The Supreme Court on Tuesday ruled that the sale of immovable property, by itself, does not amount to a “service” under the Finance Act, 1994, and is therefore outside the scope of service tax, a verdict which experts believe not only seeks to preserve the federal balance but also shields genuine land-sale transactions from service-tax exposure.

A bench of justices JB Pardiwala and Sandeep Mehta delivered the ruling while dismissing an appeal filed by the Commissioner of Service Tax, New Delhi, against M/s Elegant Developers, a Prayagraj-based partnership firm.

The revenue department had contested a 2019 order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which had quashed a tax demand exceeding ?10 crore.

The department had claimed that Elegant Developers had rendered taxable “real estate agent” services to Sahara India Commercial Corporation Ltd (SICCL) in connection with the purchase and development of land in several states.

The firm, however, said that its dealings with SICCL involved outright sale and transfer of land, not advisory or brokerage functions. Between 2002 and 2005, the parties executed three memoranda of understanding (MoUs) for the procurement of land in Rajasthan, Gujarat, and Haryana. Under these, Elegant Developers undertook to identify, consolidate, and transfer land parcels to SICCL at a fixed per-acre rate, bearing all financial risks associated with price variation.

Following an investigation, the Directorate General of Central Excise Intelligence (DGCEI) issued a show-cause notice demanding ?10.28 crore in service tax, alleging suppression of facts and classifying the firm as a “real estate agent”.

The Commissioner confirmed the demand in 2013, but the CESTAT later overturned the order, holding that the transactions were plain sales of land.

Upholding the tribunal’s reasoning, the Supreme Court examined the contractual terms and statutory definitions under Sections 65(88), 65(89), and 65B (44) of the Finance Act. The apex court found that the firm had acted on its own account, assumed commercial risk, and executed registered sale deeds transferring title, activities expressly excluded from the definition of “service”.

“These transactions were not undertaken for service charges, commission, agency or consultancy but were plain and simple transactions of sale of land, which are expressly protected under the exception clause to the definition of ‘service’,” the court observed.

The bench also rejected the revenue department’s attempt to invoke the extended limitation period, finding no evidence of fraud or wilful suppression. The court reiterated that non-payment of tax, absent intent to evade, does not justify the extended recovery period under Section 73(1) of the Finance Act.

Concluding that the CESTAT’s findings were correct, the Supreme Court dismissed the appeal, affirming that transactions amounting to transfer of title in land fall wholly outside the ambit of service tax.

Experts said after the judgment, real-estate players and land-banking entities can breathe easier about old service-tax disputes.

 “The judgment fortifies the principle that substance must triumph over label-- if a transaction walks and talks like a sale, it cannot be taxed as a service. It also disciplines the revenue’s enthusiasm to stretch tax law beyond its natural meaning. The ruling brings long-needed clarity, in the eyes of law, selling land is business, not babysitting,” Rishabh Gandhi, founder of law firm Rishabh Gandhi and Advocates, said.

SR Patnaik, partner (head-taxation) at Cyril Amarchand Mangaldas, noted that the decision preserves the federal balance.

“Levy of tax on land or building is a domain that constitutionally belongs to the states. It preserves the federal balance; one level of government cannot encroach upon another’s field,” he said.

Yash B Joglekar, an advocate practising in Bombay High Court, said that by reaffirming that conveyance of property is a transfer in rem, not a rendition of service inter partes, the court “restores the fiscal boundary between Central and State jurisdictions”.

 “Practically, the ruling shields genuine land-sale transactions from service-tax exposure and prevents overlapping levies with stamp-duty regimes, bringing long-overdue certainty to real-estate taxation,” he said. 

Neeraj K Mishra, executive director at NCR based Ganga Realty said that the Supreme Court’s clarification would bring much-needed certainty and relief to the real estate sector. 

Mohit Mittal, chief executive officer (CEO) of realty services company Mores added that recognising the transfer of property rights as a sale and not a service removes ambiguity and prevents unnecessary tax burdens.

 “This decision strengthens buyer confidence, encourages fair pricing and promotes stability on property transactions,” he said.