The applicant intends to develop a residential complex on its own land at its expense. The complex will comprise of more than 12 residential units, a clubhouse and other common facilities. The applicant will book the residential units in favour of a particular buyer after taking a token booking amount and executing an agreement. The full value of the residential unit will be indicated to the buyer at the time of booking. The sub-plot on which the building has to be constructed is also specified in the Agreement. The physical possession of the residential unit will be given to the buyer after the construction activity is completed and the full payment is received.

While in activity No. 1, the construction will be carried out by the applicant itself through its own labour; in activity No. 2, the construction will be carried out by engaging labour, contractors/petty contractors who will carry out the work under the applicant’s supervision and control.

The construction material will be bought by the applicant in both the activities.

1. Whether the activity of booking the residential units to be undertaken by the applicant is a taxable service liable to Service Tax under the provisions of section 65 (105) of the Finance Act, 1994 ?

2. Whether the applicant is liable to service tax under section 65 (105) (zzzh) of the Finance Act, 1994 under the notified taxable service of construction of Complex in case of Proposed Activity No.1 ?

3. Whether the applicant is liable to service tax under section 65 (105) (zzzh) of the Finance Act, 1994 under the notified taxable service of construction of Complex in case of Proposed Activity No. 2 ?

The AAR observed that the answer to the first question mainly depends on the answers to question No. 2 and 3. Question 3 is practically the same as question No. 2. So the AAR answered question No. 2 first.

Question No. 2 in substance is whether in respect of the proposed activity No. 1, any service "in relation to the construction of complex" is provided by the applicant to the booker/prospective buyer of the residential unit constructed and ultimately sold by the applicant.

The AAR observed that, "We are of the view that the question has to be answered in the affirmative upholding the contention of the Revenue. It must be noted that the words ‘construction of complex’ in (zzzh) is qualified by the preceding phrase ‘in relation to’. This expression — ‘in relation to’ is used by the legislature to widen the scope and dimension of the sub-clause so as to establish a greater nexus between the construction and the services implicit in such construction. The expression ‘in relation to’ is of wide import. Thus, it is not merely the construction part of the activity that matters; the correlated and incidental services are all embraced within the scope of sub-clause (zzzh).

AAR further observed that,

"The whole purpose of inserting sub-clause (zzzh) in section 65(105) appears to be to bring the services in connection with the construction of residential complexes by the developers/promoters within the net of taxable services. By introducing such a specific provision and defining the term ‘residential complex’, incidentally, the legislature wanted to obviate any controversy on the point whether the services of the nature involved in proposed activity No. 1 could at all fall within the scope of (zzzza) dealing with works contract. The net of taxation is intended to be spread out so as to reach the entire gamut of Complex construction activities which are part of a commercial venture. The activity of building a residential unit on an earmarked plot in the Complex and making construction thereon as per the plan, design and specifications, obtaining various permissions and providing amenities as contemplated by clause 9(b) of the Agreement, apart from the provision of common infrastructural facilities before handing over the building to the customers would undoubtedly constitute ‘services provided or to be provided’ by the applicant. A host of facilities and amenities have to be or are contemplated to be provided under the terms of the agreement, apart from construction. Some or many of them may be common amenities which will be available to others who inhabit in the complex but they cannot be dissociated from the construction of the residential unit for the benefit of the booker/buyer. Package of services is necessarily involved in the activity viewed as a whole and that is the reason why the phrase ‘in relation to’ has been used. The fact that the ownership and possession remains with the applicant throughout the process of construction and that the constructed residential unit can only be transferred to the booker/buyer on receipt of entire sale consideration does not have a real bearing on the question whether any services in relation to the construction of complex are required to be rendered by the applicant. The applicant, in our view, has laid undue stress on the aspect of ownership remaining with it till completion and on the element of control over construction. If the contention of the applicant is to be accepted, the entire purpose of sub-clause (zzzh) will be defeated or at any rate, it may become otiose. We do not think that the point of time at which the ownership gets transferred will be determinative of the applicant's liability to pay service tax. Viewing from another angle, though in one sense, the applicant can be said to be constructing the residential unit on its own and not exactly on behalf of the booker, yet, the fact remains that the applicant does everything to honour its commitment to the customer (booker) from whom it receives valuable consideration in installments. The construction and allied services, it must be noted, is referable to the agreement with the prospective buyer and cannot be viewed in isolation. The possibility of the booker defaulting in payments of installments and the agreement being terminated in that event is really not material in evaluating the true nature of the transaction."

The Authority further rejected the contention of the applicant that the proposed activities No 1 and 2 tantamount to self-service and that there is no recipient of service, as it found no legal or factual basis for such argument.

The applicant argued by invoking the principle of contemporaneo expositio that as para 79.01 of the Circular No 96/7/2007-ST dated 23/8/07 (issued by CBEC), the activities involved should not be subjected to service tax.

The relevant part of the query mentioned in the said Circular is as follows :

"Whether service tax is liable under construction of complex service (zzzh) on builder, promoter, developer or any such person (a)…(b) who builds the residential complex on his own by employing direct labour".

This query has been answered in the said Circular as follows :

"(b) If no other person is engaged for construction work and the builder/promoter/developer/any such person undertakes construction work on his own without engaging the services of any other person, then in such cases,

Rejecting the contention of the appellant, the AAR observed that the situation covered by the Board Circular query is one of outright sale of a residential unit after the construction, the construction having been done without reference to any agreement with the customer/buyer. The recipient of service is not in the picture at all at any stage of construction. The developer and the buyer come face to face after the entire process of construction is complete and the building ready for occupation is offered for sale. In such a situation, it cannot be said that any services were extended by the developer to the buyer. The relationship between the developer and the buyer is purely one of seller and buyer. But, the factual position is qualitatively different in the case of proposed activity No. 1.

The AAR further stated that there is no material difference between the proposed activity no.1 and 2. The factual matrix in relation to the proposed activity no.2 is almost the same except that the applicant, instead of directly building the residential unit on its own, will be sub-contracting the work. The applicant is accountable to the bookers/buyers and remains to be a service provider vis-à-vis the buyer. The engagement of sub-contractor to do a substantial part of the construction work does not absolve the applicant of the responsibility of providing services in relation to the construction of residential unit agreed to be sold to the customer ultimately.

In reference to the question No. 1 i.e. "Whether the activity of booking the residential units to be undertaken by the applicant is a taxable service liable to service tax under the provisions of section 65 (105) of the Finance Act, 1947", the AAR observed that it seems that the question as framed lacked in clarity. The question, if literally read, is confined to the first step of ‘booking’ the residential unit but not the series of activities that follow the booking and entering into the agreement. However, it is clear from what is stated in the application and also the arguments of the learned authorised representative that the applicant wants a ruling on the broader question whether the service tax liability is fastened on it by reason of undertaking the construction on an identified plot and handing over the constructed unit to the customer on receipt of the entire consideration.

The AAR observed, "While discussing the question No. 2 and 3, we have recorded the conclusion that the proposed activities 1 and 2 undertaken in accordance with the terms of the draft agreement attract service tax liability under section 65 (105) (zzzh) of the Finance Act, 1994. Therefore, it is unnecessary to give a separate ruling on this question."

On the issue of whether the service is taxable under ‘Construction Service’ or under ‘Works Contract Service’ ?, the AAR clarified the issue based on principles of classification and held that the service would fall under ‘construction’ and not works contract.

In the opinion of the author, there was no need to raise the issue of classification of service before the AAR as it had been already clarified by the Board vide paras 9.9 & 9.10 of the TRU’s letter F. No. B1/16/2007- TRU dated the 22nd May, 2007. The said letter clarified as follows :

"9.9 Various trade and industry associations have raised apprehension in respect of classification of a contract either under the newly introduced works contract service or under erection, commissioning or installation and commercial or residential construction services.

9.10 Contracts which are treated as works contract for the purpose of levy of VAT/sales tax shall also be treated as works contract for the purpose of levy of service tax. This is clear from the definition under section 65(105)(zzzza)".

In conclusion, the AAR gave answers to questions 2 and 3 in the affirmative and accordingly ruled that the applicant is liable to pay service tax in respect of the proposed activities 1 and 2 under sub-clause (zzzh) of section 65 (105) of Finance Act, 1994. The first question was not answered specifically by the AAR.