FEBRUARY 25, 2015

By Timish Salot

ISSUE: Clarification on provisions relating to "Completion Certificate by the Competent authority as provided in Section 66E (b) of the Finance Act."

++ Brief Points:

a)   Construction of a complex, building etc.for sale to buyer is liable to service tax except where the entire consideration is received after issuance of completion certificate by the competent authority,

b)   Competent authority means Government or any authority authorized to issue completion certificate,

c)   The Building Completion certificate can be issued by Architect, Chartered Engineer, Licensed surveyor in case of non-requirement of issuance of certificate from authority mentioned in (b) above.

d)  No service tax is leviable on the sale of premises that takes place after issuance of completion certificate by the competent authority,

e)   In places like Mumbai Metropolitan Region (MMR) the building completion certificate is furnished by the Licensed surveyor or any person approved by the Commissioner who supervises the construction of the building. Later, the Commissioner on being satisfied grants occupancy certificate for the building,

f)   Once the occupancy certificate is obtained it signifies that construction of building is completed, no further construction activity is required to be undertaken,

g)   If the sale takes place after completion of construction and no further construction activities are to be carried out, the transaction is sale of immovable property and not provision of any service,

h)   Thus sale of premises after grant of occupancy certificate should not be liable to service tax being sale of immovable property.

++ Suggested Circular/Instruction that Board should give:

With effect from 1.7.2012, 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. As per explanation for the purpose of this clause:

(I)  The expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:-

(A)  Architect registered with the Council of Architecture constituted under the Architects Act, 1972(20 of 1972);or

(B)  Chartered engineer registered with the Institution of Engineers (India);or

(C) Licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(II)  The expression "construction" includes additions, alterations, replacements or remodeling of any existing civil structure;

According to the above provisions of Section 66E (b) when the sale of premises takes place after the issuance of the completion certificate by the competent authority, no service tax is leviable on such sale.

The basic thrust of the Finance Act is that if the sale takes place after completion of construction and no further construction activities are carried out the transaction is sale of immovable property and not provision of any service. This view finds support of the Hon'ble Supreme Court in case of M/s K. Raheja Development Corporation V/s State of Karnataka as reported in 2005-TIOL-77-SC-CT :

"18. Thus the Appellants are undertaking to build as developers for the prospective purchaser. Such construction/development is to be on payment of a price in various instalments set out in the Agreement. As the Appellants are not the owners they claim a "lien" on the property. Of course, under clause 7 they have right to terminate the Agreement and to dispose off the unit if a breach is committed by the purchaser. However, merely having such a clause does not mean that the agreement ceases to be a works contract within the meaning of the term in the said Act. All that this means is that if there is a termination and that particular unit is not resold but retained by the Appellants, there would be no works contract to that extent. But so long as there is no termination the construction is for and on behalf of purchaser. Therefore, it remains a works contract within the meaning of the term as defined under the said Act. It must be clarified that if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract. But so long as the agreement is entered into before the construction is complete it would be a works contract."

Also this view is fortified in the judgment of the Hon'ble Supreme Court in case of M/s Larsen & Toubro Limited V/s State of Karnataka, as reported in 2013-TIOL-46-SC-CT-LB :

"115. It may, however, be clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government ".

It is represented that in places like Mumbai Metropolitan Region (MMR) comprising of Municipal Corporation of Greater Mumbai, Thane, Kalyan, Navi Mumbai, Ulhasnagar etc. as per Municipal Corporation Act for time being in force, the building completion certification is furnished by the licensed surveyor or any person approved by the Commissioner to erect the building. Later on being satisfied the Commissioner grants the Occupancy certificate for the premises. Once the Occupancy certificate is issued it signifies that construction of building is completed. On perusal of the enclosed provisions of the Mumbai Municipal Corporation (MMC) Act and Development Control Regulation (DCR) i.e. Section 353A of MMC Act relating to Completion certificate, permission to occupy or use of premises, Regulation 6(6) & 6(7) of the DCR relating to Completion certificate & Occupancy certificate, once the occupancy certificate is granted for the premises it signifies that construction of building is completed.

Hence no service tax shall be applicable in case of sale of premises after grant of occupancy certificate by the competent authority for time being in force. Basically if there is no further construction activity to be undertaken after premise is sold to the buyer then it is sale of immovable property and the entire consideration received from the buyer of such premises shall be excluded from levy of service tax.

[References :- Extracts of Section 353A of the Municipal Corporation Act and Regulation 6 of the Development Control Regulations (DCR) :

(A) The Section 353A of Mumbai Municipal Corporation Act, (MMC), reads as follows:-

"353A. Completion certificates, permission to occupy or use.

(1) Every person who employs a licensed surveyor or person approved by the Commissioner to erect building or execute any such work as is described in section 342 shall, within one month after the completion of the erection of such building or the execution of such work, deliver or send or cause to be delivered or sent to the Commissioner at his office, notice in writing of such completion, accompanied by a certificate in the form of Schedule-T, signed by the person employed under section 344A, who is hereby required immediately upon completion of the work and upon demand by the person employing him to sign and give such certificate to such person, and shall give to the Commissioner all necessary facilities for the inspection of such building or of such work:

Provided that –

(a) Such inspection shall be commenced within seven days from the date of receipt of the notice of completion, and

(b) The Commissioner may, within seven days from the date of commencement of such inspection, by written intimation addressed to the person from whom the notice of completion was received, and delivered at his address as stated in such notice, or, in the absence of such address, affixed to a conspicuous' part of the building to which such notice relates-

(i) Give permission for the occupation of such building or for the use of the building or part thereof, affected by such work, or

(ii) Refuse such permission in case such building has been erected or such work executed so as to contravene any provision of this act or of the bye-laws.

(2)   No person shall occupy or permit to be occupied any such building, or use or permit to be used the building or part thereof affected by any such work, until-

(a)   The permission referred to in proviso (b) to sub-section (1) has been received, or

(b) The Commissioner has failed for twenty-one days after receipt of the notice of completion to intimate as aforesaid his refusal of the said permission".

(B) The Development Control Regulations (D.C.Regulations) provides for Completion Certificate, Occupancy Certificate and Part Occupancy Certificate. The regulation 6 of the DCR reads as follows:-

"(6) Completion Certificate:- The owner, through his licensed plumber, shall furnish a drainage completion certificate to the Commissioner in the form in Appendix-XIX. The owner through his licensed surveyor / engineer / structural engineer / supervisor or his architect, who has supervised the construction, shall furnish a building completion certificate to the Commissioner in the form in Appendix –XX. These certificates shall be accompanied by three sets of plans of the completed development. The Commissioner shall inspect the work and after satisfying himself that there is no deviation from the approved plans, issue a certificate of the completion of the work in form in Appendix-XXI.

(7) Occupancy Certificate:- On receipt of the acceptance of completion certificate in the form in Appendix-XXI, the owner, through his licensed surveyor / engineer / structural engineer / supervisor or his architect, shall submit to the Commissioner a development completion certificate in the form in Appendix-XVIII with three copies of the completion plan, one of which shall be cloth mounted for record. The Commissioner may inspect the work and after satisfying himself that there is no deviation from the sanctioned plans, issues an occupancy certificate in the form in Appendix XXII or refuse to sanction the occupancy certificate within 21 days from the date of receipt of the said completion certificate, failing which the work shall be deemed to have been approved for occupation, provided the construction conforms to the sanctioned plans. One set of plans, certified by the Commissioner as the completed plans, shall be returned to the owner along with the occupancy certificate. Where the occupancy certificate is refused or rejected, the reasons for refusal or rejection shall be given in intimation of the rejection or refusal.

(8) Part Occupancy Certificate:- When requested by the holder of the development permission, the Commissioner may issue a part occupancy certificate for a building or part thereof, before completion of the entire work as per the development permission, provided sufficient precautionary measures are taken by the holder to ensure public safety and health. The occupancy certificate shall be subject to owner's indemnifying the Commissioner in the form in Appendix XXIII".]

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