No Service Tax Payable on Residential Construction Prior to 1 July 2010: CESTAT

The Bangalore Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT), has ruled that no service tax is leviable on construction of residential complexes undertaken by builders/developers for the period prior to 1 July 2010, even when such activities are carried out under works contract arrangements. The bench of Dr. D.M. Misra (Judicial Member) and R. Bhagya Devi (Technical Member) has disposed of two service tax appeals filed by a real estate developer against substantial service tax demands confirmed by the Commissioner of Central Excise and Service Tax, Bangalore. The appeals related to two separate periods—February 2009 to December 2009 and January 2010 to May 2010. During these periods, the appellant was engaged in construction of residential and commercial buildings on a works contract basis and was duly registered under service tax as well as Karnataka VAT laws. Relying on CBEC Circular No. 108/02/2009-ST dated 29 January 2009, the developer had stopped charging and paying service tax on residential construction projects, informing the department accordingly. The Circular clarified that where a builder constructs residential units on its own account and transfers ownership only upon completion, the activity amounts to self-service and does not attract service tax prior to 1 July 2010. However, the department issued show cause notices alleging that the benefit of the Circular was not available since the services were rendered under the category of “works contract service.” The Commissioner confirmed service tax demands aggregating to over ₹10.75 crore along with interest and penalties under Sections 76 and 78 of the Finance Act, 1994. The principal issue before the Tribunal was whether service tax could be levied on construction of residential complexes by a builder/developer, under works contract or otherwise, for the period prior to 1 July 2010. After examining the statutory provisions, Board Circulars, and a series of judicial precedents, the Tribunal held that the issue is no longer res integra. Relying heavily on earlier Tribunal decisions such as Krishna Homes v. CCE and Pragati Edifice Pvt. Ltd., and the Supreme Court ruling in Larsen & Toubro Ltd., the Bench observed that prior to 1 July 2010, construction of residential complexes intended for sale was not taxable, irrespective of whether the activity was categorized as “construction of complex service” or “works contract service.” The Explanation inserted to Section 65(105)(zzzh) by the Finance Act, 2010, which deemed such construction intended for sale as a taxable service, was a substantive and prospective amendment. Before the insertion of the Explanation, the prevailing legal position was that the builder was essentially providing service to itself, as ownership of the property remained with the builder until completion and transfer. Accordingly, the Tribunal held that the service tax demands confirmed for the period February 2009 to May 2010 were unsustainable and liable to be set aside. While granting relief on the tax demand, the Tribunal noted that the appellant had utilized accumulated CENVAT credit amounting to approximately ₹7.97 crore to discharge the disputed service tax liability during the relevant period. Since the output services themselves were held to be non-taxable, the Tribunal ruled that the appellant could not retain the benefit of the CENVAT credit availed. However, as the exact quantum of credit required to be reversed needed factual verification, the matter was remanded to the original adjudicating authority for re-determination of the credit reversal in accordance with the CENVAT Credit Rules, 2004. Case Details Case Title: M/s. Sobha Developers Ltd. Versus The Commissioner of Central Excise and Service Tax Case No.: Service Tax Appeal No. 2089 of 2011 Date: 15.01.2026 Counsel For Appellant: Syed Peeran Counsel For Respondent: M.A. Jithendra Click Here To Read Order Read More: Defence Certificates Crucial to Decide Whether Aircraft Safety Systems Qualify as ‘Parts of Aircraft’: CESTAT

No Service Tax Payable on Residential Construction Prior to 1 July 2010: CESTAT

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