By Ahsan Mehmood & Maria Khan
Association of Builders and Developers of Pakistan (ABAD) and others v. Province of Sindh and others is a landmark recent judgment by the Honourable Sindh High Court (“the Court”), which accepted various constitutional petitions filed by the persons, who were the part of the construction industry and had challenged the levy and demand of provincial sales tax by the Sindh Revenue Authority under the provisions of the Sindh Sales Tax on Services Act, 2011 (the “Act”). The issue before the Court was to decide whether or not petitioners were engaged in any such business which can be termed as “services” under the Act and hence taxable under the provisions of the Act.
Kinds of Property Developers or Promoters
The Court divided the property developers or promoters into three categories: (a) property developers or promoters (falling under Tariff Headings 9807.0000 & 9814.3000) providing services for construction of residential or commercial units, (b) property developers or promoters (falling under Tariff Headings 9807.0000 & 9814.3000) providing services for development of purchased land for conversion into residential or commercial plots; and (c) persons providing “Construction Services” falling under Tariff Headings 9824.0000.
The main stance taken by the Petitioners before the Court was that during the course of their business in construction industry, they sometimes acted as builders, other times as developers and from time to time as both. As builders, they buy a piece of plot/land, raise construction thereon (multistory building or project), and then sell the units (flats, offices, etc.) to general public. As developers they buy a piece of land, develop it by creating infrastructure by way of roads, utilities etc. thereon, dividing it into plots and then sell the same to general public.
They further stated that in all the aforesaid situations, they were engaged in the business of sale of land/ immoveable property to general public, which business cannot be termed as a “service” much less a taxable service chargeable to tax under the provisions of the Act and is also outside the provincial purview and domain.
Observations made by the Court
The Court at the very outset observed that since “we are here concerned with only immoveable property, therefore, the question whether any services are, or are not, being rendered revolves around the immoveable property only”. The Court further observed that “under the general law immoveable property is subjected to various rules that are sometimes peculiar to it and this aspect had a material bearing on the outcome of the petitions”. The Court accepted the stance taken by the petitioners on the basis of following analysis.
(1) Property Developers or Promoters Providing Services for Construction of Residential or Commercial Units
While dealing with the first category of the petitioners, the Court held that when a building project is advertised by a developer, any person acquiring a unit books the same by entering into a contract with the developer. The legal nature of such contracts is nothing other than a contract for sale (agreement to sell) within the meaning of Section 54 of the Transfer of Property Act, 1882 (“the TPA”), so it does not, of itself, create any interest in or charge on the immoveable property being sold and the person who has booked the unit/flat has no interest in the unit during the period of agreement to sell.
Therefore, the question before the Court was that 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 agreement to sell, i.e., when as a matter of law he has no interest in the unit?. The Court after discussing the relevant provisions of the Act with reference to the provisions of the TPA answered the same in negative by holding that the construction of residential or commercial unit does not amount to, or involve, any services being provided by the developer to the person who booked the unit and therefore, is not taxable under the provisions of the Act.
(2) Property Developers or Promoters Providing Services for Development of Purchased Land for Conversion into Residential or Commercial Plots
With respect to the second category of petitioners, the Court held that in this typical case,the developer or promoter buys a piece or tract of land, develop it by creating infrastructure by way of roads, utilities, etc. thereon, and then sells the plots to general public. The contract with the person agreeing to buy the plot would be an agreement to sell and, hence, no interest is created on the property during the period of agreement to sell. The entire “economic activity” would constitute the provision of taxable service falling within the same period and, therefore, no taxable services are provided by them.
(3) Persons Providing Construction Services
With regards to the third category of the petitioners providing “Construction Services” falling under Tariff Headings 9824.0000, the Court, firstly, held that this tariff heading shall not apply to any activity in which relationship between the service provider and recipient is governed by a contract of sale in terms of Section 54 of the Transfer of Property Act, 1882.
The Court further held that in order to apply the aforesaid tariff heading two conditions must be fulfilled (a) activity must be regarded as a service directly and materially related to the construction of immoveable property and (b) the activity must not come within the scope of other two tariff headings.
“Dominant Intention” of the Business
In order to decide whether a particular contract or activity falls within the definition of “service” under the Act, the “dominant intention” test has to be applied to determine the question that whether the dominant factor or essence of the transaction is the sale of material or of services. The Court noted that if the dominant intention and purpose of the contract is the provision of building services as opposed to the sale or purchase of building materials, the contract constitutes the provision of “construction services” and otherwise not.
Construction Contract is a Multi-Dimensional Contract
The Court noted that a construction contract is a multi-dimensional contract in the sense that it may contain certain elements which constitute “construction services” and others that do not. For example, when the owner may engage the contractor on an omnibus basis, engaging the later not only to undertake the actual construction but also to procure the necessary materials or supplies, etc., required for the same. Under such situation, i.e., if the contract or the activity to which Tariff Heading No. 9824.0000 is sought to be applied, the “dominant intention” test can be resorted to in order to determine whether the nature is such that it can be regarded as the provision of “construction services”.
The Court concluded that property developers or promoters who are engaged in the business of selling of units and/or plots on booking and/or allotment after construction of residential or commercial units and/or development of land into residential or commercial plot are not providing any taxable services to the person who has “booked” a unit and/or “allotted” the plot and, hence, are not liable to pay sales tax to the province of Sindh under the provisions of the Sindh Sales Tax on Services Act, 2011.
On the basis of this conclusion and analysis made by the Court, following principles can be derived:
– Firstly, for any activity to be considered taxable under the Sindh Sales of Services Tax Act, 2011, it must fulfil two conditions: firstly it should be regarded as a service directly and materially in relation to the construction of immoveable property as such and second, it cannot, more naturally and properly, be regarded as coming within the scope of some other tariff heading.
– Secondly, in order to decide whether a particular business falls within the scope of services, the “dominant intention” test is to be applied. This will determine the question whether the dominant factor or essence of the transaction is the sale of material or services.
– Thirdly, the legal nature of any contract with the person agreeing to buy the plot would be considered as an agreement to sell under the Transfer of Property Act, 1882 and hence he/she cannot be said to be providing services within the meaning of the Sindh Sales Tax on Services Act, 2011.