1. Sale of Premises – Service or Sale??
Construction business is growing at a rapid increase and it is expected that it will continue to
be achieve a higher value in the years to follow.
However with the introduction of VAT in the regime of collection of taxes, followed by the
introduction of Service Tax on Construction of Residential Complex has widened the scope
of collectibles of indirect taxation and it has been felt that the burden is not beneficial to the
need and desire of people.The levy of VAT on Works contract is on the sales effected by way
of transfer of property in goods (whether as goods or in some other form) involved in the
execution of a works contract, subject to such restrictions and conditions as may be
prescribed, in lieu of the amount of tax payable by him under this Act, whether in respect of
65 the entire turnover of sales effected by way of works contract or in respect of any portion
of the turnover corresponding to individual works contract, pay lump-sum by way of
composition,—
(a) equal to 5% of the total contract value of the works contract in the case of a
construction contract, and
(b) 8% of the total contract value of the works contract in any other case, after deducting
from the total contract value of the works contract, the amount payable towards sub-
contract involving goods to a registered sub-contractor.
The construction contract as defined under MVAT Act, 2002 “shall mean construction
contract as may be notified by the State Government in the Official Gazette, from time to
time”
Under these circumstances immergence of complex business structure has taken place,
entities have framed multifaceted agreements to save taxes through tax planning.
Government (both state and Central) over the period has ventured themselves to cover all
types of agreements in the tax regime, so that loss of revenue can be avoided. Following
table shows the certain types of business agreements which are prevalent in construction
business and there effect to the taxation regime are certain types of agreements which are
common in the business world and following are the corresponding views given by various
government authorities
1. Landowner appointing contractor for building apartment & Landowner allotting the flats
in consideration for contract which contractor may sell them as his property.

2. The contractor constructs building on land (owned by Landowner) using the material
owned by contractor. Generally, such transaction would be considered as works
contract. However, the consideration is in form of certain premises.
Definition of Sale under MVAT Act 2002 [Sec 2(24)]: “sale” means a sale of goods made
within the State for cash or deferred payment or other valuable consideration but does
not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy”
and “purchase”, with all their grammatical variations and cognate expressions, shall be
construed accordingly. Unless money consideration is agreed upon, there is no question
of sale as per Sales Tax Laws.
Definition of Sale Price under MVAT Act 2002 [Sec 2(25)]: “sale price” means the amount
of valuable consideration paid or payable to a dealer for any sale made including any
sum charged for anything done by the seller in respect of the goods at the time of or
before delivery thereof, other than the cost of insurance for transit or of installation, when
such cost is separately charged.
It can be interpreted from the combined definition of sale and sale price that unless the
money consideration is determined for transfer of property, the transaction is not liable
under MVAT Act.
Judicial Pronouncements:
• The supreme court judgment incase of M/s. Gannon Dunkerley & Co. (9 STC 353) (SC)
brings out the following criteria for construing sale transaction:
a. Basic conditions for valid contract.
b. Subject matter of sale is moveable goods.
c. Money consideration for sale.
d. Transfer of property i.e. transfer of ownership from seller to purchaser.
Consideration should be in money terms. If consideration is not in money terms, i.e. in
any other mode, it may be exchange or barter, but not a sale.
• The supreme court judgment in case of CIT v. Motors & General Stores (P) Ltd., (66 ITR
692) also emphasis on the money consideration with reference to price defined u/s
2(10) of The Sale of Goods Act, 1930.
• As per the pronouncements of M/s. Davi Dass Gopal Krishnan and Other (22 STC 430)
(SC); M/s. Radhas Printers v. State of Kerela, (90 STC 201) (Kerela) and Sales Tax
Commissioner v. Ram Kumar Agarwal, (1967) (19 STC 400) (Allahabad High Court) it
was held that ‘Other valuable consideration’ must be interpreted on the basis of rule

3. of ejusdem generic to mean cheques, bills of exchange or such other negotiable
instruments. Thus it shall be concluded that unless consideration is in money terms,
contractor cannot be made liable to any tax under MVAT Act as the deal cannot be
construed as sale.
2. Owner of Land grants development rights to Developer who constructs the
superstructure. The Land and the superstructure are then separately conveyed by the
owner & developer respectively under tripartite agreement with the eventual buyer.
The Supreme Court in K. Raheja Development Corporation v. State of Karnataka, 2006 (3)
STR 337 (SC) delivered the judgment in context with the arrangement of tripartite
agreement between land owner, developer & prospective buyer. The Supreme Court
found that the developer was undertaking the construction activity on the behalf of the
prospective buyer. Under the Karnataka Sales Tax Provision, the definition of a works
contract being wide covers any type of agreement reflecting construction, and the
construction could be on behalf of owner of property or even by Owner himself. The
Court also stated that “if the agreement is entered into after the flat or unit is already
constructed, there would be no works contract. But so long as the agreement is entered
into before the construction is complete, it would be works contract.”
Subsequently Definition of ‘sale’ in sec. 2(24) of the MVAT Act, 2002 was amended to
bring it in par with the Karnataka sales tax provision. As a result, works contract came to
mean “ the transfer of property in goods (whether as goods or in some other form)
involved in the execution of works contract including building, construction,
manufacture, processing, fabrication, erection, installation, fitting out, improvement,
modification, repair or commissioning of any moveable or immovable property.”
In Trade Circular No. 12T of 2007 dated 07.02.2007, the MVAT Department clarified that
tripartite arrangements would be liable to MVAT. VAT authorities interpreted the
judgment of K. Raheja as to mean that every agreement entered into before the flat was
constructed would become a works contract.
In the Re: Hare Krishna Developers 2008 (10) STR 357 (AAR), decision was given in context
with the arrangement as in case of K. Raheja for which AAR held it as works contract
service i.e. developer was carrying out construction for and on behalf of the buyer.
3. Land owner himself undertakes construction and allots the flats to prospective buyers but
are subject to receipt of initial token money and execution of sale deed on completion

4. of construction. The land owner continued to enjoy rights and title over the apartments till
the execution of the registered sale deed.
In case of Assotech Realty Pvt. Ltd. v. State of UP [2007 (7) STR 129 (All)], Court held that
the developer was acting on its own behalf in constructing of flats & the right, title and
interest therein would only transfer over after sale deed was executed, after construction
had been completed. Court held that the arrangement was not a works contract and
that no sales tax would therefore be payable.
In the Re: Hare Krishna Developers 2008 (10) STR 341 (AAR), the arrangement was similar
to that of Assotech realty Pvt. Ltd. AAR held that the entry of ‘construction of complex
service’ would cover all the activities relating to construction of complexes including such
an arrangement. It added that the time of transferring of ownership would not determine
the liability of service tax.
Controversy has been created after the decision of Gauhati High Court in case of Magus
Construction Pvt. Ltd. v. Union of India [2008 (11) STR 225 (Gau)], which referred to tripartite
agreement as outright sale and out of the purview of service tax. The decision was based on
the circulars during the period of 2004 to 2009 collectively point out legislative intention that
construction activity undertaken by the builder / developer amounts to self service and will
not be liable to service tax.
These different patterns of execution, terms of payment and legal formalities have given rise
to confusion, disputes and discrimination in terms of service tax payments.

5. Construction Activity
Developer Transfer of property of
agrees to goods, whether as goods or Agreement to
undertake in some other form, involved sale of
construction in the execution of Works immovable
Contract property which
may be entered
before it is
constructed.
Works
Works Contract
Construction of chargeable to Controversy!!!!!
Contract
Complex Service / VAT
Service
Commercial or
Industrial
Construction based
on nature of
construction
Summarization before entry of Explanation (Finance Act, 2010):
Builder Model Developer Model
Agreement to sell is executed between Developer enters into contract with the
purchaser and builder. prospective buyer.
Conveyance is executed by builder on post Post construction, possession is handed over
completion and possession is handed over to & land is directly transferred to society /
buyer. owners of apartment (No separate sale
deed)
Contract for sale – No Construction Contract Construction Contract - No Contract for Sale
Levy of Stamp Duty No levy of Stamp duty as the property in
goods involved in works contract passes by
attainment during process of work.

6. Models of construction activity
Dealing of flat / space Assotech & Magus K. Raheja Model
after the construction Model
activity is completed
No Service tax. Under the ambit of Under the ambit of
Only Stamp Duty on Service Tax as per New Service Tax as per New
conveyance. Explanation Explanation
Introduction of explanation in the sub clause (zzzzh) of the S. 65(105) of the Act by the
Finance Act, 2010 with effect from 01.07.2010:
Construction of a complex with intended for sale, wholly or partially, by a builder or any
person authorized by the builder before, during or after construction (except in case of no
sum received from or on behalf of the prospective buyer by a builder or any person
authorized by the builder before grant of completion certificate from authority competent
to issue the same under any law for being in force) shall be deemed to be service provided
by the builder to the buyer.
The plain interpretation of above said provision is that sum received by the builder from
prospective buyer before completion of construction i.e. grant of “OC” is subject to Service
Tax w.e.f. 01.07.2010.
In order to achieve Legislative intent and bring in parity in tax treatment, to expand the
scope of existing service; the Explanation has been included. The three models of
construction activity are now covered under the ambit of service tax.
The amendment is introduced to enact a deeming fiction per which any amount received
prior to grant of Certificate of Completion are deemed to be consideration for the
performance of construction services by the builder to the buyer. However, exemptions are
provided incase such construction services are provided to Jawaharlal Nehru National Urban

7. Renewal Mission and Rajiv Awaas Yojana, services provided wholly within a port for certain
specified purposes and services provided wholly within a port an airport.
The construction service provided for personal use of buyer would not be covered by service
tax.
Vide Notification 36/2010 dated 28.06.2010, the sum of money received in advance from
prospective purchasers towards any unit in a building by a builder / developer prior to
01.07.2010 is not liable to service tax in case of construction services remaining pending to
be provided in the period post 01.07.2010
The Service tax (Removal of Difficulty) Order, 2010 dated 01.07.2010 widens the scope of
authority competent to issue Certificate of Completion by including an architect registered
under the Council of Architecture constituted under the Architects Act, Chartered Engineers
registered with the Institution of Engineers (India), or the licensed surveyor of the respective
local body or development or planning authority.
Options available under the Services applicable to Builders and Developers:
a. Commercial or Industrial Construction [S. 65(105)(zzq)] & Construction of Residential
complex [S. 65(105)(zzzzh)]
Options Amount Payable as ST CENVAT Credit
1. 10.30 % on value of services CENVAT Credit on capital goods, input
services and input goods
2. 10.30 % on 33 % of gross amount No CENVAT Credit.
including value of materials
supplied
3. 10.30 % on 25 % of gross amount No CENVAT Credit.
including value of materials
supplied and value of land
b. Works Contract service [S. 65(105)(zzzza)]
Options Amount Payable as ST CENVAT Credit
1. 10.30 % on value of services (excl. CENVAT Credit on capital goods, input
value of material supplied) services and input goods
2. 4 % of gross amount including No CENVAT Credit on inputs.
value of materials supplied
The deeming provision applicable to Builders / Developers was challenged by them before
various High Courts. The Bombay High Courts in case of Maharashtra Chamber of Housing
and Industry v. UOI (2010 TIOL 526 HC Mum. - ST) and Madras High Court in the case of A. P.

8. Ravi v. UOI (2010 TIOL 604 HC Mad. - ST) has granted an interim stay to petitioners. However,
recently in the case of G. S. Promoters v. UOI, 2011 (21) STR 100, Punjab & Haryana High
Court has pronounced its judgment and upheld the validity of the explanation inserted in S.
65(105)(zzzzh). The petitioner pleaded that sale and purchase was beyond legislative
competence of Union Legislature. If construction activity is not undertaken by a builder, then
the builder cannot be considered to be service provider in relation to services of
construction activities. The High Court observed that “the entries in the lists being merely
topics or fields of legislation, they must receive a liberal construction inspired by a broad and
generous spirit and not in a narrow pedantic sense.” Taxing of such transaction is not outside
the purview of the Union Legislature when it does not fall in any of the taxing entries of State
List. From the observations made by High court it can be contended that –
1. The presence of service or not has to be obtained not only from builders point of view but
also from the recipient’s angle.
2. Service is definitely involved when construction is carried out or before construction and
before flat is sold and therefore levy could not be held unconstitutional.
In view of above it is obvious that decision would be challenged in Hon. Supreme Court.
Further, there may not be any further consequence of the judgment in the jurisdiction of
Bombay & Madras High Court. The ultimate burden of service tax would be borne by flat
buyers as department may continue attempts to recover service tax. The issue is highly
complex and multifaceted.
HOWSOEVER THE GOVERNMENT WOULD TRY THE LEVY OF STAMP DUTY, SERVICE TAX AND VAT
WILL INDIRECTLY LEADS TO HIGHER CASH OUTFLOW FROM THE FINAL BUYER POINT OF VIEW.
THE BASIC NEEDS OF SHELTER IS SOMEWHERE BEING NEGLACTED BY THE GOVERNMENT , AND
UNDER CURRENT CIRCUMSTANCES IT SEEMS THAT LACK OF CLARIFICATION ON THESE
MAATERS ARE RESULTING INTO LOTS OF AMBIGUITY AND IT MAY WIDEN THE SCOPE OF OTHER
METHODS OF TAX PLANNING WHICH MAY NOT BE ETHICAL FFROM THE POINT OF VIEW OF
LEGISLATION AND SOCIETY.