– A Practical Perspective (PART – B)
CA Ankit Gulgulia
This article aims to discuss few essential issues that
require to be addressed in light to the changes brought by negative list
provisions, the jeopardy created by the board’s circulars and complexity of structures adhered to in this
industry. Broadly the article shall cover the aspects as mentioned hereinafter:
– (Strictly relevant to real
estate only). Also read my Previous Article which is Part A of this
Article on the Following link :- Service Tax on Real Estate – A Practical Perspective (Part –
A)
Abatement / Valuation in Construction
Activity
As already discussed, section 66E gives way to
service tax on construction
activity as it considers construction activity as a declared service. As per section 66E (b),
- Construction of a complex, building,
civil structure or a part thereof, including a complex or building intended for
sale to a buyer, wholly or partly shall be a
declared service, except where the
entire consideration is received after issuance of
completion-certificate by the competent authority.
- Competent authority means the
Government or any authority authorized to issue completion certificate under any law for the time being in
force and in case of non requirement of such certificate from such authority,
from any of the following, namely:––
◊ Architect registered with the
Council of Architecture constituted under the Architects Act, 1972; (20 of
1972.) or
◊ Chartered
engineer registered with the Institution of Engineers (India); or
◊ Licensed
surveyor of the respective local body of the city or town or village or
development or planning authority;
- “Construction”
includes additions, alterations, replacements or remodeling of any existing
civil structure;
- Once the activity is a construction
activity (and not falling in exemption, negative list), then it is significant
to understand the valuation procedures.
- As per notification
no. 26/2012 dated 20th June, 2012, SL. No 12 – Where
the activity is nature of construction activity aforesaid, then
abatement of 75% can be availed
subject to following conditions:
◊ CENVAT credit on inputs used
for providing the taxable
service has not been taken under the provisions of the CENVAT Credit
Rules, 2004.
◊ The value of land is included
in the amount charged from the service receiver.
◊ Essentially as in case of
‘service portion in works contract’, the provisions relating
to fair market value shall also
apply. The amount charged shall be the sum total of the amount charged for the
service including the fair market value of all goods
and services supplied by the recipient(s) in or in relation to the service,
whether or not supplied under the same contract or any other contract, after
deducting-
(i) the amount charged for
such goods or services supplied to the service provider, if any and
(ii) the value added tax or sales tax, if any, levied
thereon
Provided that the fair
market value of goods and services so supplied may be determined in
accordance with the generally accepted accounting principles.
Reverse
Charge Implications
For applicability of reverse charge, ensure that
the service provider and service receiver in respect of service mentioned is as
mentioned hereunder. If it is so then reverse charge shall apply.
| S.No | Service | By (SP) | To (SR) |
| 1 | Insurance | Insurance agent | Any Person |
| 2 | Goods Transport by Road | GTA | -Factory
- Society - Cooperative Society - Dealer under excise - Body corporate - Any partnership firm |
| 3 | Sponsorship | Any Person | - Body corporate
- Partnership firm in taxable territory |
| 4 | Any service |
|
Any business entity in taxable territory |
| 5 | Renting or hiring any motor vehicle designed to carry passenger | -Individual-
- HUF - Proprietorship firms - Partnership firm - AOP |
-Company
-business entity registered as body corporate located in the taxable territory |
| 6 | Works Contract Service | -Individual-
- HUF - Proprietorship firms - Partnership firm - AOP |
-Company
- business entity registered as body corporate located in the taxable territory |
| 7 | Supply of manpower for any purpose | -Individual-
- HUF - Proprietorship firms - Partnership firm - AOP |
-Company
- business entity registered as body corporate located in the taxable territory |
| 8 | Any service | Any person in non taxable territory | Any person in taxable territory |
Once reverse charge applies, the next thing is
that what shall be proportions of taxes payable by the service provider and
service receiver respectively. The same are as under,
| S.No | Service | By (SP) | To (SR) |
| 1 | Insurance | Insurance agent | Any Person |
| 2 | Goods Transport by Road | GTA | - Factory
- Society - Cooperative Society - Dealer under excise - Body corporate - Any partnership firm |
| 3 | Sponsorship | Any Person | - Body corporate
- Partnership firm in taxable territory |
| 4 | Any service |
|
Any business entity in taxable territory |
| 5 | Renting or hiring any motor vehicle designed to carry passenger | -Individual-
- HUF - Proprietorship firms - Partnership firm - AOP |
- Company
- business entity registered as body corporate located in the taxable territory |
| 6 | Works Contract Service | -Individual-
- HUF - Proprietorship firms - Partnership firm - AOP |
- Company
- business entity registered as body corporate located in the taxable territory |
| 7 | Supply of manpower for any purpose | -Individual-
- HUF - Proprietorship firms - Partnership firm - AOP |
- Company
- business entity registered as body corporate located in the taxable territory |
| 8 | Any service | Any person in non taxable territory | Any person in taxable territory |
The computation shall be as under:-
| Particulars | Amount (in Rs) | |
| Invoice Value (excluding tax) | 15,00,000/- | |
| Service Tax ( Total Service tax) @ 12.36% (A) | 1,85,400/- | |
| Total Value | 16,85,400/- | |
| Less: Tax Attributable to service receiver and to be borne by SR himself (75% of (A)) | 1,39,050/- | |
| Amount Payable by SR to SP | 15,46,350/- | |
| ST payable by SR | 1,39,050/- | |
| ST payable by SP | 46,350/- |
Some
issues:-
- Where SP is exempt under threshold
limit, still SR shall be liable.
- Where SP levies tax wrongly in
computation, SR is still liable to compute the tax correctly and vice versa. The
tax liabilities are independent affair for both SR & SP.
- Valuation mechanism can be
independently opted by either.
- 4th Digit of PAN helps in
identification of legal status of SP. For example PAN
ALGPG0652T, it is P which indicates individual, C is company
and H is HUF and so on.
- TDS shall be payable on amount paid to
SP i.e. amount paid under reverse charge shall not be subjected to TDS. For more
clarification read circular 4/2008 as issued by CBDT and our previous
post with link here. – Conflict of Service Tax & Tax Deducted at
Source
- No CENVAT can be used to pay amount
under reverse charge. Once tax is paid, the Cenvat of such paid tax shall be
available subject to Cenvat credit Rules, 2004.
Types of
Models in Real Estate
Broadly there are six models that the trade &
industry is prone to resort to. Though all of them are listed hereunder, this
article shall take up only tripartite and joint development agreement for
further discussion.
◊ Tripartite Business Model
◊ Redevelopment including slum
rehabilitation projects
◊ Investment model
◊ Conversion Model
◊ Build- Operate – Transfer (BOT)
Projects
◊ Joint Development Agreement
Model
Tripartite Business Model
Parties in the model are generally three and may
be bound by a single tripartite agreement or two separate contracts. (i)
landowner (ii) builder or developer and (iii) contractor (who undertakes
construction)
Issue involved is regarding the liability to pay
service tax on flats/houses agreed to be given by
builder/developer to the land owner towards the land /development rights and to
other buyers.
Clarification: Here two
important transactions are identifiable: (a) sale of land by the landowner which
is not a taxable service; and (b) construction service
provided by the builder/developer. The builder/developer receives consideration
for the construction service provided by him, from two categories of service
receivers: (a) from landowner: in the form of land/development rights; and (b)
from other buyers: normally in cash.
(A) Taxability of the construction
service:
(i) For the period prior to 01/07/2010:
construction service provided by the builder/developer will not be taxable, in
terms of Board’s Circular No.108/02/2009-ST dated
29.01.2009.
(ii) For the period after 01/07/2010,
construction service provided by the builder/developer is taxable in case any
part of the payment/development rights of the land was received by the builder/
developer before the issuance of completion certificate and the service tax
would be required to be paid by builder/developers even for the flats given to
the land owner.
(B) Valuation:
(i) Value, in the case of flats given to first
category of service receiver, is determinable in terms of section 67(1)(iii)
read with rule 3(a) of Service Tax (Determination of Value) Rules, 2006, as the
consideration for these flats i.e., value of land / development rights in the
land may not be ascertainable ordinarily. Accordingly, the value of these flats
would be equal to the value of similar flats charged by the builder/developer
from the second category of service receivers. In case the prices of
flats/houses undergo a change over the period of sale (from the first sale of
flat/house in the residential complex to the last sale of the flat/house), the
value of similar flats as are sold nearer to the date on which land is being
made available for construction should be used for arriving at the value for the
purpose of tax. Service tax is liable to be paid by the builder/developer on
the ‘construction service’ involved in the flats to be given to the land owner,
at the time when the possession or right in the property of the said flats are
transferred to the land owner by entering into a conveyance deed or similar
instrument(eg. allotment letter).
(ii) Value, in the case of flats given to the
second category of service receivers, shall be determined in terms of section 67
of the Finance Act, 1994.
Joint Development
Agreement
Under this model, land owner and
builder/developer join hands (note that
we are not including contractor directly in scheme of arrangements) and
may either create a new entity or otherwise operate as an unincorporated
association, on partnership /joint / collaboration basis, with mutuality of
interest and to share common risk/profit together. The new entity undertakes
construction on behalf of landowner and builder/developer.
It is a common practice that a landowner and
builder would enter into a joint venture and share the constructed area in
agreed proportion. The UDS portion of land pertaining to the
builder’s portion would be sold and the amount would be appropriated by the
builder. Further, the builder would also receive construction cost from the
buyers. The builder would also construct landowner’s share of constructed area
and hand over the same to the landowner. As the landowner would
not normally use his constructed area for his personal use, the
service provided by the builder to the landowner is a taxable service. But no
monetary consideration is flowing from the landowner to the builder, but the
builder is given the right to sell his share of the UDS portion of land and
retain the proceeds. Now since 2006, it is non-monetary consideration has also
been made part of overall consideration under section 67, the same is to be also
considered.
But, in many cases, the landowner asks the
builder to sell his portion of constructed area also. Accordingly, the UDS land
pertaining to landowner’s share would also be sold by the builder, acting as a
power of attorney of the landowner and a separate construction agreement would
be entered into with the buyer. But the entire proceeds would be remitted by the
builder to the landowner. In such circumstances, it is not clear whether the
builder is providing service to the landowner (in which case, the service tax
liability would arise) or to the purchaser (in which case, there would be no
liability on the ground of personal use) or to both?
Below is diagrammatic arrangement of one of many
possible in real estate industry.
In this regard it has been clarified vide Circular 148/17/2011-ST dated
13/12/2011, particularly paragraphs 7, 8, 9 apply mutandis
mutandis in this regard.
Circular
148/17/2011- ST dated 13/12/2011 critically states that
- ‘Para 6. It is being represented
that in certain situation the distributer and the theatre owner conduct business
together and hence no service tax is leviable. Arrangement amongst two or more
entities can either be on principal-to-principal basis or on
partnership/joint/collaboration basis. In the former, the constituent
members are independent of each other and do not share
any risk/revenue/profit/loss/liability of the other while in latter the
constituent members join hands for mutuality of interest and share
common risk/profit together’.(Note: Principle shall apply
to all industries across the trade)
- ‘Para 7. Unincorporated joint
venture, not operating on principal-to-principal basis, will exist only
if the arrangement entered into between the two independent persons is also
recognized as a person. It may be noted that the word “person” has not
been defined in the Finance Act, 1994. As per Sec 3(42) of General Clauses Act,
1897 “person shall include any company or association or body
of individuals, whether incorporated or not”. In this regard attention is
invited to explanation to Sec 65 of the Finance Act, 1994 wherein the taxable
service includes any taxable service provided or to be provided by any
unincorporated association or body of persons to a member
thereof’. (Note: Unincorporated association now finds specific
disclosures in as much as distinct persons from its
members)
- Para 8. Such a joint venture is
also recognized as a legal & juristic entity in the nature of a partnership
of the constituent companies by the Hon’ble Supreme Court of India in the case
of New Horizons [1995 SCC (1)
478; 1994 -TMI – 83686] wherein it was
held that “the expression ‘joint venture’ connotes a legal
entity in the nature of a partnership engaged in the joint undertaking
of a particular transaction for mutual profit or an association of persons or
companies jointly undertaking some commercial enterprise wherein all contribute
assets and share risks. It requires a community of interest in the performance
of the subject-matter, a right to direct and govern the policy in connection
therewith, and duty, which may be altered by agreement, to share both in profit
and losses. The independence of joint venture as a separate legal entity, away
from its constituent members, has further been fortified in the case of
M/s Gammon India Ltd. Vs
Commissioner of Customs, Mumbai, 2011-TMI –
204309 wherein the Hon’ble Supreme Court categorically denied
the benefit of exemption to the JV as the impugned goods were directly imported
by constituent member.
- Para 9. Thus, where the distributor
or sub-distributor or area distributor enters into an arrangement with the
exhibitor or theatre owner, with the understanding to share revenue/profits and
not provide the service on principal-to-principal basis, a new entity emerges,
distinct from its constituents. As the new entity acquires the character of a
“person”, the transactions between it and the other independent entities namely
the distributor/sub-distributor / area distributor and the exhibitor etc will be
a taxable service. Whereas, in cases the character of a “person” is not acquired
in the business transaction and the transaction is as on principal-to-principal
basis, the tax is leviable on either of the constituent members based on the
nature of the transaction and as per rules of classification of service as
embodied under Sec 65A of Finance Act, 1994.
Para 6 of above circular was a complete
U-turn on the part of revenue with respect to its earlier circular
F. No. 137/186/2007 – CX. 4 dated 23rd February, 2009, Para 2.2
of which states as under:
2.2. Another type of arrangement is where the
contract between the theatre owner and the distributor is on revenue
sharing basis i.e. a fixed and pre-determined portion i.e. percentage
of revenue earned from selling the tickets goes to the theatre owner and the
balance goes to the distributor. In this case, the two contracting parties act
on principal-to-principal basis and one does not provide
service to another. Hence, in such an arrangement the activities are not covered
under service tax.
Chronologically, how things have
evolved:-
- In 2009, CBEC suggests that revenue
sharing and principal to principal basis is same arrangement. In this case, the
two contracting parties act on principal-to-principal basis and
one does not provide service to another. Hence, in such an arrangement the
activities are not covered under service tax
- In 2011, CBEC suggests that revenue
sharing and principal to principal basis are different arrangement.
It gives birth to concept of unincorporated association in case of
revenue sharing agreements. Taxability of services provided by individual
members to such association and vice versa is being suggested.
- In 2012, CBEC suggests to apply the
principles of unincorporated association to Joint development agreement.
- In 2012, Negative list clears that
unincorporated association and its members shall be deemed to be distinct
persons.
Jeopardy above, clearly demarcated what
trade is facing on service tax front.
Some
Judgement on Joint Development
(A) Tribunal decision that activity done by each
member of Joint Venture is not ‘service’ to other member:
- In Mundra Port and Special
Economic Zone Ltd. v. CCE (2011) 33 STT 364 = 15
taxmann.com 33 (CESTAT), assessee had
constructed rail line between port and railhead under private-public sector
collaboration on revenue sharing basis. It was held that this
is not ‘Business Support Service’. – - In the same case, the assessee, who was
licensee of Government of Gujarat for development of port had appointed
sub-licensee to maintain container terminal, for which the sub-licensee was
paying royalty and profit sharing. It was held that this is also not business
support service.
Though
the decision is in respect of ‘Business Support Service’, the principle should
apply to all revenue sharing arrangements.
- In Nyco SA v. CST (2009) 20 STT
113 (CESTAT), a joint venture company was formed to share expertise and
know-how of both the parties. Fruits of joint venture were shared by both the
parties. It was held that sharing of knowledge cannot be termed as providing
consulting engineering service as expertise acquired is used for own benefit
along with others.
- In CCE v. Sundaram
Finance (2007) 9 STT 100 (CESTAT), it was observed that work done by a
joint venture partner is in the nature of ‘in-house services’ rendered by him as
partner of the JV company.
(B) CESTAT has taken the view that joint ventures
are not covered under service tax are Initiating Explosives Systems v.
CCE, Kolkata-V, Sunshield Chemicals Ltd v. CCE, Raigad, CCE, Chennai v. Sundaram
Finance Ltd and Glaxo Smithkline Pharmaceuticals Ltd. v. CCE, Mumbai.
More importantly, in CST v. Puravankara Projects Ltd, the
Bangalore CESTAT had taken a prima facie view that, in joint development
agreements, no service is rendered by the Developer to the Land
Owner. Hence, the current judicial view is clearly against joint
development agreements being subjected to service tax levy.
(C) In MORIAS CONSTRUCTION CO. (P) LTD.
VERSUS COMMR. OF C. EX. & S. TAX, RANCHI, it was held that decision
of the Hon’ble Supreme Court in the case of K. Raheja Development Corpn.
v. State of Karnataka – 2006 (3)S.T.R. 337 (S.C.) = (2005) 5 SCC 162 is
not applicable in the case of the appellants as the appellants have not
undertaken any building activity on behalf of anyone. They have
merely developed the property and built the flats for themselves and the land
owner as a joint venture project. The sale of the flats to
others has taken place only subsequently and therefore no service has been
rendered for the ultimate flat owners by the appellants. Also supported by
decision of Hon’ble Allahabad High Court in the case of Assotech Realty
Pvt. Ltd.v. State of U.P. – 2007 (7) S.T.R. 129 (All.) and master
Circular No. 079.01(sic), dated 23-8-2007 issued by the Board to clarify that no
service tax is payable by a person who builds the residential complex on his own
by employing direct labour since in such a case the service provider and service
recipient relationship does not exist.
(D) In a recent landmark judgement of Chennai
CESTAT, LCS City Makers Pvt. Ltd. Versus Commissioner of Service Tax,
Chennai, 2012 (6) TMI 363 – CESTAT, CHENNAI, few essential points have
come out and as detailed hereunder:
a. On Lack of Service Provider / Service
Receiver relationship in JV, it was held that “12.4. We find that
para 3 of the clarification dt29-01-2009 deals with cases where flats are sold
after construction. In the instant case, the UDS is sold first and an agreement
for construction is entered into with individual buyers. The situation in
respect of Land Owners also is the same. Firstly, UDS is registered in their
name and then the Developer constructs flats for the original Land Owner,
becoming UDS holder after registering UDS in his name, as per the terms of the
contract. So this is clearly outside the scope of the clarification given by
CBEC. In these cases there is a service provided to the UDS holders
including the original Land Owners.”
b. On contention of personal use,
lordship have clearly based findings on essence of contractual arrangement by
stating that “it is clear that the Land Owner had engaged the Developer for
construction of flats for him in a complex, in his share of land, which flats
could be sold by him. So the residential complex as a whole was not for
personal use. The exclusion in the definition of the service is for a
complex intended for personal use. The clause cannot be applied to individual
flats in a complex. So we do not see much merit in this argument”.
c. On the contention that prior to
19.4.2006, non monetary consideration could not be taxed, it was held against the assessee, by
relying on Mahim Patram Pvt. Ltd Vs. UOI-2007 (7) STR 110 (SC)
wherein it was held that “25.A taxing statute indisputably is to be strictly
construed. [See J. Srinivasa Rao v. Govt. of Andhra Pradesh& Another
- 2006 (13) SCALE 27]. It is, however, also well-settled that the
machinery provisions for calculating the tax or the procedure for its
calculation are to be construed by ordinary rule of construction. Whereas a
liability has been imposed on a dealer by the charging section, it is
well-settled that the court would construe the statute in such a manner
so as to make the machinery workable.” Further it was held in LCS
City makers that “From 16-06-2005 the section 65 (105) was amended to read
taxable service means any service provided or to be provided . Thus service to
be provided became taxable from that date but that does not mean that service
provided from that date was not taxable if consideration was received earlier.
Thus we do not agree with the contention of the appellant in this regard. The
new provision can be interpreted to mean only that prior to that date no tax was
to be paid at the time when consideration was received but tax was to be paid at
the time when service was provided. This position has been clarified by CBEC in
its circular B1/6/2005-TRU dated 27-07-2005.”
PLC/EDC/IDC/Power Back Up Charges Prior to
1.7.2012
- As per D.O.F. No.334/1/2010-TRU dated 26th
February 2010 ,these charges are in the nature of service provided by the
builder to the buyer of the property over and above the construction service,
such charges are being brought under the new service (other than routine
construction service, hence no abatement was available). Charges for providing
parking space have been specifically excluded
from the scope of this service. Development charges, to the extent they are
paid to State Government or local bodies, will be would be excluded from the
taxable value levy. Further, any service provided by Resident Welfare
Associations or Cooperative Group Housing Societies consisting of
residents/owners as their members would not be taxable under this service.
- To appreciate the impact of above
circular, one must have a brief ground on how the EDC/IDC charges are recovered
by the industry from clients. Generally the EDC/IDC is payable to statutory
authorities on the basis on area of land; such amount is then recovered from
customers on per sq. Ft basis. In light of this fact, it is very difficult to
say that only that amount which is paid to state government has been duly
recovered. If it is over and above of what is paid to state government, in such
scenario it is liable to taxed under service tax. Essentially and least to say,
a plain reading of above circular wouldn’t help.
PLC/EDC/IDC/Power Back Up Charges w.e.f
1.7.2012
- Post 1st July, 2012 i.e. in
negative list era still several issues haunts real estate industry regarding
implications of PLC/EDC/IDC and others. Some of them are as under:
- Whether EDC / IDC shall be chargeable to service tax at all?
- If yes, whether they shall be clubbed under bundling provisions such that the effective rate of tax is 3.09% only?
- Whether Rule 5 of Point of taxation Rules, 2011 is applicable on such tax?
- PLC to be taxed at 3.09% or 12.36%?
- Interest / Penalty paid on such EDC/IDC are general issue in the trade. Whether the fact that who’s delayed the payment shall be reason on which levy of service tax can depend on?
Conclusion
Before parting, i would like to end by saying
that it is high time for revenue/ TRU’s to clear the air on many such issues in
real estate/construction or works contract activities for levy of service tax.
All clarifications issued are required to be consistent and trade and commerce
needs to interact more with revenue authorities with their respective
associations.
About the Author:
Author is practicing Chartered Accountant in New
Delhi and specialising in Indirect Taxes, Corporate Laws and Management
Advisory. He can be reached at +91-9811653975 or
Ankitgulgulia@gmail.com.
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