The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, has set aside service tax demands totalling approximately ₹36.95 lakh against a property developer, holding that the Revenue failed to establish the factual and legal basis for taxing residential construction, sub-contract receipts and rental income.

The Bench of P. Dinesha (Judicial Member) and M. Ajit Kumar (Technical Member) also set aside the associated interest and penalties and emphasises that the Department must prove that an activity falls within the taxable service category invoked, and that doubts or missing documents cannot substitute for evidence. 

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The appellant/assessee engaged in constructing residential complexes and independent houses, challenged an appellate order dated October 12, 2015, which had upheld three service tax demands.

The Department alleged that the company constructed a residential complex comprising 14 dwelling units at Kilpauk in Chennai between June 2005 and December 2009 without paying service tax of ₹13,49,665.

It also demanded ₹21,51,555 on sub-contract and petty job receipts of ₹1,80,41,638 recorded during 2005–06 to 2009–10, up to December 2009. A further demand of ₹1,93,553 related to rental receipts of ₹16,55,800 between June 2007 and December 2009.

A show cause notice dated October 18, 2010, proposed recovery of these amounts. The adjudicating authority confirmed the demands with interest and imposed penalties under Sections 77 and 78 of the Finance Act, 1994. After the Commissioner (Appeals) rejected its appeal, the company approached the Tribunal.

A central factual dispute concerned whether the residential project comprised 12 or 14 dwelling units.

The company maintained that the sanctioned plan provided for only 12 residential units. According to it, the additional dwelling spaces identified by the Department resulted from purchasers subsequently converting the watchman room, generator room and open terrace.

The Revenue, however, relied on agreements between the landowners, developer and prospective purchasers to contend that the company acted as a contractor and constructed a complex containing 14 units.

The Tribunal observed that describing the company as either a “developer” or a “contractor” was not conclusive. The contractual arrangement and the statutory requirements governing residential complex services had to be examined.

It also clarified that the sanctioned number of units alone would not settle the issue if evidence showed that additional units were actually constructed. Equally, subsequent alterations made by purchasers could not automatically be attributed to the developer without evidence of its responsibility.

The adjudicating authority should have resolved the dispute by examining the sanctioned plan, approved building records and relevant agreements. The Tribunal concluded that the Revenue had failed to discharge its burden on this fundamental factual issue.

The Tribunal also considered the Explanation inserted into Section 65(105)(zzzh) of the Finance Act, 1994, with effect from July 1, 2010.

Relying on Krishna Homes v. Commissioner of Central Excise and the subsequent decision in K.J. Developers, it held that the Explanation expanded the scope of the taxable service and could not be applied retrospectively.

Since the construction activity in the present case related entirely to the period before July 1, 2010, liability could not be imposed merely by retrospectively invoking that provision.

The Tribunal found merit in the company’s alternative argument that the construction activity involved both the supply of materials and the provision of services.

It relied on the Supreme Court’s decision in Commissioner of Central Excise and Customs, Kerala v. Larsen & Toubro Ltd., which held that composite works contracts could not be subjected to service tax under the construction service categories before June 1, 2007, in the absence of a specific charging provision.

For the subsequent period, the Tribunal referred to Real Value Promoters Pvt. Ltd. and Jain Housing and Construction Ltd. These decisions recognised that composite works contracts could not be taxed under construction of residential complex service or commercial or industrial construction service, which covered services simpliciter.

The Revenue argued that the transaction did not qualify as a works contract because the sale deeds covered only undivided shares of land, stamp duty was paid only on the land value, and no VAT had been paid on the goods involved in construction.

The Tribunal held that these circumstances did not, by themselves, prove that the contracts involved only services. Their nature had to be determined from the contractual terms and the actual transfer of property in goods.

It also considered the show cause notice’s allowance of 67% abatement from gross receipts a relevant circumstance when examining the contracts.

Accordingly, the demand of ₹13,49,665 was set aside.

The Tribunal separately examined the demand of ₹21,51,555 on sub-contract and petty job receipts.

The Revenue contended that the company had not furnished documents showing that these receipts related to activities distinct from the residential complex construction.

The Tribunal held that the absence of supporting documents did not dispense with the Department’s obligation to establish the nature of the taxable service and the legal basis for demanding tax. It further noted that the Department had not shown that specific documents were called for under summons and withheld by the company.

The impugned order did not establish that the receipts represented consideration for services simpliciter independently taxable under construction of residential complex service.

Composite works contracts could not be brought under that category merely by allowing an abatement from gross receipts. The Tribunal therefore set aside this demand as well.

The company argued that its receipts for 2007–08 were below ₹10 lakh and that service tax had been paid on applicable receipts from December 2009 onwards.

The Tribunal observed that commercial use of the rented property did not, by itself, determine the amount of tax payable. The company’s eligibility for the small service provider exemption, its year-wise rental receipts and the tax payments it claimed to have made required verification and reasoned consideration.

The adjudicating authority had neither adequately examined these submissions nor rebutted them with cogent reasons.

Finding insufficient evidence to substantiate the demand, the Tribunal granted the benefit to the company. It also noted the relatively small tax amount and the fact that the underlying events had occurred more than a decade earlier. A remand for fresh consideration would impose a disproportionate burden, it held.

The rental service tax demand of ₹1,93,553 was consequently set aside.

The Tribunal did not separately decide the challenge to the extended period of limitation.

It held that the penalties imposed under Sections 77 and 78 could not survive and set aside the impugned order, granting consequential relief in accordance with law, if any.

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