Service Tax Paid on Cancelled Flat Bookings Must Be Refunded: CESTAT Mumbai

Kanakia Spaces Reality Pvt. Ltd. Vs Commissioner of CGST & Central Excise (CESTAT Mumbai)

Summary: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai, in Kanakia Spaces Reality Pvt. Ltd. Vs Commissioner of CGST & Central Excise, Mumbai, held that service tax paid on advances received for apartment bookings must be refunded where the bookings were subsequently cancelled and the developer returned the consideration along with the tax collected. The Tribunal observed that the cancellation of a booking, followed by refund of the entire amount, results in non-provision of the contracted service. Consequently, the Revenue cannot retain the tax originally deposited, as there is no taxable service supporting its collection. The Tribunal allowed three connected appeals and granted consequential relief under the applicable law.

The appellant, a developer providing construction of residential complex services, had collected booking advances from prospective apartment purchasers and discharged the applicable service tax. Subsequently, several allottees cancelled their bookings, and the appellant refunded the advances along with the corresponding service tax. Three refund claims were filed on 6 March 2018, 27 April 2018 and 29 June 2018. The original aggregate claim was ₹35,14,597, subsequently revised to ₹24,58,250. The Department issued deficiency memoranda-cum-show cause notices seeking supporting documents, including proof of tax payment, agreements, booking cancellation details and evidence of refund to customers. The refund claims were rejected by the adjudicating authority, and the Commissioner (Appeals) upheld the rejection through a common order dated 11 March 2020.

Before the Tribunal, the appellant argued that cancellation of flat bookings meant that the contemplated services had not been provided. It relied on Rule 6(3) of the Service Tax Rules and Section 67 of the Finance Act, 1994, contending that service tax could not be retained on amounts returned to customers. The appellant further submitted that, following the introduction of GST, the earlier mechanism for adjusting excess service tax was unavailable in GST returns, making a cash refund necessary under the transitional provisions of the Central Goods and Services Tax Act, 2017.

The Tribunal first considered its jurisdiction to hear appeals involving refunds of taxes paid under the erstwhile service tax law but claimed after GST implementation. Relying on the Larger Bench ruling in Bosch Electrical Drive India Private Limited v. Commissioner of Central Tax, Interim Order No. 40021/2023 dated 21 December 2023, it held that appeals arising from refund decisions under Section 142 of the CGST Act remain maintainable before CESTAT. The Larger Bench had explained that such refund claims must be disposed of under the existing law and that Sections 142 and 174 preserve the corresponding appellate remedies. The Tribunal also referred to Wave One Private Limited v. Commissioner and Jai Mateshwaari Steels Pvt. Ltd. v. Commissioner, CGST Dehradun concerning the inapplicability of the Section 11B limitation period to the relevant transitional refund claims.

On the merits, the Tribunal held that service tax presupposes the existence of a taxable service. Where an allottee cancels the booking and receives back the consideration together with service tax, the underlying service contract comes to an end without the contemplated service being provided. The amount earlier paid as tax therefore assumes the character of a deposit with the Department. Retention of such an amount without statutory authority would violate Article 265 of the Constitution of India, which prohibits levy or collection of tax except by authority of law. The Tribunal rejected the Department’s contention that cancellation of bookings did not establish non-provision of services.

The Tribunal further held that the right to credit or refund of excess service tax had accrued to the appellant under the earlier statutory framework and was protected by Section 174 of the CGST Act. Section 142(5) provided the transitional route for obtaining refund of tax paid under the erstwhile law. Accordingly, the appellant was entitled to refund, and all three appeals were allowed with consequential relief. The decision confirms that a developer cannot be denied refund merely because service tax was correctly paid when booking advances were originally received, where the proposed transaction was later cancelled and the tax was returned to the customers.

List of Cases Discussed:

1. Bosch Electrical Drive India Private Limited Vs Commissioner of Central Tax (CESTAT Larger Bench); Service Tax Appeal No. 40010 of 2020; Interim Order No. 40021/2023; 21/12/2023. Followed on jurisdiction. The Larger Bench held that appeals against refund orders under Section 142 of the CGST Act, 2017 lie before CESTAT because the existing-law appellate mechanism continues to apply.

2. Wave One Private Limited Vs Commissioner (CESTAT New Delhi); 2023 (11) TMI 1078. Relied upon for the proposition that limitation prescribed under Section 11B of the Central Excise Act cannot be invoked to reject the relevant transitional refund claim under Section 142(5) of the CGST Act.

3. Jai Mateshwaari Steels Pvt. Ltd. Vs Commissioner, CGST Dehradun (CESTAT New Delhi); 2022 (3) TMI 49. Relied upon on the question of limitation governing refund claims under Section 142(5) of the CGST Act.

FULL TEXT OF THE CESTAT MUMBAI ORDER

All these 03 (three) appeals have been filed assailing a common order impugned before me being Order-In-Appeal No. NA/GST/A-III/MUM/273-275/2019-20 Dated 11.03.2020 passed by the Commissioner (Appeals-III), GST & CX, Mumbai. Hence, all the three appeals are taken up together for hearing and disposal.

2. Facts of the case in brief are that the Appellant is in the business of providing construction of residential complex service. The Appellant have received booking in respect of the apartments being constructed by it. The Appellant had accordingly collected the booking amount and had discharged the applicable Service Tax in respect of such booking amount so collected. Subsequently, due to various reasons, 29 allottees decided to cancel their respective bookings with the Appellant. Accordingly, the Appellant refunded the advance amount/booking amount so paid by such allottees alongwith the service tax amount collected and deposited by the Appellant with the Revenue. Details of which are mentioned below:-

Refund filed on 06.03.2018

ii. Refund claim filed on 27.04.2018

3. Pursuant to the refund applications filed by the Appellant, it was issued deficiency memo cum Show Cause Notice proposing rejection of refund claims on various grounds such as absence of documents, substantiating the proof of payment of tax, copy of agreement entered into with the customers, details of booking and subsequent cancellation by the customers, proof of remittance of service tax to the customers. Subsequently, by a consolidated adjudication order, the refund claims were rejected. Being aggrieved by the same the Appellant filed appeals before the learned Commissioner (Appeals) which came to be rejected vide the common order impugned before me. Hence, the present appeals before the Tribunal.

4. The learned Advocate appearing on behalf of the Appellant has made the following submissions;

(a) That the impugned order has erred in recording in para 10.3 that, the case laws and circulars relied upon by the Appellant pertains to the issue originating prior to the introduction of the negative list, and therefore, the same are not applicable to this case.

(b) That interpretation of the Department that services were already provided at material time and at the time of cancellation of flat, it cannot be considered as “services were not provided” or “partially not provided” is absolutely baseless. If this was the intention of the lawmaker, then option of adjustment of Rule 6(3) under earlier regime would not have been provided in the legislature.

(c) That Section 67 of the Finance Act which governs the valuation of taxable services for charging/levy of tax emphasises that only the gross amount ‘charged’ by the service provider shall be liable to service tax. Therefore, where the amount has been refunded back to the customers, then it can be construed that no amount is charged by the service provider and no tax is leviable on the same. The statutory provision itself does not accommodate any service tax payment on any amount which is effectively not collected by the service provider.

5. The Ld. Authorised Representative for the Revenue has reiterated the findings of the Ld. Commissioner (Appeals) and the Adjudicating authority.

6. Heard both sides and perused the appeal records.

7. I find that the following issues are required to be examined in the facts and circumstances of the present appeals:

a) Whether the refund applications filed by the Appellant were proper and accordingly, whether the refund of the amounts claimed by the Appellant ought to have been granted?

b) Whether the Ld. Commissioner (Appeals) was correct in observing that there is no provision under the GST Laws, which provides for refund of the service tax deposited by the Appellant?

8. Before I proceed to examine the issues enumerated above, I find that when these matters had come up for hearing, this Tribunal had observed that the issue whether this Tribunal can decide upon issues pertaining to refund claims of taxes paid under the erstwhile laws, filed under the GST regime, had been referred to the Larger Bench of this Tribunal in the case of M/s Bosch Electrical Drive India Private Limited v. Commissioner of Central Tax bearing Service Tax Appeal No.40010 of 2020.

9. I find that the issue has since been decided by the Larger Bench of this Tribunal vide Interim Order No.40021/2023 dated 21.12.2023. The relevant portion of the said order is reproduced below:-

“43. It now needs to be examined whether the Tribunal would have the jurisdiction to entertain an appeal filed against an order passed under sub-section (3) of section 142 of the CGST Act.

44. Under sub-section (3) of section 142 of the CGST Act, the claim for refund of any amount of CENVAT credit has to be disposed of in accordance with the provisions of the existing law. The existing law would be Chapter V of the Finance Act and the Central Excise Act. If an application for refund of CENVAT credit had been filed at a point of time when the CGST Act had not been enacted, an appeal would lie before the Tribunal against an order passed on the application filed for refund of CENVAT credit. What has to be seen is whether an appeal can be filed before the Tribunal after the coming into force of the CGST Act against an order passed under sub-section (3) of section 142 of the CGST Act. In view of the specific provisions of sub-section (3) of section 142 of the CGST Act, every claim for refund after 01.07.2017 has to be disposed of in accordance with the provisions of the existing law i.e. Chapter V of the Finance Act and the Central Excise Act. This would mean that the appellate provisions would continue to remain the same. This position is also explicit from the provisions of sub-section (6)(b) of section 142 of the CGST Act, wherein it has been provided that every proceeding of appeal, review or reference relating to recovery of CENVAT credit initiated whether before, on or after the appointed day under the existing law shall be disposed of in accordance with the provisions of the existing law.

45. Section 174(2)(f) of the CGST Act also provides that the repeal of the Central Excise Act under section 174(1) and amendment of the Finance Act under section 173 shall not affect any proceedings including that relating to an appeal instituted before, on or after the appointed day under the said amended Act or repealed Acts and such proceedings shall be continued under the said amended Act or the repealed Acts as if the CGST Act had not come into force and the said Acts had not been amended or repealed.

46. There is, therefore, no manner of doubt that an appeal against an order passed under section 142 of the CGST Act would lie to the Tribunal.

47. This view also gains support from the fact the legislative intent could not have been to deprive either an assessee or the Revenue from the right of an appeal since an appeal against an order passed under section 142 of the CGST Act would not lie to the Appellate Tribunal constituted under the CGST Act.

48. The Division Bench of the Tribunal, while referring the matter to the Larger Bench had observed in paragraph 14.1 that an appeal would lie under section 112 of the CGST Act to the Appellate Tribunal constituted under the provisions of the CGST Act against an order passed under sub-section (3) of section 142 of the CGST Act. As noticed above, an appeal would not lie before the Appellate Tribunal constituted under the provisions of the CGST Act because an appeal lies only against an order passed either under section 107 or section 108 of the CGST Act.

49. In the present case, the service tax was paid under the provisions of Chapter V of the Finance Act and refund was claimed under sub-section (3) of section 142 of the CGST Act, under which the claim was required to be disposed of in accordance with the provisions of the existing law. Therefore, even if the service tax had been deposited by the appellant after 01.01.2017, nonetheless the refund of any amount of the CENVAT credit could be claimed only under subsection (3) of section 142 of the CGST Act and against this order an appeal will lie to the Tribunal.

50. The reference is, accordingly, answered in the following manner:

An appeal would lie to the Customs, Excise & Service Tax Appellate Tribunal against an order passed under section 142 of the Central Goods and Services Tax Act, 2017.

51. The papers may now be placed before the Division Bench of the Tribunal for deciding the appeal.”

Therefore, as held by the Larger Bench, this Tribunal exercises jurisdiction over issues of refund claims filed under Section 142 of the CGST Act, 2017. In the present matters, the refund applications had been filed under Section 11B of the Central Excise Act, 1944 read with Section 142(5) of the CGST Act, 2017.

10. At the outset, I observe that the two conditions, which are sacrosanct to any refund application, are that (i) such refund application ought to be filed within the prescribed period of limitation and (ii) the incidence of duty should not have been passed to any other person by the applicant.

11. I find that the aspect of limitation in the facts and circumstances of the present matters, has already been decided by this Tribunal in the following cases, whereby it was held that the time limit prescribed under Section 11B of the Central Excise Act, 1944 cannot be invoked to reject a refund claim filed under Section 142(5) of the CGST Act, 2017:

a) Wave One Private Limited v. Commissioner [2023 (11) TMI 1078 – CESTAT New Delhi]

b) Jai Mateshwaari Steels Pvt. Ltd. v. Commissioner, CGST Dehradun [2022 (3) TMI 49 – CESTAT New Delhi]

12. I find that the Appellant had collected service tax from the allottees and had duly deposited such service tax with the Revenue. Subsequently, on cancellation of the bookings/allotments, the allottees were entitled to the entire invoice amount paid by them, including the service tax amount and the Appellant was eligible to avail Cenvat credit in respect of the service tax amount so deposited by it as per Rule 6(3) of the ST Rules. The said Rule provides for availment of Cenvat credit of the excess service tax paid by an assessee against a service which was ultimately not provided for any reason. I find that in the present cases, the Appellant could not provide services to the allottees on account of cancellation of the bookings made by them. This aspect is not in dispute.

13. I find that it is the case of the Appellant that the cancellation of agreements for purchase of the Apartments in the project is to be considered as none provision of services under Rule 6 (3) of Service Tax Rules, 1944. It is further submitted that in post GST Regime, there is no mechanism available to claim such credits [as specified in Rule 6 (3) ibid] in GST returns and therefore the only remedy available with them is to claim refund of such service tax. The learned Advocate further submits that in the absence of any services, Appellant cannot be burdened with the service tax liability.

14. The first principle of service tax is that tax is to be paid on those services only which are taxable under the said statute. But for that purpose there has to have some ‘service’. Unless service is there, no service tax can be imposed. For the applicability of the provisions as referred to in the deficiency memo or in the Adjudication order or the appellate order, the pre-condition is ‘service’. If any service has been provided which is taxable as specified in the Finance Act, 1994 as amended from time to time then certainly the assessee is liable to pay, but when no such service has been provided then the assessee cannot be saddled with any such tax and in that case the amount deposited by the assessee with the exchequer will be considered as merely a ‘deposit’ and keeping of the said amount by the Department is violative of Article 265 of the Constitution of India which specifically provides that “No tax shall be levied or collected except by authority of law.” Since Service Tax, in issue, received by the concerned authority is not backed by any authority of law, the Department has no authority to retain the same. Buyer booked the flat with the Appellant and paid some consideration. The Appellant as a law abiding citizen, entered the same in their books of account and paid the applicable service tax on it after collecting it from the buyer. But when the buyer cancelled the said booking on which service tax has been paid and the Appellant returned the booking amount along with service tax collected, then where is the question of providing any service by the Appellant to that customer. The cancellation of booking coupled with the fact of refunding the booking amount along with service tax paid would mean as if no booking was made and if that is so, then there was no service at all. If there is no service then question of paying any tax on it does not arise and the Department can’t keep it with them. No law authorises the Department to keep it as tax. The net effect is that now the amount, which earlier has been deposited as tax, is merely a deposit with the Department and the Department has to return it to the concerned person i.e. the assessee. In the fact of this case it can be safely concluded that no service has been provided by the Appellant as the service contract got terminated and the consideration for service has been returned.

15. As per Rule 66E(b) (sic) of Service Tax Rules, 1994 in construction service, service tax is required to be paid on amount received from buyers towards booking of flat before the issuance of completion certificate by the competent authority and the booking can be cancelled by the buyer any time before taking possession of the flat. Once the buyer cancelled the booking and the consideration for service was returned, the service contract got terminated and once it is established the no service is provided, then refund of tax for such service become admissible. The authorities below are not correct in their view that mere cancellation of booking of flats does not mean that there was no service. If the booking is cancelled and the money is returned to the buyer, then where is the question of any service?

16. I find that the credit/refund of the excess service tax paid by the Appellant was a right that had accrued in favour of the Appellant and therefore, as per Section 174 of the CGST Act, 2017, such right of the Appellant ought to be upheld and protected. Further, Section 142(5) of the CGST Act, 2017 contemplates the very situation as in the present appeals and accordingly, provides for refund of taxes paid under the erstwhile Laws.

17. In view of the facts of this case and the discussions held in the preceding paragraphs, I am of the considered view that the Appellant is entitled for refund and the appeals are accordingly allowed with consequential relief, as per law.