The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has ruled that service tax cannot be imposed on construction undertaken under separate agreements with individual purchasers for completing residential units intended for their personal use.
The bench of A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) that a building or independently identifiable project containing 12 or fewer residential units would fall outside the scope of “Construction of Residential Complex Service” if it does not satisfy the statutory definition under Section 65(91a) of the Finance Act, 1994.
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The dispute arose from construction activities undertaken by the appellant/assessee under development agreements with landowners and separate agreements with individual purchasers.
A show cause notice proposed a service tax demand of ₹2.20 crore for the period from October 1, 2007 to March 31, 2013, along with interest and penalties.
The Commissioner of Central Excise, Customs and Service Tax, Visakhapatnam, subsequently confirmed a demand of approximately ₹80.28 lakh under “Works Contract Service” while dropping the remaining demand of approximately ₹1.40 crore.
The construction company challenged the confirmed demand, whereas the Revenue appealed against the portion of the adjudication order that had dropped the demand.
The assessee argued that although it was registered under “Construction of Residential Complex Service”, the adjudicating authority had reclassified its activities as “Works Contract Service”. It maintained that buildings having 12 or fewer residential units did not satisfy the definition of a residential complex under Section 65(91a).
It was further submitted that construction carried out under separate agreements with individual purchasers for their personal residential use was specifically excluded from the definition of a residential complex.
The Tribunal noted that the contracts involved both the supply of goods and the provision of construction services and were consequently in the nature of composite works contracts.
Referring to the Supreme Court’s decision in Commissioner of Central Excise and Customs, Kerala v. Larsen & Toubro Ltd., the Bench observed that an indivisible composite works contract could not be taxed under “Commercial or Industrial Construction Service” or “Construction of Complex Service” before June 1, 2007.
After June 1, 2007, such contracts could be taxed only under the specific category of “Works Contract Service”, provided that the applicable statutory conditions were satisfied.
However, the Tribunal clarified that the mere existence of a composite works contract would not automatically make the construction taxable. In the case of residential construction, the underlying project must also satisfy the statutory description of a “residential complex”.
The relevant definition contemplated a complex comprising a building or buildings having more than 12 residential units, together with common areas and one or more prescribed common facilities.
Accordingly, the Bench held that construction of a project or an independently identifiable building containing 12 or fewer residential units could not be taxed merely by describing the activity as a works contract.
“The special entry of Works Contract Service cannot enlarge the statutory meaning of ‘Residential Complex’,” the Tribunal observed.
The Tribunal separately examined the demand for the period before July 1, 2010.
It noted that the Explanation to Section 65(105)(zzzh), which deemed construction undertaken by a builder to be a taxable service when an amount was received from a prospective buyer before the completion certificate, was inserted with effect from July 1, 2010.
The provision created a deeming fiction and could not be applied retrospectively, the Bench held.
Relying on earlier Tribunal decisions, including Aruna Constructions, the CESTAT concluded that construction of residential flats by a builder for prospective purchasers was not liable to service tax before July 1, 2010 in the absence of the statutory deeming provision.
The demand pertaining to the period before that date was consequently set aside.
The Tribunal noted that the definition of “residential complex” excluded a complex constructed by a person directly engaging another person for designing, planning and construction when it was intended for that person’s personal residential use.
The statutory explanation further clarified that “personal use” included permitting another person to use the property as a residence, either on rent or without consideration.
In the present case, the material indicated that the assessee had initially transferred the undivided share in the land along with the partly constructed residential unit. It thereafter entered into separate agreements with individual purchasers for completing and finishing their respective flats.
The Tribunal observed that the construction and completion work was therefore carried out under individual agreements with the respective purchasers.
Referring to its earlier decision in MVV Builders, the Bench held that construction undertaken through individual contracts for completing residential units intended for the purchasers’ personal use fell within the exclusion under Section 65(91a).
It was immaterial whether the purchaser personally occupied the unit or permitted another person to use it as a residence on rent or without consideration.
The Department had not produced any evidence to show that the purchasers acquired the flats for commercial exploitation or that the units were not intended for residential use.
The Tribunal said that the mere fact that several individual units formed part of a common development would not, by itself, defeat the personal-use exclusion where separate construction agreements had been executed with the purchasers for completing their respective residences.
It therefore set aside the service tax demand on consideration received under such individual agreements.
The Bench also considered whether service tax could be separately demanded on flats allotted to landowners under joint-development agreements.
It referred to the decision in Vasantha Green Projects v. Commissioner of Central Tax, in which the Tribunal held that a separate demand on flats allotted to landowners would result in double taxation where the value of the development rights or land was already embedded in the value of flats sold to independent purchasers and appropriate service tax had been paid on that gross amount.
The Bench clarified that this principle was subject to verification that the value attributable to land or development rights was actually incorporated into the assessable value of the developer’s share.
A blanket finding that the landowner’s share was always non-taxable, without examining the valuation adopted in the transaction, would not be correct.
In the present case, however, the adjudication order did not establish that any consideration received in kind from the landowners had escaped taxation despite the corresponding value already being included in the assessable value of the developer’s share.
In the absence of such evidence, the Tribunal held that a second levy on the landowners’ share could not be sustained and rejected the Revenue’s challenge.
The Tribunal further directed that if any amount was ultimately found taxable upon verification, the assessee must be granted the applicable statutory abatement, subject to fulfilment of the prescribed conditions.
It also accepted the assessee’s claim for cum-tax treatment. The company had maintained that it did not separately collect service tax from the purchasers.
Under Section 67(2) of the Finance Act, where the gross amount charged includes service tax, the taxable value must be calculated on a cum-tax basis.
The Bench consequently directed that any consideration ultimately held taxable should be treated as inclusive of service tax unless the Department could establish that the tax had been collected separately.
The show cause notice was issued in June 2013 for a period beginning in October 2007. A substantial portion of the demand could therefore survive only if the Department validly invoked the extended limitation period under the proviso to Section 73(1).
The Tribunal noted that the dispute involved several interpretational questions, including the classification of composite construction contracts, the effect of the Explanation inserted from July 1, 2010, the personal-use exclusion, taxation of the landowners’ share and the appropriate method of valuation.
Divergent judicial views existed on these issues during the relevant period. The insertion of the deeming Explanation itself demonstrated the interpretational nature of the controversy, the Bench said.
Relying on the Supreme Court’s ruling in Uniworth Textiles Ltd. v. Commissioner of Central Excise, the Tribunal reiterated that mere non-payment of duty does not constitute suppression. The Department must establish a deliberate act coupled with an intention to evade tax before invoking the extended limitation period.
Since the adjudication order did not identify any positive act of fraud, collusion or deliberate suppression by the assessee, the Tribunal held that the extended period was unavailable. Any surviving liability was accordingly restricted to the normal limitation period.
For the same reasons, all penalties imposed on the assessee were set aside.
The CESTAT ultimately allowed the construction company’s appeal in full and dismissed the appeal filed by the Revenue.
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