The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad has held that construction of individual residential houses on independent plots cannot be subjected to Service Tax under the category of “Construction of Complex Service” unless the Department establishes that the statutory requirements of a “Residential Complex”, including common areas and specified common facilities, are satisfied.

The Bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has observed that  the nature of the individual residential unit and fulfilment of the statutory ingredients constituting a residential complex were material considerations for determining Service Tax liability.

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The first appeal concerned the financial year 2011-12, in which a Service Tax demand of ₹53,21,555, along with interest and penalties, had been confirmed under the category of Construction of Complex Service.

The second appeal related to financial year 2010-11. In that proceeding, a Service Tax demand of ₹8,32,635 had been confirmed along with interest under Section 75 and penalty under Section 76 of the Finance Act, 1994. The Commissioner (Appeals) subsequently upheld that demand.

Thus, the two proceedings involved Service Tax demands aggregating to approximately ₹61.54 lakh, apart from applicable interest and penalties.

The department’s case was that the company had undertaken construction of residential units forming part of a residential complex and was consequently liable to Service Tax under the taxable category of Construction of Complex Service.

The assessee disputed this classification. It contended that the houses had been constructed on independent plots for individual purchasers for their personal use and that the essential statutory requirements necessary for treating the development as a “Residential Complex” under Section 65(91a) of the Finance Act, 1994 had not been fulfilled.

The appellant further argued that roads and open spaces forming part of the layout were ultimately handed over or gifted to the Greater Visakhapatnam Municipal Corporation (GVMC). According to the appellant, there was no evidence demonstrating that it had constructed a residential complex possessing the common areas and common facilities contemplated by the statutory definition.

It was also brought to the Tribunal’s attention that for an earlier period from October 2008 to September 2009, a refund of Service Tax amounting to ₹11,93,276 paid by the same appellant had been allowed by the Commissioner (Appeals) and subsequently sanctioned by the original authority.

Examining Section 65(91a), CESTAT observed that the definition applicable during the relevant period contemplated a “Residential Complex” comprising more than 12 residential units, a common area and one or more specified common facilities, situated within premises approved by the competent authority.

The Tribunal therefore emphasised that the mere construction of a number of residential houses would not by itself establish the existence of a taxable residential complex unless the ingredients prescribed under the statutory definition were demonstrated.

On the facts of the case, the material before the Tribunal showed that the appellant had constructed individual houses on independent plots for the respective purchasers. The roads and open spaces had also been handed over to the municipal authority.

Significantly, CESTAT found that the Department had failed to bring sufficient evidence on record establishing the existence of common areas and common facilities belonging to a residential complex in the manner contemplated under Section 65(91a).

The Tribunal referred to the ruling in Macro Marvel Project Ltd. v. CST, Chennai, where it had been held that construction of individual residential houses does not fall within the taxable category merely because several such houses are constructed in a common layout.

CESTAT noted that the principle had subsequently been followed in several decisions.

It also referred to Commissioner of Central Excise, Bengaluru-I v. Alliance Infrastructure Projects Pvt. Ltd., concerning construction of independent residential houses or villas and the applicability of the definition of “Residential Complex” under Section 65(91a).

The Bench further referred to a series of decisions, including CSK Realtors Ltd., Priyadarshini Constructions, Jay Pee Enterprises, A.S. Sikarwar, Arihant Construction, Vinod Kumar Goyal, Pragati Edifice Pvt. Ltd., Citilights Properties Pvt. Ltd., SMS Gardens Pvt. Ltd. and Silver City Construction Ltd. The principle emerging from these decisions was that the Department must establish the statutory ingredients of a residential complex before fastening Service Tax liability under Construction of Complex Service.

The contracts in question involved construction together with the supply or transfer of material. The Tribunal observed that insofar as such arrangements were in the nature of composite works contracts, their classification and taxability had to be examined under the statutory provisions governing Works Contract Service.

The Bench held that a demand raised simply under Construction of Complex Service could not be sustained without first addressing the true nature of the composite contracts.

The observation assumes significance because classification of the underlying service was required to precede the fastening of tax liability upon the assessee.

The Tribunal separately examined the Department’s invocation of the extended limitation period.

It noted that the Department had been issuing periodical show cause notices to the same appellant for the same activity. The first proceedings covered 2006-07 to 2009-10, followed by proceedings for 2010-11 and another proceeding for 2011-12.

Consequently, the nature of the appellant’s activities was already within the Department’s knowledge.

CESTAT held that this circumstance militated against allegations of suppression or wilful misstatement for the purpose of invoking the extended limitation period wherever such extended period had been invoked.

Another factor considered by the Tribunal was the fact that the Commissioner (Appeals) had himself granted a refund to the appellant for an earlier period involving the same activity.

CESTAT observed that this demonstrated that the issue was capable of differing interpretation.

Accordingly, the Tribunal concluded that the ingredients required for imposing penalties on the ground of deliberate tax evasion were also absent.

Ultimately, CESTAT held that the Department had failed to establish that the individual residential houses constructed by the appellant satisfied the statutory ingredients of a “Residential Complex” under Section 65(91a) so as to attract Service Tax under Construction of Complex Service.

Consequently, the Tribunal held that the Service Tax demands raised in both appeals could not be sustained.

The Bench therefore set aside the demands along with interest and penalties and allowed both appeals with consequential relief in accordance with law.

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