consideration equal to the part price of land retained by the builder/developers as suggested in Para 6.2.1 of the Education Guide.
  
• Now coming to the question of relevant date of payment of service tax, the Circular clarifies as - “ at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (eg. allotment letter)” . However, the relevant date of payment of service tax needs to be determined as per the provisions of Rule 6 of the Service Tax Rules, 1994. The said Rule (w.e.f 01-04-2011) prescribes relevant date of payment of service tax on the basis of service deemed to be provided (Point of Taxation- earlier it was determined as per the date of payment received towards value of taxable service). Accordingly, determination of POT as per the provisions of Point of Taxation Rules, 2011 is necessarily required in every transaction so as to find out the relevant date of payment of service tax. At the time of land dealing, the Builder effectively pays net off amount, retaining the part price of land attributable to the built units to be handed over to the land owner. Therefore, the Builder can be said to have received an advance, at the time of transfer of development right by the land owner. In such a situation, the point of taxation is required to be determined as per the explanation under Rule 3 of the POT Rules. As per the said explanation, point of taxation is the date of receipt of such advance. Therefore, it appears that the clarification regarding relevant date of payment of service tax given in the Circular is not consistent with the provisions of Rule 3 of POT Rules, 2011 as well as Rule 6 of the STR, 1994. Further, if POT is considered on the date of transfer of development right (Para 6.2.1 of the Education Guide), the builders and developers will have to pay service tax on some of the projects which have a dark future (there are abundant examples where development agreement is entered into but the project could not be flagged of or is delayed for long period).

It is pertinent to mention that due to exorbitant price of land, formation of AOP/JV etc. or entering into joint development agreements by the Builders/developers with land owners has become a common phenomenon nowadays. In all such transactions, the land owner (may be a constituent of AOP or JV) least bothers for any tax compliance. It is the Builders/developers who face all sorts of difficulties including development and sale of the constructed unit and the compliance's before various authorities. In the circumstances, it would be desirable to have a clear understanding on these two important issues.

(The author is a Departmental officer and the views expressed are strictly personal)