Wednesday, October 17, 2012

SERVICE TAX ON PREFERENTIAL LOCATION CHARGES BY BUILDER


on Wednesday, October 17, 2012

(A) Position of Taxability during different periods on Preferential Location Charges 

The following table exhibits the position of taxability in respect of Preferential Location Charges during different time periods.


  • Period from 10.09.2004  to 30.06.2010 
Not subject to Service Tax because these charges did not fall within the ambit of “Commercial or Industrial Construction Services”, “Complex Construction Services” or “Management, Maintenance or Repair Services”  



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  • Period 01.07.2010 to  30.06.2012 
These charges were brought within the ambit of Service Tax under the heading “Special Services provided by Builder or any person authorised by such Builder vide the then Section 65 (105) (zzzzu) With Effect From 01.07.2010

Before proceeding further, it will be worthwhile to refer to the following relevant taxable sub-clause: 

Taxable service means any service provided or to be provided to a buyer,by a builder of a residential complex, or a commercial complex, or any other person authorised by such builder, for providing preferential location or development of such complex but does not include services covered under  sub-clauses (zzg), (zzq), (zzzh) and in relation to parking place.
Explanation.—For the purposes of this sub-clause, ‘‘preferential location’’means any location having extra advantage which attracts extra payment over and above the basic sale price; – Section 65 (105) (zzzzu). 

In It is worth emphasizing that Department issued a detailed clarification [Vide F.No, 334/1/2010 – TRU dated 26.02.2010] in which it explained the rationale for bringing these charges within the purview of Service Tax. The foregoing clarification is given below for instant reference: 

CLARIFICATION BY DEPARTMENT- VIDE F.No, 334/1/2010 – TRU dated 26.02.2010. 

8.1 Construction of commercial or industrial structures was brought under service tax net in 2004 while construction of residential complexes became a  taxable service in 2005. The scope of the existing services includes construction, completion and finishing, repairs, alterations, renovation or restoration of complexes. It has been reported that in addition to these activities, the builders of residential or commercial complexes provide other facilities and charge separately for them and these charges do not form part of the taxable value for charging tax on construction. These facilities include,- 

(a) Prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastu- having the bed room in a particular direction; Number- lucky numbers); 

(b) Internal or external development charges which are collected for developing/maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc.; 

(c) Fire-fighting installation charges; and 

(d) Power back up charges etc. 

8.2 Since 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. 

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.  

Inference: From the above, it can be safely inferred that Preferential Location Charges or Internal or External Development Charges were subject to levy of Service Tax from 01.07.2010 to 30.06.2012 at full rate i.e. without any kind of abatement if separate consideration was charged in respect of these charges. 

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  • Period From  01.07.2012 onwards 

There can be following two broad possibilities regarding for recovering these charges.

(i) No Separate consideration 

If consideration in respect of these charges is not charged separately. In other words, consideration for these charges is clubbed with the charges for construction of a complex, building, civil structure or a part thereof. In this situation, exemption of 75% of the gross amount charged will be available. 

(ii) Separate Consideration 

If consideration in respect of these charges is charged separately. In this case, the amount charged on account of PLC is taxable at the full rate [which is presently 12.36%] and not at abated rate of 25% because of following reasons:


  1. While rendering Preferential Location Services there is no transfer of material from the service provider to the service recipient. Abatement in Service Tax is granted only in respect of such services where there is transfer of materials. Thus, if Service Tax is allowed to be paid at abated rate in respect of PLC, it will go against the basic principle of granting abatement.
  2.  “Construction of a Complex, Building etc” and “Preferential Location” are separate and different activities. Usually, all the houses/floors in a complex/building may not have preferential location. Therefore, the builder may not charge PLC in respect of all the houses/floors. Thus, an inference may be drawn that “Construction of a Complex, Building etc.” is an independent activity {service] in itself even without Preferential Location. 
    • On the other hand, a different view can be taken by some professionals regarding the quantum of service tax to be levied in respect of Preferential Location Charges [abbreviated as PLC]
    • According to this view, PLC fall within the ambit of clause (b) of Section 66E i.e. Construction of a complex, building, civil structure or a part thereof including a complex or building intended for sale to a buyer.
    • Resultantly, the amount charged on account of PLC will be put on the same pedestal on which amount charged for construction of a complex, building etc stands. 

Inference: From the above, it can be safely inferred that service tax should be charged at the full rate in those cases where separate consideration is charged for PLC, especially when these services are provided by a builder to a contractor who will be entitled to get CENVAT Credit in respect of Service Tax paid to the said builder.

By :CA. Roopa Nayak ,CA Pulak Saha ,CA. Rajiv J. Luthia , CA. Ashok Batra, CA. Bimal Jain, CA.  Sumantra Guha 

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  1. Preferential location means east facing , corner etc ?

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  2. For period from 1.7.2012 onwards, its not clarified whether for special and other services especially power/water supply ,treatment plant etc which are essential services required as per original plans and conditions put by the local authority , if abatement and /or exclusion of goods and material cost will be allowed ? If so to what extend ?
    ii. what about monthly maintenance /service charges? are they fully exempt or there is some limitations ?

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