V/DGST/22/Audit/Misc/1/2004 Dated:- 16-2-2006 Order-Instruction – Circulars – Service Tax – Construction Services / Commercial or Industrial Construction Services Instructions [ Source: G.G.S.T. Letter F. No. V/DGST/22/Audit/Misc/1/2004, dated 16-2 -2006] Subject: Collection of Service Tax under construction of Complex services/Commercial or Industrial Construction service. Service Tax was levied on “Commercial or Industrial Construction Services” and “Construction of Complex Services” w.e.f. 10-9-2004 and 16-6-2005 respectively. Further the scope of “Commercial or industrial Construction Service” was expanded w.e.f. 16-6-2005 so as to include completion and finishing services. 2. The Board vide Circular No. 80/l0/2004-S.T., dated 17-9-2004 [ (172) E.L.T. T3} has clarified that “Estate Builders” (i.e. who gets such construction done) are not covered under the ambit of these services. It is only the hired contractors engaged by these builders who are to be taxed, In o
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hat the activities undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under the works contract and not under sale”. 5. Considering the above decision, if the construction is undertaken by the builder for prospective customer under an agreement for sale and after construction, the rights in property have been transferred to the said prospective purchasers, the activity will amount to “work contract” or taxable service is covered under the Service Tax and not sale. 6. Divergent practices are being reported by field formations and in most of the cases, builders are avoiding registration in view of CBEC Circular No. 80/10/2004-ST., dated 17-9-2004. Further, there is wide gap between the amount charged by builders from their customers for such work contract (sale) and the amount on which contractors are discharging their Service tax liability. The various miscellaneous charges l
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ex services. In all such situations, the tax able value under section 67 shall be the gross amount charged by the service provider (builder in this case) for such services provided or to be provided by him. This read with Notification No. 18/2005-ST., dated 7-6-2005 entitles a builder/contractor an abetment of 67% on the gross amount charged, which shall include the value of goods and material supplied. Further, there is no deductions/exemptions provided for computation of such taxable value in the composite contract. 9. The aforesaid view flows from the definition of the taxable service of construction of complex besides the judicial pronouncement listed above. 10. The all India tax collection under the service head of 'Construction of complex service', is reportedly too low. Please initiate pro-active measures to realize service tax on this service especially when only 43 days are now left in the current fiscal. 11. Action taken on the above may be communicated to us with a cop
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uction the residential apartments or the commercial complex would be handed over to the purchasers who would get an undivided interest in the land also. The owners of the land would then transfer the ownership directly to the society which is being formed under the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974. The question which arises for consideration is whether the Appellants are dealers and are liable to pay turnover tax under the Karnataka Sales Tax Act. The Appellants filed returns showing Nil liability to pay tax on the footing that there was no transfer of any property in goods either by itself or by virtue of any works contract. The Adjudicating Authority did not accept their contention and passed an Assessment Order claiming tax. Against the Assessment Order, the Appellants went in Appeal to the Additional Joint Commissioner of Commercial Taxes (Appeal). The Additional Joint Commissioner held that tax was
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ehta submitted that as the Judgment in Mittal Investment Corporation's case has been reviewed this matter should also be sent back to the High Court. However, on a question from the Court, whether the Appellants were accepting the principles laid down in Mittal Investment Corporation's case the answer was that the Appellants wanted to agitate all the grounds including the ground that there was no works contract. Such a contention would stand concluded by the High Court Judgment in Mittal Investment Corporation's case even after the Order passed in the Review Application. No purpose would therefore be served in remitting the matter back to the High Court. Mr. Mehta was therefore asked to proceed in this Court itself. Mr. Mehta drew the attention of this Court to relevant provisions of the Karnataka Sales Tax Act [hereinafter called the said Act]. Section 2(1)(k)(viii) defines a “dealer” as follows : “2(1)(k) “dealer” means any person who carries on the business of buying, selling or
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y of India.” Section 2(1)(v-i) is relevant. It defines a “works contract” as follows : “2(1)(v-i) “works contract” includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property.” It is thus to be seen that under the Karnataka Sales Tax Act the definition of the words “works contract” is very wide. It is not restricted to a “works contract” as commonly understood, i.e., a contract to do some work on behalf of somebody else. It also includes “any agreement for carrying out either for cash or for deferred payment or for any other valuable consideration, the building and construction of any moveable and immoveable property”. The definition would therefore take within its ambit any type of agreement wherein construction of a building takes place either fo
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shall pay for each year, a tax under this Act on his taxable turnover of transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract mentioned in column (2) of the Sixth Schedule at the rates specified in the corresponding entries in column (3) of the said Schedule.” Mr. Mehta submitted that by virtue of the Agreement entered into by the Appellants with the owner of the property the Appellants became owners of the property even though a formal conveyance in their favour had not been executed. He took this Court through various provisions of the Agreement entered into by the Appellants with the owner of the property. He submitted that under such Agreements almost the entire consideration amount is paid to the owners and possession of the property is handed over to the Appellants. He submitted that by virtue of the principles laid down in Section 53A of the Transfer of Property Act the Appellants were the owners of the property. I
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mounts paid can be forfeited and the agreement rescinded. He submitted that a person carrying out a works contract would have no right to forfeit or rescind the contract itself. He submitted that such a clause indicates that the Agreements are not agreements to carry out a works contract. On the other hand, Mr. Hegde submitted that the definition of a 'works contract' in the said Act is an inclusive definition which is very wide. He submitted that any agreement wherein party has agreed to construct or build for cash, deferred payment or other valuable consideration would be covered by the definition of the term 'works contract' as used in the said Act. In support of his submission he relied upon the Agreements entered into by the Appellants with the various purchasers and submitted that these Agreements indicate that the Appellants are undertaking the construction of the building and the flats for and on behalf of the purchasers and that the same is for valuable consideration to be p
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ks contract if he enters into an agreement to construct for cash, deferred payment or other valuable consideration. We, therefore, do not need to go into the question whether the Appellants are owners as even if the Appellants are owners to the extent that they have entered into Agreements to carry out construction activity on behalf of somebody else for cash, deferred payment or other valuable consideration, they would be carrying out a works contract and would become liable to pay turnover tax on the transfer of property in the goods involved in such works contract. Further under the said Act there is no distinction between construction of residential flats or commercial units. Thus, a works contract, within the meaning of the term in the said Act, can also be for construction of commercial units. For the purposes of considering whether an agreement amounts to a works contract or not, the provisions of the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales,
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erest and a right to construct. Such rights do not constitute the person an owner of the property. To consider whether the Appellants are executing works contract one needs to look at a typical Agreement entered into with the purchaser. The relevant clauses are clause (q), (r) of the recitals and clauses 1, 5(c) and 7, which read as follows : “(q) (i) Construction of the said multi-storeyed building; (ii) Sale of the units in the aforesaid multistoreyed building to different persons in whose favour ultimately a Deed of Conveyance would be obtained by the Holders, directly from the Vendors, of an undivided fractional interest in the said land (i.e. the area of 5910.17 sq. metres described in the First Schedule hereunder written) and such owner of units would own, on ownership basis, the respective units on condition that an Agreement would be entered into between the Holders on the one hand and the persons (desiring to acquire on ownership basis an unit in such multi-storeyed buil
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s' and also car parking space/s No./s nil in the basement/ground floor of the said building (hereinafter referred to as 'the said Unit')” 1. As and by way of a package deal : (a) K. Raheja Development Corporation, (as Holders) agree to sell to the Prospective Purchaser an undivided 0.42% share, right, title and interest in the said land described in the First Schedule hereunder written (with no right to the Prospective Purchaser to claim any separate sub-division and/or right to exclusive possession of any portion of the said land) for a lump sum agreed and quantified consideration of Rs. 3,25,000/- (Rupees three lacs twenty five thousand only) to be paid by the Prospective Purchaser to the Holders at the time and in the manner stated in Clause 2 hereof; (b) K. Raheja Development Corporation, (as Developers) agree to build the said building named ' Raheja Towers', having the specifications and amenities therein set out in the Second Schedule hereunder written and as Develope
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ereunder written and/or in the said premises : (a) … (b) . (c) The overall control and management of the project and the development and completion of the said building shall be with the Developers and furthermore the Developers are and shall continue to be in possession of the said land and building and shall be entitled to a lien thereon and that the Prospective Purchaser shall not be entitled to claim or demand from the Holders possession of any portion of the said land or to claim or demand from the Developers possession of the said premises unless and until the Prospective Purchaser has paid in full through the Holders the full consideration money payable to the Holders under Clause 2 above and the full consideration money payable to the Developers under Clause 3 above. 7. If the Prospective Purchaser commits default in payment of any of the installments of consideration aforesaid on their respective due dates (time being the essence of the contract) and/or in observing a
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e as they may determine and the Prospective Purchaser shall not be entitled to question such sale, disposal or to claim any amount from them. 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 installments 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 work
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