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Applicability of service tax on under construction flat


    I had booked a flat measuring super area 915 sq.ft. in Ghaziabad (UP) in 2009.  Paid 95% (basic cost+ Parking) 

amount in March 2009.  Now the Builder Company has given me a demand letter for the balance amount of Rs.208105/- (including Electrification & dual meter charges-47,875/- ,Power Back up 20,000/-, Club membership-35000/-, Fire fighting charges- 22875/-) Plus Service Tax of Rs. 25,722/-.  The Total cost of the flat is less than 20,00,000/- (affordable housing).  

Kindly clarify whether the Service Tax of Rs. 25,722/- being claimed by the builder is in order. I would be thankful to you if the rule position in this regard is explained to me.



JC Joshi


 2 Replies

AAK (Advocate)     11 October 2013

L &T Vs STATE OF KARNATAKA .. 26th September 2013

Held: Builder has to pay Sale Tax

ECC division of Larsen and Toubro (for short, “L&T”) is engaged in property development  along with the owners of vacant sites. On 19.10.1995, L&T entered into a development agreement with Dinesh Ranka, owner of the land for construction of a multi-storeyed apartment complex. After development, 25% of the total space was to belong to the owner and 75% to L&T. A power of attorney was executed by the owner of the land in favour of L&T to enable it to negotiate and book orders from the prospective purchasers for allotment of built up area. Accordingly, L&T entered into agreements of sale with intended purchasers. The agreements provided that on completion of the construction, the apartments would be handed over to the purchasers who will get an undivided interest in the land also. Sale deeds, thus, were executed in favour of the intended purchasers by L&T and the owner.

On 21.12.2005, the Deputy Commissioner called upon L&T to furnish the details of development project. On 04.10.2005, the Deputy Commissioner served a show cause notice on L&T stating that it was liable to tax as per the decision of this Court in Raheja Development case (SC held “ an agreement to carry out construction activity on behalf of someone else for cash or for deferred payment or for any other valuable construction, it would be carrying out works contract and therefore would become liable to pay turnover tax on the transfer involved in such work contracts.) The L&T inter alia submitted that the development agreement was not a works contract.

On 02.02.2006, the Deputy Commissioner served upon L&T a further notice proposing to tax the sale of materials used in the construction of flats on the ground that it was entitled to 75 per cent of the share of the projects.

On 03.07.2006, the Deputy Commissioner issued provisional assessment orders under Section 28(6) of the Karnataka Sales Tax Act, 1957 (for short, ‘KST Act’) for the years 2000-01 to 2004-05. Along with the provisional orders, the Deputy Commissioner also issued demand notices raising a total demand of Rs. 3,99,28,636/.

SC Held:

The question is: Whether taxing sale of goods in an agreement for sale of flat which is to be constructed by the developer/promoter is permissible under the Constitution? When the agreement between the promoter/developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is obvious that such transaction involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed. We, therefore, think that there is no reason why such activity of construction is not covered by the term “works contract”. After all, the term “works contract” is nothing but a contract in which one of the parties is obliged to undertake or to execute works. Such activity of construction has all the characteristics or elements of works contract. The ultimate transaction between the parties may be sale of flat but it cannot be said that the characteristics of works contract are not involved in that transaction. When the transaction involves the activity of construction, the factors such as, the flat purchaser has no control over the type and standard of the material to be used in the construction of building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or lay-out of the building, in our view, are not of much significance and in any case these factors do not detract the contract being works contract insofar as construction part is concerned.


saravanan (articled assistant)     19 April 2014

Hi Jagdish,

I understand, that your query relates to the appropriateness of Service Tax charged by the builder and not VAT.

Considering the provisions of Service Tax, law, the rate of tax adopted @ 12.36% in the instant case appears to be fine. 

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