CST vs. Shri Krishna Chaitanya Enterprises (Bombay High Court)

The High Court had to consider the following questions of law in an appeal filed by the Revenue:

“(a) Whether the CESTAT was right in holding that the assessee was not providing Management, Maintenance or Repair Service by collecting amount from prospective flat buyers, for maintaining the building, in the guise of deposits which is not returnable?

(b) Whether the CESTAT has erred in holding that assessee is providing statutory service and has rendered definition provided under Section 65(105)(zzg) of Finance Act as null and void by accepting that he is not providing Management, Maintenance or repair service by maintaining the building and collecting amount for that or not?

(b) Whether the CESTAT was right in setting aside the interest and penalty on the assessee?”

HELD by the High Court dismissing the appeal of the Revenue:

(i) The arguments of the Revenue fail to take note of this backdrop and in which it terms the obligations and duties under the MOFA to be rendering of taxable service. The definition in the Finance Act, pure and simple, alone has been looked at for the purpose of advancing this argument. The backdrop in which the promoter comes on the scene is totally lost sight of and that is precisely noted by the Tribunal. It is well settled that in India there is dual ownership. The land beneath the building does not belong to the person who constructs or owns the building. In most of the cases, the builders and developers obtain rights from the land owners so as to enable them to pull down the existing structure and exploit the potential of the land to its optimum.

(ii) The covenants with the owner are that such land would be exploited to its optimum and with its exploitation and usage the builder and developer can construct building/s comprising of units and flats which can be sold in the open market. The consideration for this agreement is strictly a sum payable in money so also certain number of units or Flats to be handed over to the owner. The cost of construction and other charges are defrayed or reimbursed by the promoter or builder by selling units or Flats other than those reserved for the owner of the land, in open market at the price which it commands on the given date.

(iii) It is also clear from the provisions of law that it is not necessary that any or all the Flats should be ready or the building itself should be completely constructed and fit for occupation. The Flats in the buildings under construction can also be sold and the agreement for sale with individual Flat takers can provide for appropriate stipulation with regard to payment of money and consideration. This is agreed to be paid and collected slabwise. The Flat taker, therefore, knows at what stage he has to pay the amount and if he has to pay the amount in toto by the stage, namely, construction of a particular floor, located on which the Flat agreed to be sold to him is constructed, then, full payment would be made by that time.

(iv) However, the obligation that is carved out by the statute goes beyond this contractual stipulation between the promoter/developer and the Flat purchaser. The law enacts a regulatory mechanism so that there is enough safeguard and protection for such Flat takers and unit purchasers which would ensure to them a title in the property. The title in the building has to be conveyed together with the rights to the land beneath it.

(v) The land beneath and appurtenant to the building therefore enables the building owner, namely, a cooperative housing society or a company to enjoy the fruits of the development. When housing accommodation is scarce and there is acute shortage, private participation for removal of this shortage or scarcity is encouraged by the State, but at the same time the Legislature has ensured that there are safeguards and inbuilt protection to the Flat purchasers else they could be exploited by builders and developers. There are often complaints and cases of unscrupulous builders and developers fleecing and cheating Flat purchasers.

(vi) Therefore, a complete mechanism till conveying of the property is put in place. Prior thereto, it is the promoter who must form the legal entity, namely, a cooperative housing society or a company. It is towards that end that he has to hold on to the property and the money for complete discharge of his eventual duty and function. Until that stage is reached, he has to maintain, safeguard and protect the property. He has to look after the daytoday wear and tear. Therefore, when he maintains the structure or repairs it, he is not rendering a taxable service in the sense envisaged by the Financial Act, 1994. If one looses complete focus or sight of the backdrop in which the so called service is rendered, then, the conclusion as erroneous and suggested by the Revenue will be reached.

(vii) The deposit or the monies themselves are held and appropriated towards payment of taxes, etc., popularly known as outgoings. The building and the Flats therein has to stand intact till all the Flats or units are sold and the statutory obligations are fully discharged. This is not a service of the nature understood by Section 65 (64) of the Finance Act, 1994. It is not a contractor simplicitor of maintenance of immovable property. It is not as if there is a existing building comprising of Flats, fully occupied, the maintenance and upkeep of which is handed over under a contract. It is a statutory obligation superimposed on a contract to sell a Flat/unit in a building to be constructed on a piece or parcel of land. That cannot be confused with a taxable service as defined under the Finance Act, 1994. The day to day upkeep, maintenance and repair is till the statutory duty is fully performed as noted above.

(viii) True that while defining the term “Service” in the Consumer Protection Act, 1986, the Legislature did not exclude construction or building activity and therefore provided that the definition under that {Section 2(o)} means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or loading or both, and by amendment housing construction is also included in the inclusionary part of the definition.

(ix) We are not concerned with the definition of service under the Consumer Protection Act, 1986 and that would not control the provisions of the Finance Act, 1994, for the simple reason that interest and rights of a consumer are protected and safeguarded by law so as to enable him to complain about deficiency and defect in the service by approaching the Forum under the Consumer Protection Act, 1986 and that law has a distinct objective and purpose.

(x) As noted by the Hon’ble Supreme Court in the case of Lucknow Development Authority Vs. M.K. Gupta, reported in AIR 1994 SC 787, the building and construction activity is a service covered by the expression Service as defined in the Consumer Protection Act, 1986 but that law is not a taxing or fiscal statute. Hence, that definition is of no assistance in construing similar expression in the Finance Act, 1994. The backdrop, setting and the context in which the word or expression and its definition appears is thus different. We are concerned here with a taxable service. The service of maintenance, management or repair, rendered by any person to any other person is a taxable service but in the context and backdrop in which the issue arises before us, we do not think that a taxable service is rendered.

(xi) The Revenue does not wish to take into consideration the background in which buildings are maintained and till they are conveyed with complete title to even the land beneath. Thus, the provisions of Sections 5 and 6 and eventually the further provisions right upto Section 13 of the MOFA would make it clear that builder and developer maintains and repairs the property till it is conveyed or the title in the same is conveyed to the Flat purchasers or the legal entity which would ultimately be formed by him.

(xii) Thus, a cooperative housing society or a company would have to be formed of all those Flat purchasers who have purchased the Flats prior to or under construction, namely, subsequently purchased Flats. The completion of the building or it being rendered fit for occupation is one of the duties and obligation of the builder and promoter under this law. For them to be conveyed he has to maintain the property. His liability is in terms of the statute itself. It is towards that end that money is collected and paid over to the statutory authorities in the form of charges and taxes as it is the builder’s obligation to collect these amounts from individual Flat takers and make it over to these authorities.

(xiii) After formation of the legal entity, the obligation ceases and it is taken over by the cooperative housing society or the company. Until that takes place, the promoter continues to be liable. If this aspect is ignored, then, the narrow or restricted construction placed on the provision by the Revenue can be accepted. The tax then can be justified on the ground that it is a taxable service provided by the builder.

(xiv) However, if all this has been seen not de hors the MOFA by the Tribunal, then, it has not committed any error of law apparent on the face of the record, or perversity. It has construed the definition of the above provision consistent with the provisions of MOFA and mindful of the same. When such is the exercise undertaken by the Tribunal, we do not think that its conclusions are so vitiated or perverse so as to enable us to interfere therewith in our further appellate jurisdiction.