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Builders not liable to pay Service Tax on One-time maintenance charges

Written By Admin on Saturday, 7 December 2013 | Saturday, December 07, 2013

ST - Builders not liable to pay Service Tax under category 'Maintenance or Repair services' on 'One-time maintenance charges' collected from flat buyers: CESTAT

By TIOL News Service

MUMBAI, DEC 04, 2013: THE appellants are builders/developers of residential flats and various commercial complexes. They sell the residential flats to various customers over a period of time. After sale of all the flats, a Co-operative Housing Society is formed by the owners of the flats, thereafter the title of land etc. is passed on to the Flat Owners Co-operative Housing Society. The appellants are recovering a one-time maintenance deposit from each of the customers to whom they have sold the flats. The said amount is kept in a separate bank account as fixed deposit. From the interest earned on the said deposit, the appellants are expected to pay for various charges such as common electricity bill, water charges, security charges etc. After the flat owners co-operative housing society is formed, whatever balance is left in the said bank account the same is handed over to the Flat Owners Co-operative Housing Society.

The CCE, Pune-III was of the view that the appellants are required to pay Service Tax on the deposits made by various purchasers of the flats on the ground that the appellants are providing “Maintenance and Repair” service falling under Section 65(64) and Section 65(105)(zzg) of the Finance Act, 1994.

On the application for Stay, the Bench had observed thus –

"5. …The issue involved in this case is whether the activity of maintaining the immovable property which is developed by the applicants will get covered under the category of the services “Management, Maintenance or Repair services”. We find that the applicants herein had collected the amount from their customers for the purpose of maintenance of the property. The Ld. Chartered Accountant emphasis on the provisions of the Maharashtra Ownership of Flats (Regulation of promotion of construction, sale, management and transfer) Act 1963 needs to be gone into detail. We find that these provisions do cast an obligation on the builder/promoter to maintain separate account of the sums taken as advance deposit and the responsibility for payment of outgoings till the property is transferred to the proprietor. How far the provisions of the said Act, would apply to the provisions of the Finance Act, 1994, has to be gone to detail which can be done only at the time of final hearing. We also find that the issue in this case is an arguable one. Accordingly we are of the considered view that the applicants have not made out a prima facie case for complete waiver of the pre-deposit of the amount involved. The applicants have not pleaded any financial hardship."

We had reported the stay order more than five years ago as 2008-TIOL-1721-CESTAT-MUM.

The appeal was heard recently.

The Bench noted that as per the agreement submitted by the appellants, certain amounts were collected from the buyers of the flats as one-time deposit on account of the following services:-

(a)Towards maintenance and repairs of common areas and facilities;

(b) Wages of watchmen, sweepers etc.

(c) Insurance

(d) Revenue assessment

(e) All other taxes, levies, charges and cess.

(f) Electricity and water charges and deposits in respect of common electrical and water pumps and other installations.

(g) Expenses of and incidental to the management and maintenance of the said Housing societies.

Further, the sections 5 and 6 of the Maharashtra Ownership Flats (Regulation of the Promotion of construction, sale, management and transfer) Act, 1963 provide as under –

SECTION 05: PROMOTER TO MAINTAIN SEPARATE ACCOUNT OF SUMS TAKEN AS ADVANCE OR DEPOSIT AND TO BE TRUSTEE THEREFOR; AND DISBURSE THEM FOR PURPOSES FOR WHICH GIVEN

SECTION 06: RESPONSIBILITY FOR PAYMENT OF OUTGOINGS TILL PROPERTY IS TRANSFERRED.

The Bench thereafter observed -

"6.4 We also note that the appellants are not in the business of maintenance or repair service or management of immovable property. The appellants cannot be held as provider of maintenance or repair service as they are only paying on behalf of various buyers of flats to various authorities (Municipal Corporation, Revenue authorities etc.) and various service providers (such as security agency, cleaning service providers etc.) and they are not charging anything on their own. The payments are made cost on cost basis and the same is debited from the deposit account. They act only as trustee or as pure agent. When the co-operative society is formed even the deposit account is shifted to Flat Owner's Co-operative Society. We also note that this is a statutory obligation on the appellants in terms of Maharashtra Ownership Flats (Regulation of the Promotion of Construction, sale, management and transfer) Act, 1963."

Holding that held that the appellants were not providing the maintenance or repair service to the buyers of the flats, the CESTAT set aside the order of the CCE, Pune-III and allowed the appeals.

Realty bites – Some good news in the otherwise dull property market!

(See 2013-TIOL-1806-CESTAT-MUM )
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