By TIOL News Service

MUMBAI, FEB 16, 2018: IN the case of Kumar Beheray Rathi & Ors - 2013-TIOL-1806-CESTAT-MUM, the CESTAT while allowing their appeals had held thus –

ST - Appellants are not in the business of maintenance or repair service or management of immovable property – they are collecting one-time maintenance charges from their buyers to whom they have sold flats - they are only paying on behalf of various buyers of flats to various authorities (Municipal Corporation, Revenue authorities etc.) and various service providers (such as security agency, cleaning service providers etc.) and they are not charging anything on their own -the payments are made on cost basis and the same is debited from the deposit account - They act only as trustee or as pure agent - When the co-operative society is formed even the deposit account is shifted to Flat Owner's Co-operative Society - this is a statutory obligation on the appellants in terms of sections 5 & 6 of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, sale, management and transfer) Act, 1963 – Appellants cannot be held as provider of maintenance or repair service – Order set aside and appeals allowed: CESTAT [paras 6.2 & 6.4] 

The above decision was relied upon in the case of Green Valley Developers - 2016-TIOL-696-CESTAT-MUM.

Revenue is aggrieved with these orders and have filed appeals in the Bombay High Court.

After considering the submissions made, the High Court adverted to the provisions of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 which were framed for the regulation of the promotion of the construction, sale and management and transfer of Flats taken on ownership basis in the State of Maharashtra and observed that the Act must receive an interpretation consistent with its object and purpose.

The High Court explained the various sections of the MOFA, 1963 thus –

+ By Section 5, it is stated that the promoter shall maintain a separate account in any Bank of the sums taken by him, from persons intending to take or who have taken, Flats, as advance or deposit, including any sums so taken towards the share capital for the formation of a co-operative society, or towards the outgoings, including ground rent if any, municipal or other local taxes, taxes on income, water charges, electricity charges, revenue assessment, interest on any mortgage or other encumbrances if any, and he shall hold the said moneys for the purposes for which they were given and shall disburse the moneys for those purposes and shall on demand in writing by a Competent Authority, make full and true disclosure of all transactions in respect of that account.

+ By Section 6, it is clear that there is a responsibility for payment of outgoings till property is transferred. A promoter shall while he is in possession, and where he collects from persons who have taken or are to take over Flats, sums for the payment of outgoings even thereafter, pay all outgoings until he transfers the property to the persons taking over the Flats, or to the organisation of any such persons and the promoter shall continue to be liable in terms of this provision.

+ By Section 9 no encumbrance can be created without consent of parties after execution of Agreement for Sale.

+ By Section 10, the promoter has to take steps for formation of co-operative society or company, and by Section 11 the promoter to convey title, etc., and execute documents according to the agreement. There are general liabilities of Flat takers also. Then there is a provision whereby essential supply or service cannot be cut, withheld, or curtailed or reduced.

Commenting that the Revenue had failed to take note of the backdrop and in which it termed the obligations and duties under the MOFA to be rendering of taxable service, the High Court added the definition in the Finance Act, pure and simple, alone has been looked at but the backdrop in which the promoter comes on the scene is totally lost sight of and which was precisely noted by the Tribunal.

The High Court added –

++ (MOFA) is a complete mechanism till conveying of the property is put in place.

++ Prior thereto, it is the promoter who must form the legal entity, namely, a cooperative housing society or a company.

++ It is towards that end that he has to hold on to the property and the money for complete discharge of his eventual duty and function. Until that stage is reached, he has to maintain, safeguard and protect the property. He has to look after the day-today wear and tear. Therefore, when he maintains the structure or repairs it, he is not rendering a taxable service in the sense envisaged by the Finance Act, 1994.

++ If one loses complete focus or sight of the backdrop in which the so called service is rendered, then, the conclusion as erroneous and suggested by the Revenue will be reached.

++ The deposit or the monies themselves are held and appropriated towards payment of taxes, etc., popularly known as outgoings. The building and the Flats therein has to stand intact till all the Flats or units are sold and the statutory obligations are fully discharged.

++ This is not a service of the nature understood by Section 65 (64) of the Finance Act, 1994. It is not a contract simplicitor of maintenance of immovable property. It is not as if there is an existing building comprising of Flats, fully occupied, the maintenance and upkeep of which is handed over under a contract.

++ It is a statutory obligation superimposed on a contract to sell a Flat/unit in a building to be constructed on a piece or parcel of land. That cannot be confused with a taxable service as defined under the Finance Act, 1994. The day-to-day upkeep, maintenance and repair is till the statutory duty is fully performed as noted above.

++ We are not concerned with the definition of ‘service' under the Consumer Protection Act, 1986 and that would not control the provisions of the Finance Act, 1994, for the simple reason that interest and rights of a consumer are protected and safeguarded by law so as to enable him to complain about deficiency and defect in the service by approaching the Forum under the Consumer Protection Act, 1986 and that law has a distinct objective and purpose.

Holding that the conclusions arrived by the Tribunal do not call for any interference, the Revenue appeals were dismissed.

(See 2018-TIOL-288-HC-MUM-ST)