CESTAT Hyderabad Rules Out Service Tax on Post-Sale Construction for Individual Buyers’ Personal Use
Background and Context
The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Greenwood Estates Vs Commissioner of Central Tax has categorically held that no service tax is payable on construction services rendered to individual flat/house purchasers when such construction is for their personal use.
The dispute related to the ‘Flower Heights’ residential project, where the assessee, Greenwood Estates, followed a dual-agreement model:
- A registered sale deed for an undivided share of land along with a semi-finished residential unit, and
- A separate construction agreement for carrying out/finishing the remaining construction work of the same unit.
Revenue authorities attempted to levy service tax on the value received under the post-sale construction agreements, treating it as a taxable “works contract service” in relation to a “residential complex” under Section 65(105)(zzzza) read with Section 65(91a) of the Finance Act.
The Tribunal, however, applying earlier precedent including Modi Ventures Vs CCT & GST, Final Order No. 30882/2020 (Hyderabad Bench), has ruled fully in favour of the assessee.
Project Structure and Business Model of Greenwood Estates
Nature of Activities
Greenwood Estates was engaged in:
- Acquisition of land
- Obtaining statutory approvals and layout sanctions (including HMDA and Alluvial municipality approvals)
- Construction of residential houses/units in a project named ‘Flower Heights’
- Sale of semi-finished units along with undivided interest in land to individual purchasers
The assessee followed a two-stage contractual framework:
Stage 1 – Registered Sale Deed
- A sale deed was executed for:
- An undivided share in the project land; and
- The semi-finished flat/unit.
- The sale consideration reflected:
- Cost of construction of the unfinished unit; and
- Value attributable to the undivided land share.
- Proper stamp duty was paid on the sale deed.
- VAT liability for the deemed sale of materials under the relevant State VAT law was discharged.
- A sale deed was executed for:
Stage 2 – Construction Agreement
- A separate agreement was executed with each individual purchaser for:
- Completing the construction of that particular flat/house; or
- Carrying out the remaining civil, finishing and allied works.
- A separate agreement was executed with each individual purchaser for:
The assessee considered that such construction for individual purchasers was for their personal residential use, and hence outside the ambit of “residential complex” service by virtue of the exclusion under Section 65(91a).
Revenue’s Stand and Service Tax Demand
Periods Covered and Quantification
Investigations revealed lapses in ST-3 return filing and non-payment of service tax, as alleged by the department. On the basis of statements furnished by Greenwood Estates, Revenue initiated demands for the following periods:
January 2010 to December 2010
- Gross receipts (as per statement):
Rs. 11,65,14,336/- - Proposed service tax demand:
Rs. 48,00,391/-
- Gross receipts (as per statement):
January 2011 to December 2011
- Gross receipts (as per statement):
Rs. 11,36,37,141/- - Proposed service tax demand:
Rs. 46,81,850/- - Proposal to appropriate already deposited service tax:
Rs. 5,98,671/-
- Gross receipts (as per statement):
The show cause notices were primarily based on statements submitted by the assessee and received on:
- 22.04.2011 (for the first notice dated 23.04.2011)
- 08.02.2012 (for the second notice dated 24.04.2012)
Core Legal Reasoning of the Department
The Revenue’s reasoning can be summarised as follows:
Pre-sale construction (up to sale deed date)
- Until execution of the sale deed, the property remained in the name of the builder.
- Any construction activity during this period was treated as self-consumption, i.e., the assessee providing services to itself.
- Therefore, no service tax was proposed on the value embedded in the registered sale deed.
Post-sale construction (under separate construction agreement)
- Once the sale deed was executed, title in the land and semi-finished unit passed to the buyer.
- Any further construction under a separate agreement was viewed as:
- A “service” rendered by the builder (service provider);
- To an independent customer (service recipient).
- Consequently, the department classified this as a taxable works contract service under
Section 65(105)(zzzza).