Construction of Residential Complex service - Construction undertaken after transfer of undivided share of land - Case of appellant is prima facie covered by Circulars of 2006 & 2007 - Tribunal was not justified in ordering pre deposit - Appeal restored to Tribunal: HC
By TIOL News Service
CHENNAI, SEPT 03, 2014: THIS is an appeal by the assessee against the order of Tribunal dismissing their appeal for non-compliance with the order of pre deposit. The appellant is engaged in construction of Residential Complexes and vide Misc order 2013-TIOL-1938-CESTAT-MAD held that the appellant has no prima facie case and ordered pre deposit of Rs 4.5 crores and dismissed the appeal for non-compliance with the same. The assessee is before the High Court. While ordering pre deposit, the Tribunal held:
When UDS is sold the person to whom UDS is sold becomes the legal owner of UDS. The fact 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 of 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 instalment, the applicant had to advance his money to carry on the construction activity. In such situation the lien only helps 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.
However, the High Court after drawing reference to the CBEC Circulars dated 01.08.2006, 23.08.2007 and 29.01.2009, held:
In the Circular F.No.332/25/2006-TRU, dated 1.8.2006, it is clearly provided that in a case where the builder, promoter or developer builds a residential complex having more than twelve residential units by engaging a contractor for the construction of such residential complex, the contractor shall be liable to pay service tax to the builder, promoter or developer under the construction of complex service falling under Section 65(105)(zzzh) of the Finance Act, 1995 and in a case where the builder, promoter or developer undertakes construction work on his own without engaging the services of any other person, there is no service provider and service recipient relationship and, therefore, the question of providing taxable service to any other person by any other person does not arise.
The view of the Department that Circular No.108/2/2009-S.T., dated 29.1.2009 is in their favour, is prima facie, not tenable.
Consequent to the sale of the undivided share, the ultimate owner, namely the prospective buyer, comes into play and as per the second portion of paragraph (3) of the circular dated 29.1.2009, if the ultimate owner enters into a contract for construction of a residential complex with a promoter, builder, or developer, who himself provides service of design, planning and construction, and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because, according to the Circular, it would fall under the exclusion provided in the definition of residential complex under Section 65(91)(a) of the Finance Act, 1994.
It, therefore, follows that for the purpose of this case, if the department accepts that the sale in favour of the ultimate owner, even then by virtue of the prior agreements for construction and sale of undivided share, it would fall under the second limb of paragraph (3) of the circular dated 29.1.2009 and to that extent the appellant has a prima facie case.
The circular further makes it clear that in both the situations, if services of any profession like contractor, designer or a similar service provider are received, then such a person is liable to pay service tax. That clarifies the stand of the assessee that in the nature of the transaction entered into in the present case, there is no liability to pay service tax up to 1.7.2010. On and from 1.7.2010 the explanation to Section 65(105)(zzzh) of the Finance Act, 1994 makes the present transaction liable to service tax and we are not on that issue. At present, we are concerned with the period prior to 1.7.2010. The Tribunal has unfortunately not considered the said factor which prima facie enures to the benefit of the appellant.
On financial hardship, the High Court held:
We find much force in the plea of the appellant regarding undue hardship and financial difficulty in pursuing the appeal on payment of the pre deposit as ordered by the Tribunal. In the present case, nearly 40% of the demand has been paid and that would safeguard the interest of the Revenue. Even otherwise, we are satisfied that there is a prima facie case on merits and, therefore, the appellant is entitled to the benefit of waiver of balance amount of pre deposit as ordered by the Tribunal.
