The fate of indirect taxation in India, especially the taxation of services, is always like a rolling stone, which never gathers any moss. The positive list-based taxation was in vogue for certain period, and when the dust seems to be settled, the negative list-based taxation was introduced. When all the stake holders took a deep breath to unlearn the positive list-based taxation and learn the new law, then there was a repeal of negative list-based taxation and the introduction of goods and services tax law, more colloquially referred as GST.
Amidst the rapid changes of taxation of services, one sector which always felt the burnt of the changes is the real estate and construction sector. The development of law pertaining to this sector, if written goes into volumes. In this article, we are restricting ourselves only to analyse the recent decision of Vasantha Green Projects vs CCT, Rangareddy GST1 which was delivered by Hyderabad CESTAT. The said decision deals with the limited issue of applicability of service tax on the construction services provided by the builder to the land owner in the context of joint development agreement.
Story So Far:
We will resume the analysis of the decision in subsequent paras. To appreciate the said decision, the story so far assumes importance. The Chennai CESTAT in the case of LCS City Makers Private Limited v Commissioner of Service Tax, Chennai2 , has held that the builder has provided construction services to the land owners and accordingly liable to service tax. This was more clearly brought out in Para 12.5 of the said order:
“12.5 In the case of Land Owners also the UDS is registered in the name of the land owners. He parts with his rights in the land partially and receives a consideration for parting with such rights. The consideration is the form of constructed flats to be received later. Of course, the constructed flat has got both value of material used and the value of service provided by the service provider. Obviously, service tax can be levied only on the value of service and cannot be equal to the full value of the land parted with by the land owner. This principle gets complied with when abatement from value of the constructed flat is given to the extent of 67% by Notification No. 1/2006-ST and earlier Notifications.”
(emphasis supplied)
The above judgment has created ripples in the industry because of the very reason that till such time, transaction between the builder and land owner was over looked by the authorities nor trade. At the same time, CBEC has released Circular No 151/2/2012-ST dated 10th Feb 2012, wherein it was stated that the transaction between the builder and land owner is a separate transaction and is subjected to tax and also laid down the valuation methodology and point of taxation as to when such service tax is to be paid by the builder on services provided to land owner. The valuation and point of taxation which were laid down by the Circular ibid, were being challenged before various forums but never was the existence of
12018 (5) TMI 889 – CESTAT Hyd
22012 (6) TMI 363 – CESTAT Chennai
liability was challenged. In other words, the trade has prepared for the payment of tax on the services provided to the land owners and was only disputing the value of tax and time of payment of tax.
In this background, the judgment issued by Honourable CESTAT of Hyderabad in case of Vasantha Green Projects (supra) sets the clock back to the square one, which is discussed in the following paras.
Decision of Vasantha Green Projects:
Before understanding the said decision, let us get the facts straight. Certain facts are evident from the certificate issued by Chartered Accountant which was relied in the judgment.
The said certificate states that Vasantha Green Projects has entered a joint develop agreement with land owners and obtained a General Power of Attorney to construct the residential villas/units and agreed to share 60 constructed villas & certain areas of constructed flats to the land owners on Barter system. The total number of villas are 197 with a total built up area of 9,30,116 Square feet out of which 60 villas having a built-up area of 2,71,268 has to be shared to the land owners. The balance 6,58,488 Square feet belongs to the developer. To arrive at the value of construction area of villas to be shared to land owners, the developer with the help of architect has arrived the cost of construction to be Rs 1,779/- per square feet. Hence, the total construction cost of villas pertaining to land owner’s share is Rs 48,32,26,212/-(1,779/Sq feet * 2,71,268 Sq feet). The said cost was added to the construction cost of villas pertaining to the developer, on which the service tax was paid by the developer.
The said decision has stated that there is no requirement to see the transaction between the land owners and sale to ultimate customers as if there are two different transactions and essentially it is one transaction and the relevant para is reproduced hereunder for better understanding:
“5. We have considered the submissions made at length and perused the records as also the Board circulars and instructions in this regard. We find that in the present case, Revenue has demanded service tax from appellant on the ground that it was not paid correctly on the villas which were constructed by appellant for land owner, as a part of compliance of the agreement entered with the land owners. We find that adjudicating authority has confirmed the demands holding that transactions between builder and land owner and builder and buyers have to be understood as two separate transactions. It is undisputed that appellant has provided construction services to the land owner and as a consideration, received legal rights on his share of land, constructed Villas on that land and sold them, which would mean that appellant is investing the consideration received from first transaction of land owners right to construct in second transaction. In our view, merely because the consideration received from land owners is invested in construction of villas to other buyers on which service tax is paid, it cannot be concluded that service tax paid on consideration received from land owners has to be evaluated differently”
(emphasis supplied)
Even though the para above states that developer has provided construction services to the land owner, goes forward to treat the consideration received from such transaction as an investment in the second transaction between the developers and ultimate customers and proceeds to state there is no requirement to pay tax on the services provided by developer to the land owner, because such consideration is invested in the second transaction. The order in another para states that there is no requirement to pay tax for the below stated reasons:
“7. It has to be construed, in the above factual matrix, that construction of villas for the land owners is a consideration towards the land on which villas were constructed and offered for sale to prospective customers. It would not be a rocket science to understand that the value which has been arrived at for sale of villas to prospective customers, would include the consideration paid or payable for acquisition of land. It is not a case that appellant has not discharged the service tax liability on the value received for the villas from prospective customers. In our view, if the consideration towards the acquisition of the land has been included in the value of the villas sold to prospective customers and appropriate service tax liability has been discharged the same value, it cannot be again made liable to service tax under the premise that sale value of the villas given to land owners is a consideration on which service tax liability was not discharged.”
However, what is not clear from the judgment is whether the developer is paying service tax on the entire value received from the ultimate customer or is he paying by applying abatement available. The logic of the order fails, if the developer is availing abatement because, once abatement is applied, it essentially takes out the value of land in the consideration received from the customer, which in the instant case would be the cost of construction of villas pertaining to land owners.
Let us take a small example, to understand the above. Let us say, the construction cost per sq feet of villa pertaining to land owners is Rs 2,000/-, which stands included in the cost of construction pertaining to the villas of developer, which is assumed to be Rs 6,000/-. When the developer applies an abatement of deemed 8% (75%-67%, where 67% is towards materials) on Rs 6,000/-, a portion of Rs 2,000/- would be gone from the tax net, whereas if the transaction between land owner and builder is made taxable, then tax should be charged @ 33% (after availing abatement of 67%, please note that abatement of 75% is not available since Rs 2,000/- is essentially cost of construction and not a value which includes the land). Then, how would one ensure that tax is paid on such amount and who would be responsible for payment of tax on such amounts. There will not be any change even if the tax rates prevalent during the period in dispute in the subject case are taken into consideration. The rate of tax applicable during the period in dispute is an abatement of 70% (if the value of land is included in the gross amount charged) and 60% (if the value of land is not included in the gross amount charged). Hence, there would be a difference of 10% instead of 8% as explained above.
Alternatively, one would argue that the abatement availed by the developer is towards the undivided share of land, however, the said argument fails on two counts, one being the developer has not invested a single rupee towards land and he claiming abatement towards the value of land, would be illogical and second being, the value of land is nothing but the construction cost of the villas of land owners and hence what is claimed as abatement is not the value of land but the construction cost of villas of the land owners.
However, if the entire value received from the customer is subjected to service tax without availing any abatement towards land, then the logic stated in the judgment holds good. However, the current judgment is not clear in the aspect whether the developer has paid service tax on the entire value without availing or availed abatement towards value of land. Hence, to this extent one has to carefully place reliance on the said judgment.
Further, even assuming that the developer has included the entire value of land in the construction cost of his share of villas, can that be a route to be out from the taxability of the transaction between the land owners and builders. Indirect tax being a transaction-based taxation, can it absolve the tax liability in the first transaction in a case consideration from first transaction is invested in the second transaction. If so, there should be a clear provision in the statute which would allow this. In our opinion, there is no such provision under the service tax law, which exempts the consideration received from first transaction from tax, if it is invested in the second transaction.
Further, when there is a separate agreement with the land owner with rights and obligations clearly being demarcated, can such a transaction be said to be as a part of the transaction which the developer enters into with the ultimate customer. The rights and obligations of development agreement and rights and obligations of agreement with customers are entirely different and it would be very hard to call it as a single transaction. Further, under the service tax regime, CBEC has clarified vide ______ that the sub-contractor is not absolved from payment of service tax on his services provided to main contractor for the reason that the main contractor pays service tax on the entire amounts received from the client/customer. Applying such circular, various CESTATs have passed orders stating that the sub-contractor has to pay service tax and main contractor has to claim the same as cenvat credit and use it while discharging his liability. The point, we wish to drive home is, when the law decides that the transaction of sub-contractor and main contractor as different transaction from the transaction of main contractor and client/customer, which is essentially a single activity, the view taken in this judgment treating the transaction of land owner and developer and developer and customer as a single transaction is hard to digest. We have to wait and see whether it passes the test at higher forums.
Apart from the above observation, the judgment also tries to distinguish the ratio of LCS City Makers (supra). The relevant para of the judgment is hereunder:
- The reliance placed by Ld. DR on the case of LCS City Makers Pvt. Ltd. will also not carry the case of Revenue any further, as in that Bench upheld the contention of the Revenue that recording that “the facts and circumstances of the case do not warrant assessment of a different value for services in respect of flats sold to individual buyers as compared to flat handed over to the land owners”; and recorded that the flats which were allotted to land owners were sold by land owners. In the case in hand, the facts are different.
(emphasis supplied)
From the above para, it is evident that the Vasantha Green Projects judgment tries to make a distinction from LCS City Makers, by stating that in case of LCS City Makers, the flats were sold by land owners, wherein the case of Vasantha Green Projects, they were retained by land owners and not sold by them.
We opine that the above distinction requires reconsideration since, there could not be any difference in taxation at developer’s level if the flats/villas are sold or retained by the land owners. The taxation at developer’s level should remain either exempted or taxable irrespective of the fact the land ownersretains or sells his share.
Further, there would be every possibility that the builder/developer might sell some flats after obtaining completion certificate (depending upon the market conditions). In such cases, where flats are sold after obtaining completion certificate, then there is no requirement to charge GST in light of Schedule III of CGST Act, 17. In such cases, the construction cost incurred towards the land owner share of flats/villas will not be subjected to GST in the hands of developer/builder, since such flats/villas are sold after obtaining completion certificate and the judgment does not address such instances.
In light of the above issues, we opine that the above judgment requires reconsideration and cannot be relied upon without considering the facts under which the judgment is proposed to be applied.
