SHAHID MASOOD MANZAR, CHAIRMAN.---- The titled appeal has been filed agitating its compulsory registration through the Order under reference No.C.No.BTB/Best/Comp.ST/Samama/27 dated 07.02.2019 passed by learned Commissioner Inland Revenue, BTB Zone, Islamabad.
Messrs Samama Star Construction, herein after referred to as 'the Appellant' , is a partnership firm registered under Section 58(1) of the Partnership Act, 1932 vide certificate of Registration No. RF/ICT/200056 of 2015. The Appellant purchased land/immovable property in the name of the registered partnership firm for use as a commercial project and subsequently selling the constructed units (shops and apartments) to various buyers.
The Department, alleged that its activities come under the purview of taxable activities as defined under Section 2(35) of the Sales Tax Act, 1990 (the Act) and in terms of the provision of taxable services under the Islamabad Capital Territory (T ax on Services) Ordinance, 2001.
The Appellant upon being served upon a show-cause notice, was subsequently compulsorily registered vide order C.No.BTB/Best / Comp.ST Reg/Samama/27 dated February 02, 2019 under Section 14 of the Act read with Rule 6 of the Sales Tax Rules, 2006 and the Ordinance, with immediate effect. According to the order the Appellant was allegedly involved in the following taxable services: S. No.Description PCT Heading Rate of Tax 05 Construction Services 9824.0000 and 9814.20005% subject to the condition that no input tax adjustment or refund shall be admissible.
06 Services provided by property developers and promoters (including allied services) excluding the actual purchase value or documented cost of land9807.0000 and respective sub- headings of heading 98.14Rs. 100 per square yard for land development and Rs. 50 per- square feet for building construction.
21 Services provided by architects, town planners and interior decorators9814.1000 9814.9000Sixteen percent.
2. The Appellant upon receiving no relief from the office of learned CIR, Islamabad and being aggrieved and dissatisfied with the treatment meted by the learned cm, Islamabad filed the instant appeal on following grounds: - GROUNDS
1. The Order of the Commissioner Inland Revenue (BTB Zone) Islamabad (Hereinafter referred to as 'CIR") is bad in law and on facts of the case.
2. That the CIR has passed the order without understanding the nature of business of the appellant that appellant is involved in the construction on its own land and is not providing any services.
3. That the appellant is not providing any services or performing any taxable activity under the Ordinance. The appellant is selling apartments, offices and shops on its own construction under two projects in Gulberg Greens, Islamabad, whereby high rise buildings are constructed on the land owned by the appellant or through JV with partners of the appellant. After such construction the offices, apartments and shops are being sold.
4. That constructing building 'on its own' and selling the same is not a services under the ordinance and therefore cannot be regarded as a taxable service under the Ordinance.
5. That the Commissioner has bulldozed the order of Honorable Sindh High Court on the same grounds and on the same nature of issue. The officer is not justified for such brutal treatment with the direction of Honorable Sindh High Court.
6. For further clarification regarding sales applicability on the appellant reliance is placed on the following judgment of Hon'ble High Court of Sindh.
7. Judgement of Hon'ble High Court of Sindh.
The Honorable has relied on the case Magus Construction (Pvt.) Ltd. and another v. Union of India and others (2009) 3 GL T 161 a part of which is reproduced as follows: "48. In the light of what has been laid down in the catena of decisions referred to above, it becomes clear that the circular , dated August 1, 2006, aforementioned, is binding on the department and this circular makes it more than abundantly clear that when a builder , promoter or developer undertakes construction activity for its own self, then, in such cases, in the absence of relations hip of "service provider" and, "service recipient", the question of providing "taxable service" to any person by any other person does not arise at all. In the present case too, the materials placed by the writ petitioners clearly show that the construction activities, which the petitioners have been undertaking, are in respect of the petitioner's own work and it is only the completed construction work, which is sold by the petitioner -company to the buyers who may have made agreements for sale before the construction had actually started or during the progress of the construction activity or at the end or completion of the construction activity . Any advance, made by a prospective buyer or deposit received by the petitioner -company is against consideration of sale of the flat building to such prospective buyer and not for the purpose of obtaining "service" from the petitioner -company ."
3. During the course of the hearing, the learned AR of the Appellant while pleading the case put forth the fact that during the course of the proceedings against the show-cause notice for compulsory registration, based on which the impugned order was served, no heed was paid to their contentions by the of fice of the Respondent.
The learned AR of the Appellant explained the relationship of the Ordinance with the Act and how the two are simultaneously used. He has submitted that the provisions of the Act related to registration and compulsory registration are applied mutatis mutandis with that of the Ordinance. In this regard he has referred Rule 6(1) of the Sales Tax Rules, 2006 (the Rules) which is being quoted as under: Quote "If a person, who is required to be registered under the Act, does not apply for registration and the Commissioner Inland Revenue or any other officer, as may be authorized by the Board, after such inquiry as deemed appropriate, is satisfied that such person is required to be registered, he shall issue notice to such person in the Form STR-6." Unquote According to the learned AR before registering a person firstly it has to be considered as to "who are the persons required to be registered under the Ordinance read with the Act?"
The learned AR of the Appellant submitted that the answer lies in the provisions of Section 14 of the Act which is applied mutatis mutandis to the Ordinance . He whilst quoting the provision of the aforementioned section reiterated the fact that there are two essential cond itions for a person to be liable to be registered under the Ordinance read with the Act. The two conditions being, (Firstly ) provision of taxable services in the course or furtherance of (Secondly) taxable activities .
He has further submitted that, Taxable Activity by definition under Section 2(35) of the Act means any economic activity carried on by a person whether or not for profit. Hence, any person carrying out any sort of economic activity be it in the nature of trade, service or otherwise is said to be involved in a taxable activity . However , it is not just merely the involvement of a person in a taxable activity which renders them liable to be registered under the Ordinance/Act, it is the provision of "taxable service" in the course of a taxable activity that renders a person liable to be registered . Taxable services under the Ordinance are those services which have been listed under the schedule to the Ordinance.
He has in this respect drew our attention to the three services listed in the Sched ule to the Ordinance which the Appellant was allegedly said to have been providing in the impugned order . The list of those services are reproduced in the table below: S.No. Description PCT Heading Rate of Tax 05Construction Services 9824.0000 and 9814 . 20005% subject to the condition that no input tax adjustment or refund shall be admissible.
06Services provided by property developers and promoters (including allied services) excluding the actual purchase value or documented cost of land.9807.0000 and. respective sub- headings of heading 98.14Rs. 100 per square yard for land development and Rs.50 per square feet for building construction.
21Services provided by architects, town planners and interior decorators.9814.1000 9814.9000Sixteen percent.
It was further submitted that the Department has initiated proceedings on the basis of an alleged desk audit conducted without prior selection under the law. Through the audit observations raised by the office of the Deputy Commissioner Inland Revenue (DCIR), Regional Tax Office -- Islamabad the Department has allegedly calculated sales tax under serial No. 6 of the Schedule to the Ordinance. The learned AR stated that such tax is chargeable on services provided by "property developers and promoters" and was in no way chargeable to the Appellant being involved in construction of buildings on self-owned land for resale. He has stressed on the fact that initiation of such proceedings reflected the lack of understanding of the Department regarding the Appellant's nature of business.
It is pleaded that the Appellant is a registered partnership firm and has purchased land/immovable property in the name of the registered partnership firm as a commercial project and it is subsequently selling the self-constructed units (shops and apartments) to various buyers. The land/immovable property purchased by the Appellant is Plots Nos. 20 and 21 situated in Business Avenue, Gulberg Expressway , Gulberg Greens, Islamabad. The ownership of the land used in the construction rests with Appellant. The Partnership deed, corrigendum to the same and title documents evidencing the ownership of the land in the name of the registered partnership firm were submitted before this bench.
It is contended that the Appellant; under normal practice of the construction industry and for the purpose of meeting the working capital requirements of any commercial project under construction, initiates a process of "booking" through which a space can be booked by potential buyers after payment of an initial fee along with progressive payments as per an agreed payment schedule. It is argued that apart from raising working capital, the purpose of this booking process is to reserve a space in the prospective building which is a mere contract to sell and in no way creates a right to the ownership of this space i.e. the ownership of the land as well as the building remains with the Appellant until it is transferred through the execution of a sale deed.
According to the learned AR, the core differences between a "sale agreement " and an "agreement to sell" is that the process of booking is an "agreement to sell" which in no way transfers the risk and rewards to the property to the prospective buyer unlike a "sale agreement". The comparison submitted by the learned AR of the Appellant is set out below: Sale Agreement Agreement to sell
1. When in a contract of sale, the exchange of goods for money consideration takes place immediately , it is known as Sale.1. When in a contract of sale the parties to contract agree to exchange the goods for a price at a future specified date is known as an Agreement to Sell.
2. The property or ownership in the goods immediately passes from seller to buyer .2. The property or ownership in goods transfers on some future date or subject to fulfillment of some conditions. The seller continues to be the owner of goods.
3. Sale is always of existing, specific or ascertained goods .3. An agreement to sell may relate to existing goods, unascertained goods and mostly to future or contingent goods.
4. The goods belong to the buyer even if they remain in the possession of seller . In case of4. The goods belong to the seller and the seller will suffer the loss if goods are destroyed, even if these loss or damage, the buyer will suffer the loss.are in the possession of the buyer .
It was clarified that the payments received during the process of "booking " were consideration against the "agreement to sale", under the normal course of business of the construction industry and in no way represented payments against any sort of constructi on services, Services provided by property developers and promoters (including allied services) excluding the actual purchase value or documented cost of land or Services provided by architects, town planners and interior decorators. It was submitted that where the risks and rewards of the property were not transferred to the person who has "booked" the unit, then any construction work performed on such unit would not tantamount to provision of any services to such person.
The learned AR referred the judgment of the Hon'ble High Court of Sindh reference 2018 PTD 1487 having almost identical facts of the case. In the aforementioned case law it was adjudged that the petitioners being builders, developers and involved in purchasing a piece of land and raising construction or developing structural improvements before selling the same to a private party or the public does not tantamount to provision of ANY taxable services in the course of taxable activity .
The Hon'ble High Court of Sindh whilst summarizing the above referred judgment concluded that a contract to sell i.e. booking of space in the building does not create any interest in or charge on property being sold. Moreover , where no right of ownership is established on the property then any construction/improvement on it would not tantamount to services being rendered to the persons who had "booked " a space in the property . The extracts from relevant paragraphs is reproduced below: "22.....T ypically , whenever a building project is advertised any person interested in acquiring a unit (whether shop, flat, office or apartment) "books" the same by entering into a contract with the developer .
The contract can, and does, have many clauses, of which two are relevant here: (a) the time period within which the unit is to be handed over, and (b) the total price to be paid for the same, including especially the installments in which the price is to be paid. Even more importantly and crucially for present purposes, the legal nature of this contract under the general law must be kept in mind. It is, of course, nothing other than a contract for sale within the meaning of S. 54 of the Transfer of Propert y Act, 1882 (1882 Act), more usually known as an agreement to sell. Now, it is an essential aspect of such contract, and indeed S.54 expressly so provides, that it "does not, of itself, create any interest in or charge on" the property being sold. What this means is well established and requires no elaborate reference to the case law ....
23. ....Thus when a person has "booked" a unit in a building project, that "booking" creates no right of interest therein in his favor . He may be entitled to sue the developer for specific performance of the contract (and may, in such suit, also be entitled to injunctive relief and/or other remedies) but at the stage of the agreement to sell, there is no interest in the property itself. This is a fundamental rule of the general law in respect of immovable property....While a residential or commercial unit is being constructed the matter is still at the stage of an agreement to sell. The question therefore is this. Can there be provision of services by way of, or for, construction of a unit, to the person who has "booked" the unit, during the period of the agreement to sell, i.e. when as a matter of law he has no interest in the unit? Section 3 of the Sindh Sales Tax on Services Act, 2011 provides that a taxable service must be provided in the course of an economic an activity as meaning any activity carried on by a person that involves or is intended to involve the provision of services to another person. Here the activity is carrying on the construction must involve or to be intended to involve the provision of services by the developer or builder to the person who has booked the unit. But, such activity is in respect of immovable property . More importantly , it is not merely on immoveable property; the nature of the activity is the creation of the immoveable property itself (the unit agreed to be sold). While this activity is being carried on, as a matter of law the person who has booked the unit has no interest in the said property . Can it be said in any, meaningful sense that he is being provided services within the meaning of the Sindh Sales Tax on Services Act, 2011 In our view , the answer to this question must be in negative ..."
It is finally held by the Hon'ble High Court in this case that: "44. In view of the foregoing, we hereby quash the notices and orders impugned in the petitions and restrain the respondents from taking, or continuing with, any action or proceedings in terms or in respect thereof......"
In view of these submissions, the learned AR requested to allow the appeal.
4. The learned DR on the other side on his turn supported the impugned orders of the officers below . The learned DR while defending the treatment afforded by the department stressed upon the point that the Appellant has not put forward any such arguments at the time of registration. He has, therefore, requested to reject the appeal.
5. We have heard the learned representatives from both the sides and have perused the impugned orders, the relevant provisions of law and the case law referred. After perusal of the precedent set by the Hon'ble Sindh High Court in the aforementioned judgment, we are of the view that it is sufficiently clarified the matter under appeal.
After perusal of the same, we have observed that it would be illogical to state that the construction and development carried out by the Appellant for a "booked " unit or only on the basis of an "agreement to sell" to be a taxable service.
In view of the above reproduced arguments and the judgment of the Hon'ble High Court of Sindh reference 2018 PTD 1487 , we feel no hesitation to quash the order of the learned CIR which has illegally been passed to compulsory register the Appellant and obviously have no sanctity in the eyes of law. The Appellant's registration be cancelled and no adverse inference regar ding collection of any sales tax, default surcharge or penalty be drawn on the Appellant.
6. Ordered accordingly .