The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that the purchase, development and subsequent sale of land on a principal-to-principal basis cannot be subjected to service tax under the category of “Real Estate Agency Services,” while also rejecting the Department’s attempt to revalue works contract services by invoking the deemed valuation provisions.
The bench of P. A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) has observed that the assessee was engaged in the sale of immovable property rather than rendering agency services and that the Revenue had wrongly sought to tax the margin earned on land transactions as consideration for services.
The appellant/assessee, a partnership firm engaged in real estate development, had entered into agreements with The Jnanaganga House Building Co-operative Society Ltd. for procuring agricultural land, obtaining conversion to residential use, developing layouts, and ultimately transferring the developed land to the society. Since partnership firms were barred under the Karnataka Land Reforms Act from purchasing agricultural land during the relevant period, the firm acquired the land through a Memorandum of Understanding and power of attorney arrangement with an individual who held the land in trust for the firm.
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The Department nevertheless treated the arrangement as a taxable service rendered as a real estate agent and demanded service tax along with interest and penalties.
The assessee argued that the transactions constituted outright purchase and sale of immovable property and not agency services. It emphasized that it acquired the land at its own cost, bore the expenses for land conversion and layout development, and transferred ownership to the cooperative society on a principal-to-principal basis. It also pointed out that its audited financial statements reflected income from sale of land rather than commission income, demonstrating the absence of any agency relationship. The appellant relied heavily on the Supreme Court’s ruling in CST v. Elegant Developers, which clarified that direct transactions involving sale or purchase of land do not amount to services rendered by a real estate agent.
Accepting these submissions, the Tribunal observed that the Department’s sole basis for invoking Real Estate Agency Service was that the land had initially been purchased in the name of an individual instead of the partnership firm. The Bench held that this arrangement merely complied with the restrictions imposed by the Karnataka Land Reforms Act and did not alter the true nature of the transaction.
The department found no evidence that the appellant had rendered any service as an intermediary or agent or had earned any commission. Instead, the Revenue had incorrectly treated the difference between the purchase price of the land and the sale consideration as taxable service charges. Since none of the statutory ingredients defining a real estate agent were satisfied, the demand under this category was set aside.
The Tribunal also examined the dispute regarding valuation of works contract services. The Department had alleged that the appellant wrongly paid service tax on only the actual labour component under Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006, and instead ought to have paid tax on 40% of the gross contract value under Rule 2A(ii). According to the appellant, it had correctly discharged VAT on the value of goods transferred during execution of the works contract and paid service tax only on the labour and service component, consistent with Rule 2A(i).
The Tribunal found merit in the appellant’s contention, noting that the Department had selectively picked only those invoices where service tax had been paid on a 30% labour component while ignoring invoices where tax had been paid on labour values exceeding 40%. Such selective treatment, the Bench observed, amounted to an impermissible “pick-and-choose” approach.
The tribunal held that Rule 2A(ii), which provides for deemed percentages, can be invoked only when the actual value under Rule 2A(i) cannot be determined. Since the appellant had maintained records identifying the value of goods and services and had already paid VAT on the goods portion, there was no justification for rejecting Rule 2A(i) and applying the deemed valuation mechanism. Accordingly, the differential service tax demands on works contracts were quashed.
However, with respect to Goods Transport Agency services, the Tribunal noted that the appellant had already paid the service tax liability during departmental audit and had not challenged that demand. Consequently, it confirmed the tax liability relating to GTA services.
The Tribunal partially allowed the appeal relating to the period October 2010 to July 2013 by sustaining only the nominal demand pertaining to GTA services while setting aside the remaining service tax demands and all penalties. The other two appeals, covering the subsequent periods from August 2013 to June 2017, were allowed in full, granting complete relief to the appellant.
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