Private Township Roads Not Exempt From Service Tax: CESTAT Delhi

Warsi Buildcon Vs Principal Commissioner (CESTAT Delhi)

Summary: In Warsi Buildcon Vs Principal Commissioner (CESTAT Delhi), the Customs, Excise and Service Tax Appellate Tribunal, New Delhi, dismissed the assessee’s appeal and upheld a service tax demand of ₹1,14,85,964 arising from construction and infrastructure development activities undertaken for builders and developers of residential colonies and townships during 2010-11 to 2013-14. The dispute primarily concerned whether construction of internal roads within residential townships qualified for exemption under Notification No. 25/2012-ST dated 20 June 2012, and whether other civil construction activities were taxable as works contract services. The demand comprised ₹99,06,318 relating to road construction during 1 July 2012 to 2013-14 and ₹15,79,645 relating to other civil works during 2010-11 to 2013-14.

The appellant contended that roads constructed within residential colonies were eligible for exemption because they were ultimately required to be surrendered to municipal or local authorities. It was further argued that treating roads situated within boundary-walled colonies as private roads was incorrect, particularly when municipal authorities exercised statutory responsibilities concerning roads and public infrastructure. The appellant also relied upon the Tribunal’s earlier decision in Alokik Township Corporation Vs Commissioner of Central Excise and Service Tax, Jaipur-I, 2015 (37) STR 859 (Tri.-Del.), to contend that township development activities were not taxable.

The Tribunal rejected these submissions, holding that the exemption under Notification No. 25/2012-ST specifically applied to construction, repair, maintenance and related activities concerning roads intended for use by the general public. Roads developed within residential colonies for the benefit of plot purchasers, residents and occupants of residential or commercial complexes did not satisfy this requirement. The Tribunal emphasised that the expression “general public” contemplated public use rather than infrastructure principally intended for the occupants of a particular township. Merely proposing to surrender such roads to a municipal corporation or panchayat did not establish their eligibility for exemption, particularly when maintenance obligations continued to rest with the coloniser. The Tribunal also relied upon CBEC Circular D.O.F. No. 334/1/2012-TRU dated 16 March 2012, which clarified that roads constructed within factories or residential complexes and not intended for general public use were taxable.

The earlier decision in Alokik Township Corporation was distinguished because it concerned a period preceding the relevant exemption notification, whereas the disputed road construction services were provided after 1 July 2012. Regarding other civil works, including sewer lines, water lines, sump wells and boundary walls, the Tribunal observed that the appellant executed construction contracts involving materials and labour for township developers. The activities were therefore appropriately classified as works contract services under Section 65(105)(zzzza) of the Finance Act, 1994. The Tribunal also rejected the contention that the show cause notice failed to identify the taxable service categories, observing that the notice expressly referred to commercial or industrial construction, site formation and works contract services.

On limitation and penalties, the Tribunal found that the appellant had failed to correctly assess and disclose its service tax liability in ST-3 returns. The non-disclosure supported the adjudicating authority’s finding of wilful suppression with intent to evade tax, justifying invocation of the extended limitation period under Section 73(1) and penalties under Sections 77 and 78. Interest on delayed payment was upheld as mandatory, while late fees for delayed filing of service tax returns were sustained under Section 70 read with Rule 7C of the Service Tax Rules, 1994. Finding no infirmity in the adjudication order, CESTAT Delhi affirmed the service tax demand, interest, penalties and late fees and dismissed the appeal, with the order pronounced on 6 March 2024.

FULL TEXT OF THE CESTAT DELHI ORDER

The appellant has filed this appeal against the Order-in- Original No. 29/PR.COMMR./ST/IND/2016 dated 22.08.2016 passed by the Principal Commissioner, Indore whereby the Commissioner confirmed the service tax demand of Rs. 1,14,85,964/-. and imposed penalty of Rs. 10,000/- under Section 77 of the Act.

2. The appellant is a proprietorship firm having service tax registration for providing taxable services ―commercial and industrial construction services‖, ―site preparation services‖ and ―works contract services‖. On the basis of specific intelligence that the appellant was engaged in evasion of service tax, the officers of Central Excise, Indore initiated inquiry. It has been revealed that the work orders were awarded to the appellant by various developers/builders of the township for various work required to develop a township such as construction of sewer lines, chamber, boundary walls, sump well, parking areas, roads etc. It was also found at the time of scrutiny of records that on some bills service tax was not paid by them treating the said bills for exempted services. Show cause notice dated 21.10.2015 was issued raising demand of service tax of Rs. 1,14,85,964/- with the following break up:

3. The show cause notice also proposed charging of interest and penalty under section 77 and 78 of the Finance Act, 1994 and also proposed for appropriation of ₹26, 76, 565/- towards service tax liability having been paid during investigation by the appellant. On adjudication, the Principal Commissioner confirmed the demand relying on the Notification No. 25/2012-ST dated 1.07.2012 and the Circular No. 334/1/2012-TRU dated 16.03.2012. Being aggrieved, the present appeal has been filed by the appellant on 1.12.2016 and since then the appeal has been listed on several occasions, however the appellant has not appeared once despite service of notice. In terms of the previous order dated 12.12.2023 directing that the appeal shall be decided on merits even if the appellant does not appear, we have heard the Authorized Representative for the Revenue and have fully perused the records of the case.

4. From the memo of appeal, we find that the grounds taken by the appellant are to the following effect:

”2 The adjudicating authority while deciding the order-in- original has erred on following grounds:

(a) Treatment of any colony with boundary walls as a complex.

(b) Construction of Roads inside such a colony to be of private use.

(c) Denial of exemption to construction of roads inside such a colony under Notification No. 25/2012-ST on the ground that they are not for use by general public.

(d) Not accepting the submission that roads are required to be surrendered to Nagar Nigam/Pachayat/Local authority after completion of colonization work and they cease to be owned by a colonizer.

(e) Accepting such a view that any colony with boundary wall is a residential complex will make construction of even a single residential unit in a colony with boundary walls taxable, which is not the intent of law.

(f) Not accepting the legal position relating to Madhya Pradesh Corporation Act 1954 that:

(i) Municipal Corporation is responsible for lighting and maintenance of roads.

(ii) Property in public streets, sewers, drainage etc. is vested with Municipal Corporation.

(iii) No fence, gate etc. can be made on any street without permission.

3. The authority has further erred in not accepting the view in various judicial pronouncements that construction of roads is not taxable.

4. The authority has further erred in not considering the view in Alokik Township Corporation Vs. Commissioner of Central Excise and Service Tax, Jaipur-I – 2015 (37) STR 859 (Tri.- Del.) that development of land for township itself is not a service at all.

5. The authority failed to recognize that the show cause notice did not specify any category of service tax for the differential demand.”

5. The learned Authorized Representative has reiterated the findings of the adjudicating authority and submitted that the appellant is not entitle to the exemption of service tax liability under the Notification No. 25/2012 which specifically provides for exemption in case of construction of road for use by general public whereas the appellant has rendered services for construction of road and other infrastructure for development of colonies/township and construction of residential complexes. The appellant is working under self assessment system and is therefore duty bound to disclose the true and correct facts and assess their service tax liability accordingly but they deliberately suppressed the facts with intent to evade the payment of service tax and therefore the extended period and the penalty has been rightly invoked.

6. The issues considered by the adjudicating authority was whether the activity of construction of roads can be covered under the category of ―Commercial Construction or Works Contract Services‖ or otherwise for the period 1.07.2012 to 2013–14 and whether the exemption on construction of roads under notification no. 25/2012-ST would be available to them or not.

7. As per the work order issued by the project developers to the appellant, it appears that the appellant had rendered their services for construction of residential complexes as defined under Section 65 (30a), commercial or industrial construction service as defined under section 65(25b) of the Finance Act, Site Formation and Clearance as defined under section 65 (97a) and Works Contract Service as defined under section 65 (105) (zzzza) of the Act. Their clients included builders, developers and housing societies like M/s DHL Infrabulls International Pvt. Ltd., M/s Vardan Infrastructure, M/s Maharashtra Infrastructure and M/s Geekay Colonizers who were engaged in providing the services of construction of residential complexes. The project developers have only allotted the plots and other works like water tank, sump well, sewer line, water line and boundary wall construction works in addition to construction of roads, were to be undertaken by the appellant for development of colonies/township and construction of residential complexes. In some cases, the development work was done by the appellant with material and in some cases, they executed the contract for supply of labour to complete specific work in a township and where only labour contract was executed, material was supplied by the appellant separately. The appellant was receiving consideration for performing such development work and supply of material on site, from the developers.

8. On the nature of activities carried out by the appellant, there is no dispute that they undertook road construction, sewage and water line, boundary wall etc., namely, civil works for a coloniser during development of a colony on the open plots handed over by the colonisers. These township/residential complexes were covered with boundary wall and were not open to the public at large but were meant for the occupants of the colony/ complexes. The plots in these colonies were sold to various persons for residential as well as commercial purposes on payment of consideration which covered the cost of the land including development/construction cost. Therefore, the appellant has provided construction services for development of colonies and construction of residential complexes and, therefore, the receipts from these services were liable to service tax.

9. It may be relevant to extract the statutory provisions relating to the services here:

”30(a) “Construction of complex” means–

(a) Construction of a new residential complex or a part thereof;

(b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or

(c) repair, alteration, renovation or restoration of, or similar services in relation to, residential complex.

(25b) “Commercial or industrial construction” means —

(a) construction of a new building or a civil structure or a part thereof; or

(b) construction of pipeline or conduit; or

(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, which is —

(i) used, or to be used, primarily for; or

(ii) occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;

(105) “taxable service” means any service provided or to be provided –

(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

(97a) “site formation and clearance, excavation and earthmoving and demolition” includes, —

(i) drilling, boring and core extraction services for construction, geophysical, geological or similar purposes; or

(ii) soil stabilization; or

(iii) horizontal drilling for the passage of cables or drain pipes; or

(iv) land reclamation work; or

(v) contaminated top soil stripping work; or

(vi) demolition and wrecking of building, structure or road, but does not include such services provided in relation to agriculture, irrigation, watershed development and drilling, digging, repairing, renovating or restoring of water sources or water bodies;]

From the statutory definitions, we find that construction of roads is covered more specifically under Section 65(25b) defining ”commercial or industrial construction service‖ and section 65(105)(zzzza) defining ―Works Contract Service‖, however, the same excludes the levy of service tax on construction of roads.

10. The Notification No. 25/2012-ST dated 20.06.2013 w.e.f. 01.07.2012 granted exemption on services, provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of road, bridge, tunnel, or terminal for road transportation for use by general public. By virtue of the said notification the exemption on payment of service tax in respect of services relating to the construction of roads was limited only in respect of those roads which were meant to be used by general public. In other words the utility of the roads was linked with general public. The very clause of the exemption notification when it uses the words road, bridge, tunnel or terminal for road transportation implies the common services to be used by the general public and cannot be restricted which is constructed for development of any township or residential complexes by a builder/developer/coloniser for the utility of the occupants therein. The two has to be distinguished on account of the nature of utility, whether the same is meant for common public or for private use by the buyers of the builders. Also, the definition clause (q) of the notification defines ―general public‖ meaning the body of people at large sufficiently defined by some common quality of public or impersonal nature. We have no doubt on the intent and the scope of the notification exempting the construction of roads for use by general public and as per the Rules of interpretation the exemption notification has to be construed strictly. Considering the activity of construction of roads by the appellant for the development of the township/residential complexes on behalf of the builders/ developers is specifically meant for the buyers of the plots/residential/commercial complexes and the same cannot be termed for the use of the general public in the sense it has been provided in the notification. Hence the appellant is not entitle to claim exemption from levy of service tax under the notification.

11. In addition to the notification, we find that CBEC had issued Master Circular D.O.F. No. 334/1/2012-TRU dated 16.03.2012 where it has been clarified that construction of roads for use by general public is exempt from service tax. Construction of roads which are not meant for general public use e.g. construction of roads in a factory, residential complex, etc would be taxable. This itself clarifies that the exemption in respect of construction of roads is not available where they are not meant for general public use whereas the majority of the services rendered by the appellant are ―construction of roads‖ within the residential complexes of the builders/developers, which cannot be construed to mean for general public use.

12. The learned Counsel for the appellant has referred to the decision of the Tribunal in Alokik Township Corporation vs Commissioner of Central Excise & Service Tax Jaipur, 2015 (37) STR 859, however, the same is distinguishable as the demand under the definition of ―Construction of Commercial Complex Services”of the Act was for the period up to 30.05.2007, which is the period prior to the exemption notification, whereas in the present case, the period involved for levy of service tax on construction of road is 1.07.2012 to 2013-14, i.e. after the Notification No.25/2012 restricting the exemption was issued.

13. One of the contentions raised by the appellant that the roads were required to be surrendered to the Nagar Nigam/Panchyat and hence cannot be treated as private roads, we would like to quote the para from the impugned order: ―28.5 The Noticee contended that the road was required to be surrendered to Nagar Nigam/Panchyat (local authority) after completion. Therefore, the said roads cannot be treated as private roads. I find that, even after getting surrender the same, the liability towards maintenance etc. of said roads lies upon the colonizer. This proves that the roads does not fall under the definition of public roads that means these roads are private roads. And in light of Notification No. 25/2012-ST these roads are not exempted from service tax. Further, it has been observed from the reply that the Panchyat/SDO has issued instructions to maintain the connectivity with the road already exists or proposed for construction of roads. I am not impressed with this submissions, the main road of residential complex has to be connected with a public road outside such complex, otherwise there will be no easy approach to the main entrance of residential complex inclosed by a boundary wall and main gate. I further find that services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a road, bridge, tunnel or terminal for road transportation other than for use by general public came under service tax net w.e.f. 01.07.2012 as the condition of use by general public has been imposed by Notification No. 25/2012 dated 20.06.2012. Hence the noticee’s contention is not acceptable as the said construction of roads have not satisfied the condition of Notification No. 25/2012-ST.”

14. From the records of the case including the statements of the appellant, we find that they had rendered all the services of construction with material, though in some case they issued separate bills for labour charges and raw material for the same work and charged VAT in the bills of raw material. Therefore, the services executed being works contract were rightly classified under the category of ―Work Contract Services‖, as defined under Section 65(105) (zzzza) of the Act. In this regard, we may quote the para from the impugned order:

”30.7 From the defence reply, I find that they did not dispute the facts regarding leviability of service tax under Works Contract Service on civil construction work got done by them through various service providers. They have also not disputed on the valuation method i.e. reverse charge mechanism. Therefore, I find that they have made short payment of Rs. 15,79,645/- (Service Tax Rs. 15,33,636/-, Education Cess Rs. 30,673/- and Higher and Secondary Education Cess Rs. 15,337/-) for the period from 2010-2011 to 2013-14 towards work contract services and the same is liable to be recovered in terms of Section 73 of Finance Act, 1994. The same is ordered to be appropriated against the demand/interest. I hold accordingly.”

15. One of the grounds taken by the appellant that the show cause notice did not specify any category of service tax for the differential demand is baseless. In view of para 8.2 of the show cause notice where it is specifically stated that essential character of work done by the noticee indicates that the services are covered under ―commercial or industrial construction service‖ as defined under the section 65(25b), ―site, formation and clearance, excavation earth moving and demolition services‖ as defined in section 65(97a) and ―works contract services” as defined under the section 65(105) (zzzza) of the Act.

16. Having upheld the service tax liability as affirmed by the impugned order, we may now examine whether the department is justified in invoking the extended period of limitation under section 73(1) of the Act and imposing penalty under section 77 and 78. Show cause notice was issued on 21.10.2015 for the period 2010- 11 to 2013-14. The appellant is working under the self assessment system and is therefore duty bound to assess the correct service tax liability and file the service tax returns accordingly within time. As discussed above, the appellant did not assess the correct amount of service tax and did not reflect the same in ST-3 Returns and hence violated the provisions of the Act. The non-disclosure of these facts would have gone unnoticed, if the same were not unearth by the department at the time of Audit. The adjudicating authority had rightly observed that the appellant wilfully suppressed the facts with intent to evade payment of service tax and therefore the invocation of the extended period of limitation and imposition of penalty is justified. We are of the view that no interference is called for in the present case invoking the extended period of limitation and imposing penalty under section 77 and 78 of the Act.

17. The imposition of interest on delayed payment of service tax is of mandatory nature and consequently, the liability to pay interest has been correctly imposed on the appellant. From the chart given in the order we agree with the adjudicating authority that the service tax returns were filed after the due date and hence the liability to pay late fee under section 70 read with rule 7C of the Service Tax Rules, 1994 is upheld.

18. We do not find any reason to interfere with the impugned order and hence the same is hereby affirmed. The appeal is, accordingly, dismissed. (Pronounced in open Court on 06.03.2024)