CESTAT Orders Fresh Review of Service Tax Exemption on Residential Construction After 01.07.2010

Aditya Construction Company India Pvt Ltd Vs Commissioner of Central Tax (CESTAT Hyderabad)

M/s Aditya Construction Company India Pvt Ltd provided ‘Construction of Complex Service’ (CCS) and ‘Works Contract Service’ (WCS). The department alleged that the appellant had wrongly classified WCS as CCS and had not paid Service Tax for the period April 2008 to June 2010, while Service Tax had been paid up to March 2008 without filing ST3 returns. The department worked out short-paid Service Tax of Rs.3,25,17,745/- under WCS for the period 01.06.2007 to 30.09.2011.

The Adjudicating Authority, relying on CBEC Circular No. 151/2/2012-ST dated 10.02.2012, held that no Service Tax was leviable on Construction of Residential Complex Services (CRCS) rendered prior to 01.07.2010 and confirmed a demand of Rs.1,41,64,403/- for the period thereafter, classifying the services rendered from 01.07.2010 to 30.09.2011 under CRCS.

The appellant contended that the Show Cause Notice had proposed demand under WCS whereas the demand after 01.07.2010 was confirmed under CRCS. It also relied on Circular No. 108/2/2009-ST dated 29.01.2009 and the decision in Modi Ventures Vs CST, Hyderabad, submitting that construction intended for personal use fell within the exclusion from the definition of residential complex. The appellant further relied on Greenwood Estates Vs CCT, Secunderabad-GST [2024 (3) TMI 563 – CESTAT Hyderabad] and Modi & Modi Constructions Vs CCE, Hyderabad-II [2021 (45) GSTL 398 (Tri-Hyd)].

The Tribunal noted that the department had itself appealed against the classification under CRCS instead of WCS. It found that both appeals concerned interconnected issues and considered them together. For the period prior to 01.07.2010, the Tribunal found that the classification as CRCS or WCS did not affect the Service Tax liability, as no Service Tax was leviable on the construction activity for that period as held in the cited case laws.

For the period beyond 01.07.2010, however, the Tribunal found that the facts were not sufficiently clear regarding the applicability of an exclusion or exemption. It observed that the Commissioner had consciously classified the activity under CRCS while considering it to be part of WCS, rather than treating it as CRCS simpliciter.

The Tribunal therefore remanded the matter to the Commissioner to determine afresh the proper classification, whether WCS or CRCS, and whether any exemption or exclusion was available for the period beyond 01.07.2010. Both the departmental appeal and the appellant’s appeal were accordingly allowed by way of remand.

Background and Service Tax Dispute

The appellant was engaged in providing ‘Construction of Complex Service’ (CCS) and ‘Works Contract Service’ (WCS). Based on investigation, the department noticed that Service Tax had been paid up to March 2008, although no ST3 return had been filed, while Service Tax had not been paid for the period April 2008 to June 2010.

The department further alleged that the appellant had actually provided WCS but had wrongly claimed the services as CCS. The appellant had rendered CCS in the projects ‘Hill Paradise-I’ and ‘Green Fields’ executed on development basis during the period 01.10.2006 to 30.05.2007. Projects named ‘Eden Park’ and ‘Windsor’ were undertaken on the appellant’s own land during the period 01.07.2010 to 30.09.2011.

The department also noted that the appellant had claimed exemption of Service Tax on 67% of the value under Notification No. 01/2006-ST dated 01.03.2006 for projects executed during the period 01.10.2006 to 31.05.2007 and exemption of 75% for projects executed during the period 01.07.2010 to 30.09.2011.

Adjudication and Classification under CRCS

The Adjudicating Authority considered CBEC Circular No. 151/2/2012-ST dated 10.02.2012 and held that no Service Tax was leviable where Construction of Residential Complex Services were rendered prior to 01.07.2010. The demand for the relevant period was therefore dealt with on that basis.

For services rendered from 01.07.2010 to 30.09.2011, the Adjudicating Authority classified the services under CRCS and confirmed the demand amounting to Rs.1,41,64,403/-.

The Commissioner also examined the classification from the perspective of WCS and CRCS. He concluded that CRCS was part and parcel of WCS and that, where a specific classification was available in the form of CRCS, there was no need to classify the activity under the general heading of WCS.

Appellant’s Submissions

The learned Advocate for the appellant submitted that the Show Cause Notice had been issued under WCS for the period 01.06.2007 to 30.09.2011, whereas the demand after 01.07.2010 had been confirmed under CRCS. The demand before 01.07.2010 had been dropped in view of the Board’s circular.

The appellant also relied on Circular No. 108/2/2009-ST dated 29.01.2009. According to the submission, where an ultimate owner entered into a contract for construction of a residential complex with a promoter, builder or developer who provided design, planning and construction services, and the ultimate owner received the property for personal use, the activity would not be subjected to Service Tax because of the exclusion in the definition of ‘residential complex’.

The appellant relied on Modi Ventures Vs CST, Hyderabad, including the Tribunal’s observation that construction for personal use by an individual was excluded from the definition of ‘residential complex’ and that Service Tax could not be levied even for the period post 01.07.2010 in the facts considered in that case.

The appellant additionally relied on Greenwood Estates Vs CCT, Secunderabad-GST [2024 (3) TMI 563 – CESTAT Hyderabad] and Modi & Modi Constructions Vs CCE, Hyderabad-II [2021 (45) GSTL 398 (Tri-Hyd)]. It was also submitted that the Adjudicating Authority had traversed beyond the Show Cause Notice.

Department’s Submissions

The department challenged the classification of the services under CRCS instead of WCS. According to the departmental appeal, the activities were chargeable to Service Tax under WCS and Circular No. 151/2/2012-ST dated 10.02.2012, which clarified the position concerning CRCS up to 01.07.2010, could not be applied to WCS.

The learned Authorised Representative for Revenue reiterated that, if the proper classification was WCS, the circular would not apply for the period prior to 01.07.2010 and Service Tax would accordingly be payable.

Tribunal’s Findings

Liability Prior to 01.07.2010

The Tribunal observed that the dispute involved whether Service Tax was payable before and after 01.07.2010 and, if payable, under which category the services would fall.

It found that, for the period prior to 01.07.2010, there was no dispute that irrespective of classification under CRCS or WCS, there would be no Service Tax liability. The Tribunal therefore considered the dropping of demand for that period to be correct.

Classification for the Period After 01.07.2010

For the period after 01.07.2010, the Tribunal noted that the Commissioner had examined both WCS and CRCS and had consciously concluded that the activity was classifiable under CRCS while also considering CRCS to be part of WCS.

The Tribunal observed that the Commissioner had not held that the activity was CRCS simpliciter. Rather, the Commissioner had treated CRCS as being in the nature of WCS. Accordingly, the Tribunal held that the classification under CRCS for the period beyond 01.07.2010 did not, by itself, suffer from infirmity.

Exemption or Exclusion

The Tribunal noted that the appellant had raised grounds concerning the explanation inserted in Section 65(105)(zzzh), the absence of a construction agreement with the client, the valuation of unfinished construction and the exclusion contained in Section 65(91a) of the Finance Act, 1994.

The appellant had also relied on the exclusion relating to construction intended for personal use and on the decision in Larsen & Toubro Ltd Vs State of Karnataka [2014 (1) SCC 708].

The Tribunal, however, found that the facts were not clear regarding the applicability of an exclusion or exemption for the period after 01.07.2010. It therefore considered that the matter required fresh determination by the Commissioner based on the admitted facts and evidence on record.

Remand Directions

The Tribunal held that the appropriate course was to remand the matter to the Commissioner for deciding the demand for the period beyond 01.07.2010 afresh.

For the departmental appeal ST/30600/2016, the Adjudicating Authority was directed in the remand proceedings to examine the proper classification, namely WCS or CRCS, and whether any exemption or exclusion existed so as to avoid Service Tax liability for the period beyond 01.07.2010.

For the appellant’s appeal ST/30403/2016, the Tribunal directed that the exemption or exclusion available to the appellant for the period beyond 01.07.2010 be redetermined in accordance with the classification ultimately adopted by the Adjudicating Authority.

Final Decision

Both appeals were allowed by way of remand. The Tribunal did not finally determine the Service Tax liability for the period beyond 01.07.2010. Instead, the Commissioner was directed to reconsider the proper classification and the availability of any exemption or exclusion on the basis of the admitted facts and evidence on record.

Cases Discussed

• Modi Ventures Vs CST, Hyderabad
• Greenwood Estates Vs CCT, Secunderabad-GST [2024 (3) TMI 563 – CESTAT Hyderabad]
• Modi & Modi Constructions Vs CCE, Hyderabad-II [2021 (45) GSTL 398 (Tri-Hyd)]
• LCS City Makers Pvt Ltd Vs CST, Chennai [2013 (30) STR 33 (Tri-Chennai)]
• Larsen & Toubro Ltd Vs State of Karnataka [2014 (1) SCC 708]

FULL TEXT OF THE CESTAT HYDERABAD ORDER

M/s Aditya Construction Company India Pvt Ltd (here inafter referred to as the Appellant) are engaged in providing the services of ‘Construction of Complex Service’ (CCS) and ‘Works Contract Service’ (WCS). Based on the investigation, the department noticed that while they have paid Service Tax till March, 2008, though not having filed any ST3 return, they have not paid Service Tax for the period April, 2008 to June, 2010. It was also noticed that they have actually provided WCS though they have wr ongly claimed the said service as CCS. It was also noticed that they have rendered CCS in two projects viz., ‘Hill Paradise-I’ and ‘Green Fields’ executed on development basis during the period 01.10.2006 to 30.05.2007. T hey have also undertaken projects on their own land, named as ‘Eden Park’ and ‘Windsor’ for the period 01.07.2010 to 30.09.2011. It was also noticed that they have claimed exemption of Service Tax on 67% of the valu e under Notification No. 01/2006-ST dt.01.03.2006 for the projects execu ted during the period 01.10.2006 to 31.05.2007 and exemption of 75% for t he projects executed during the period 01.07.2010 to 30.09.2011. The dep artment, therefore, worked out the Service Tax short paid amounting to Rs.3,25,17,745/- under the category of WCS for the period 01.06.2007 to 30.09.2011.

2. On adjudication, the Adjudicating Authority held the view at Para 21 that in view of the clarification by the CBEC vide Circular No. 151/2/2012-ST dt.10.02.2012, no Service Tax is leviable where Construction of Residential Complex Services (CRCS) were rendered prior to 01.0 7.2010 and that it would attract only post 01.07.2010 and confirmed the demand amounting to Rs.1,41,64,403/- for the said period. He has also h eld that the services rendered by the appellant during the period 01.07.2010 to 30.09.2011 are classifiable under the category of CRCS.

3. Learned Advocate for the appellant submits that in this case, the SCN was issued under the category of WCS for the period 01.06.2007 to 30.09.2011 but the demand has been confirmed under CRCS for the period after 01.07.2010. Demand for the period before 01.07.2010 was dropped in view of the Board’s circular. He also submits that in view of Circular No. 108/2/2009-ST dt.29.01.2009, if the ultimate owner enters into contract for construction of residential complex with a promoter/builder/developer, who himself provides service of design, planning and construction and after such construction, the ultimate owner receives such property for his personal use, then such activity would not be subjected to Service Tax, because this case would fall under the exclusion provided in the defi nition of ‘residential complex’. This issue is clearly covered by the decision of Modi Ventures Vs CST, Hyderabad of this Bench vide Final Order No. 3 0887/2020 dt.03.03.2020. Para 10 of this order is relevant and is reproduced below. “10.The undisputed fact is that appellant had entered into two contracts one for sale of land and the second construction agreemen t for the flat with individual buyers. For a tax to be levied under works contract service, in the first place, it must be either construction of a new residential complex or a part thereof or completion of unfinished services related to it. The term “residential complex” under S ection 65(91a) specifically excludes any construction for personal use by an individual. This builder has planned his business with a separate con struction agreement entered into with individual flat owners. Hence they get excluded from the definition of works contract service. T herefore no service tax can be levied even for the period post 01.07.2010.”

4. He has also relied on the decision of this Tribu nal in the case of Greenwood Estates Vs CCT, Secunderabad-GST [2024 (3) TMI 563 – CESTAT Hyderabad] and Modi & Modi Constructions Vs CCE, Hyderabad-II [2021 (45) GSTL 398 (Tri-Hyd)]. Additionally, he ha s also submitted that the Adjudicating Authority has traversed beyond the SCN, which is not legally sustainable. He further points out that the department has also filed an appeal in this case that the classification of service under CRCS instead of WCS by the Adjudicating Authority is not legal and proper.

5. We also find that the department is also in appe al against the said impugned order, wherein, they have, inter alia, challenged the decision of the Adjudicating Authority in holding the service under the category of CRCS and not under WCS. The only ground taken by the dep artment is that in the facts of the case and also relying on the judgment in the case of LCS City Makers Pvt Ltd Vs CST, Chennai [2013 (30) STR 33 (T ri-Chennai)], the activities of the appellant would be chargeable to Service Tax under WCS and since the circular relied upon by the Adjudicating Authority only clarifies that no Service Tax is applicable to CRCS up to 01.07.2010 but not to WCS and therefore, the service was not exempt. Therefor e, the only ground is that in the facts of the case, the activities were in the nature of WCS and not CRCS and that the circular referred to is only applicable to CRCS and not to WCS and hence, Service Tax is payable. Since bot h issues are interrelated, we intend to take up both the appeals together for better appreciation of facts and dispose the appeals.

6. Learned AR for Revenue reiterates the grounds ta ken in the departmental appeal, insofar as the issue of classi fication under CRCS instead of WCS is concerned. On the issue of appellant’s appeal against the confirmation of demand of Rs.1,83,53,342/-, he is reiterating his submission that since the classification adopted itself was wrong, as it should have been WCS in the facts of the case and therefore, once it is classified under WCS, the circular will not be applicable for the period prior to 01.07.2010. In other words, once it is held that the proper classification should have been WCS, then even for the period prior to 01.07.2010, the S ervice Tax would be payable as the circular would not be applicable.

7. Heard both sides and perused the records.

8. We find that the issue involved is whether there is any liability to pay Service Tax by the appellant for the period prior to 01.07.2010 as well after or not and if they are liable to pay Service Tax, then under which category their services would fall. The appellant have canva ssed that the matter regarding non-leviability of Service Tax on CRCS or for that under WCS prior to 01.07.2010 is no longer res integra as it has be en held in catena of judgments passed by the Tribunals that Service Tax is not leviable. Insofar as the issue of the activity being in the nature of WCS, which is not covered by the scope of the circular, he further submits that in terms of settled law now irrespective of whether the nature of construction service is simpliciter or in the nature of WCS, no Service Tax is leviable on them for the period prior to 01.07.2010. Therefore, the dropping of demand by the Adjudicating Authority for the period prior to 01.07.2010 is cor rect. For the period beyond 01.07.2010, their main argument is that sinc e the Adjudicating Authority himself has confirmed the demand under di fferent heading than what was proposed in the SCN, the demand itself is not tenable on this ground alone.

9. We also note that in the impugned order, the Com missioner has examined the issue as to what would be the proper classification in the facts of the case. He examined it from the angle of WCS a s well as CRCS. Thereafter, he concluded that CRCS is very much par t and parcel of WCS and when there is a specific classification available in the form of CRCS, there is no need to classify the activity under general heading of WCS. He has also noted that in the subject notice, the depa rtment initially had classified the services provided by the appellant under CRCS and later, the department changed the service category to WCS and felt that there was no need to change the classification of subject service just to circumvent the Circular No. 151/2/2012-ST dt.10.02.2012 issued by the Board in this regard clarifying that there is no Service Tax liability under this category prior to 01.07.2010.

10. Therefore, we find that conscious decision was taken by the Adjudicating Authority to stick to the classification under heading CRCS considering that the same is also covered within the ambit of WCS. In other words, he has classified the activity under CRCS considering that it was very much part of WCS and it is not being denied nor held by the Commissioner that it is construction service simpliciter. Therefore, holding of service as CRCS in the facts of the case even for the period beyond 01.07.2010 does not suffer from any infirmity and for the period prior to 01.07.2010, it does not matter whether it is CRCS or WCS, as no Service Tax is leviable on any construction activity, as held in cited case laws. The appellants have not extended any specific ground as to why there is no leviability of Service Tax for the period beyond 01.07.2010. On going through the appeal memorandum, we find that they have mostly stated th at for the Service Tax demand beyond 01.07.2010, in terms of explanation i nserted in Section 65(105)(zzzh), there should be a finding that appellants have received some amount before the grant of completion certificate b y the authority. They have also admitted that there was no construction a greement with the client. They have also taken a plea that if at all there is any levy of Service Tax, it would be only on the value of construction for the unfinished portion of the flat and not on the amounts received after 0 1.07.2010 as held by Hon’ble Supreme Court in the case of Larsen & Toubr o Ltd Vs State of Karnataka [2014 (1) SCC 708]. They have also emphas ized that section 65(91a) of the Finance Act, 1994 which defines ‘res idential complex’ and residential complex excludes a complex, which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended fo r personal use as residence by such person. Therefore, in view of the same, the demand for the period beyond 01.07.2010 is not tenable.

11. On the one hand, the department, in their appea l, is taking a stand that it is wrong on the part of the Commissioner to hold the activities undertaken by the appellant as CRCS, wherein, in th e facts of the case, it should have been WCS. The appellants/respondents ar e mainly submitting that even if it is WCS, these are meant for persona ls use and therefore, there would not be any liability on the said amount. We find the facts are not clear here. As far as the liability of demand for the period prior to 01.07.2010 is concerned, there is no dispute that i rrespective of the classification under CRCS or WCS, there shall not b e any liability. The dispute is however for the period after 01.07.2010. While the appellant is mainly adducing that demand is not sustainable on t he ground that Adjudicating Authority has not confirmed the demand under proposed classification and on this sole ground, the demand is liable to be set aside. We find that in the facts of the case, it is not tenable as Commissioner has classified in the impugned order as CRCS, considering it as part of WCS and by holding that this is more specific and at no point of time he has held that there is no element of WCS in the said CRCS. In oth er words, he has not held, in the case of appellant, that it was CRCS simpliciter rather he has held that it is CRCS, which is very much in the nature of WCS. We find that there is some merit in the departmental appeal as well as appellant’s claim. However, the best way would be to remand the matter to the Commissioner to decide the matter afresh for the demand for the period beyond 01.07.2010. While doing so, he shall go by the admitted facts and evidence on record to decide whether there is any exclusion or exemption available for the said service (WCS/CRCS) in the given set of facts and evidence on record to arrive at the demand for the period beyond 01.07.2010.

12. Therefore, we decide as follows:-

a) Insofar as departmental appeal i.e., ST/30600/2016 is concerned, we feel that the Adjudicating Authority, in the remand proceedings, should examine proper classification i.e., WCS or CRCS, in the facts of the case and whether any exemption or exclusion exi st for not demanding Service Tax for the period beyond 01.07.2010. This appeal is allowed by way of remand.

b) Insofar as the appellant’s appeal i.e., ST/30403/2016 is concerned, the exemption or exclusion available to the appellant for the period beyond 01.07.2010 needs to be redetermined in terms of the definition of the classification to be finally adopted by the Adjudicating Authority. This appeal is also allowed by way of remand.

(Pronounced in the Open Court on 28.01.2025)