As we know for the period prior to 01.07.2010, the construction service provided by builder/developer was not taxable. However, for the period after 01.07.2010, construction service provided by builder/developer is taxable.

The Ministry of Finance, Department of Revenue vide Circular No. 151/2/2012-ST dated 10.02.2012 examined the tripartite business model wherein three parties are involved i.e. (i) land owner; (ii) builder or developer; and (iii) contractor who undertakes construction). The issue was involved with respect to the liability of 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 provided vide Board Circular dated 10.02.2012

“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

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.

It is relevant to mention here that on the other hand, Para 6.2.1 of the Education Guide provides that value of construction services provided to such land owner will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly. Relevant extract of the Education Guide is reproduced here under:

“6.2.1 What would be 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. If payable, how would the services be valued?

…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…

Value, in the case of flats given to first category of service receiver will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.”

On a perusal of the Board Circular and para 6.2.1 of the Education Guide (supra), it is evident that there is a contradiction of views as expressed therein and the same has been a matter of debate since long. In this regard, Ministry of Finance, Department of Revenue (TRU) vide instruction dated 20.01.2016 (report of High Level Committee, regarding the valuation of flats for levy of Service Tax) has directed that in valuing the service of construction provided by a builder/developer to a landowner, who transfers his land/development rights to builder, for getting, in return, constructed flats/dwellings from builder/developer, the Service Tax assessing authorities should be guided by the said Board Circular dated 10.2.2012 and not the Education Guide.

Vide the said instruction it has been further explained that-

(i)       The Circular dated 10.2.2012 is in accordance with the provisions relating to valuation as laid down in the Finance Act, 1994 and the Service Tax (Determination of Value) Rules, 2006.

(ii)      As regards the Education Guide, it has been clearly stated in the Education Guide, 2012 that it is merely an educational aid based on a broad understanding of a team of officers on the issues. It is neither a “Departmental Circular” nor a manual of instructions issued by the Central Board of Excise and Customs.

(iii)     To that extent it does not command the required legal backing to be binding on either side in any manner. The guide was released purely as a measure of facilitation so that all stakeholders could obtain some preliminary understanding of the new issues for smooth transition to the new regime.

Hence, Circulars such as the present one would prevail over the Education Guide, 2012.

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