The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has partly allowed a builder’s appeal against a substantial service tax demand arising from construction of residential flats, holding that the demand under Construction of Complex Service (CCS)/Construction of Industrial Complex Service (CICS) for the period prior to July 1, 2012 was not sustainable where the agreements with buyers were composite works contracts involving transfer of property in goods.
The bench of Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) upheld the service tax liability for the subsequent period from July 1, 2012 to March 2015, along with the applicable penalties, after finding that the appellant had collected service tax from prospective flat buyers, remained unregistered until departmental investigation began, and had not discharged the tax liability in accordance with law.
The dispute arose from the activities of a builder/developer engaged in construction of residential flats at Bhiwadi, Rajasthan. The appellant was registered for service tax under the category of “Construction of Complex Services” and had undertaken construction of three residential projects—MVL Coral, MVL Palm and MVL Indigo.
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According to the department, the builder was not merely selling completed immovable properties but was providing taxable construction services to prospective buyers by entering into agreements under which payments were linked to stages of construction. Revenue also alleged that the builder was collecting several additional amounts from purchasers, including external development charges, parking charges, power backup charges, preferential location charges, interest-free maintenance security, meter charges and sewer treatment plant charges.
Following departmental investigation and audit, the authorities worked out a service tax liability of ₹12,29,16,928 for the period from August 2010 to March 2015. The department also noted that the appellant had deposited approximately ₹1.41 crore after an audit objection, but had allegedly failed to include various amounts, including car parking charges, in the taxable value.
A Show Cause Notice dated October 16, 2015 proposed recovery of service tax along with interest and penalties. It also proposed late fee for delayed filing of service tax returns. The adjudicating authority subsequently confirmed the demand through Order-in-Original dated February 17, 2017.
The appellant contended that the transactions related to sale of residential flats under agreements with buyers, with consideration payable according to construction-linked plans. Ultimately, title in the flats was transferred through execution of sale deeds.
The appellant argued that the nature of the transactions had to be examined in the context of the law applicable during different periods because the service tax regime underwent a significant change from July 1, 2012, when the negative-list based taxation framework was introduced.
The appellant further submitted that its service tax registration was obtained only on February 13, 2013, after the investigation had commenced. It had also attempted to avail the Service Tax Voluntary Compliance Encouragement Scheme, 2013 (VCES) by declaring a service tax liability of ₹57,93,613, although the declaration was rejected because investigation was already pending.
The appellant challenged the department’s computation on the ground that the demand was based substantially on a chart extracted from an email account containing details such as allottee names, payment plans, broker details, flat areas, sale prices, payments, advances, service tax collected or waived and outstanding dues. It also disputed inclusion of several additional charges in the taxable value.
One of the central arguments advanced by the builder was that the levy of service tax could not be sustained in the absence of a proper mechanism for determining the service component in a composite transaction.
The appellant relied upon the decision of the Delhi High Court in Suresh Kumar Bansal v. Union of India, arguing that the composite agreements with flat purchasers involved both service and transfer of materials and that the department could not simply treat the entire transaction as taxable construction service without a legally sustainable method of determining the taxable service component.
The appellant also invoked the Supreme Court’s decision in Larsen & Toubro, contending that composite contracts involving transfer of property in goods were appropriately classifiable as works contracts, rather than under Construction of Complex Service.
It was further argued that the department had incorrectly included amounts relating to periods before July 2010, cancelled flats, waived amounts and flats sold after issuance of completion certificates. The appellant also relied on the relevant CBEC circulars and claimed abatement, CENVAT credit and the benefit of the composition scheme applicable to works contracts.
The department, on the other hand, maintained that the builder had been collecting service tax from prospective buyers but had failed to deposit the amount with the exchequer.
Revenue argued that from July 1, 2010, where a builder received consideration from a prospective buyer before completion of construction, the activity was deemed to constitute a taxable service provided by the builder/developer to the buyer. The department further relied upon the post-July 2012 statutory framework under which construction undertaken by a developer for a prospective buyer was treated as a declared taxable service.
A serious allegation raised by the department concerned a purported completion certificate. According to Revenue, the certificate relied upon by the appellant had allegedly been issued by D Mason’s Consortium Pvt. Ltd., a company incorporated only in April 2012, even though the certificate was dated May 11, 2010. The department stated that the company’s director denied having issued the certificate. According to Revenue, no valid completion certificate was subsequently produced.
The department therefore argued that this was not a case involving mere interpretational uncertainty. It alleged deliberate suppression of facts, failure to obtain registration and intentional non-payment of service tax, justifying invocation of the extended period of limitation and imposition of penalties.
The Tribunal first examined what it considered to be admitted facts.
It recorded that the appellant was a builder/developer constructing multi-storeyed residential flats and was entering into agreements with buyers under which payments were linked to construction milestones.
Importantly, the Tribunal noted that after July 2010 the appellant was collecting service tax from buyers because payments were being received before obtaining the completion certificate. It also noted that the appellant remained unregistered until February 13, 2013, with registration being obtained only after departmental investigation commenced.
The Tribunal further noted that the appellant had itself approached the VCES by declaring service tax liability of ₹57,93,613, although the declaration was rejected because investigation was already in progress.
On limitation, the Tribunal took a strict view of the appellant’s conduct.
It observed that the appellant was aware of its service tax liability in respect of amounts received from prospective flat purchasers, yet did not obtain registration until departmental intervention. The Tribunal also observed that the appellant had collected service tax from buyers but had not deposited it with the government.
On these facts, the Tribunal concluded that there was suppression of material facts with an intent to evade service tax, and therefore held that the extended period of limitation had been correctly invoked by the department.
The Tribunal also upheld penalties relating to delayed/non-filing of returns and the statutory penalties under Sections 77 and 78 of the Finance Act, 1994. It relied upon the principle that a deliberate act aimed at tax evasion is sufficient to justify invocation of the extended period and imposition of penalties.
The most significant aspect of the ruling is the Tribunal’s decision to bifurcate the disputed period.
The Tribunal noted that the service tax law underwent a fundamental change from July 1, 2012, when the negative list regime was introduced through Section 66D and the statutory definition of “service” was provided under Section 65B(44).
Consequently, the Tribunal examined the demand in two separate periods: 2010 to June 30, 2012 and July 1, 2012 to March 2015.
This distinction ultimately determined the outcome of the appeal.
The Tribunal examined the legislative and administrative history concerning taxation of construction of residential complexes.
It referred to earlier circulars, including Circular No. 79/09/2004-S.T. and Circular No. 108/02/2009-S.T., which had dealt with the taxability of construction activities undertaken by builders and the point at which a service could be said to have been rendered to a prospective flat purchaser.
The Tribunal noted the earlier position that construction of a building for sale, in circumstances where the transaction essentially involved sale of immovable property, did not automatically constitute provision of a taxable service.
The Tribunal then turned to the Supreme Court’s ruling in Larsen & Toubro, which clarified the treatment of composite contracts involving transfer of property in goods.
According to the Tribunal, where a construction contract was composite in nature and involved transfer of property in goods, the appropriate classification was works contract service, rather than Construction of Complex Service or Construction of Industrial Complex Service. The Tribunal noted that the Supreme Court had affirmed the principle that building contracts between a developer and buyer could constitute works contracts.
Accordingly, the Tribunal held that the demand for the period from 2010 to July 2012 under Construction of Complex Service/Construction of Industrial Complex Service could not be sustained.
It therefore set aside the demand for this period.
The outcome was different for the period beginning July 1, 2012.
The Tribunal observed that the Supreme Court’s decision in Larsen & Toubro recognized that the service element in a works contract could be subjected to service tax from July 1, 2012, either through determination of the service/labour component or under the applicable composition/abatement mechanism.
The Tribunal also referred to the principle that construction undertaken by a developer from the stage of entering into an agreement with a flat buyer until completion of construction falls within the framework of works contract taxation.
The Tribunal emphasized that after July 1, 2012, the question was no longer governed simply by the earlier classification-based regime. Activities were generally taxable unless specifically covered by the negative list or an exemption.
In the present case, the Tribunal found that the construction activity undertaken for prospective flat buyers fell within the taxable service framework. It also placed considerable significance on the absence of a valid completion certificate.
The Tribunal noted that the only completion certificate relied upon by the appellant was allegedly issued by D Mason’s Consortium Pvt. Ltd., but that entity denied having issued it.
In the Tribunal’s assessment, the absence of a valid completion certificate meant that the construction activity continued to constitute a taxable works contract activity for the relevant post-July 2012 period.
Consequently, the Tribunal held that the appellant was liable to pay service tax for the period from July 2012 to March 2015, and that the tax had not been discharged within the prescribed time even after the appellant obtained service tax registration.
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