These services were first brought in the service tax net with effect from June16, 2005. The issue of charging service tax on builders/developers selling residential units first cropped up when the Director General of Service Tax (DGST) issued a circular in this regard, based on the Supreme Court's judgment in the K. Raheja Developers case. In this case, the Apex Court had held that where a builder/ developer sells a flat under construction for a consideration to be received in installments, such a transaction is a works contract and hence chargeable to VAT. The notable point is that this case was unrelated to service tax. However, based on the ratio of the above case, the DGST issued a circular stating that as sales of residential units amounted to works contracts and since works contracts also involved services, such contracts were chargeable to service tax under the heading of residential complex construction services.
The above DGST circular was challenged in a writ in the Bombay High Court. While the case was pending with the Court, the CBEC issued a clarification stating that where the builder, promoter or developer builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of such a residential complex, the contractor would be liable to pay service tax on the gross amount charged for the construction services provided to the builder under