Service Tax Demand on Composite Residential Construction Contracts Quashed: CESTAT Chennai

SMS Gardens Pvt. Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai)

Summary: The Customs, Excise and Service Tax Appellate Tribunal, Chennai Bench, comprising Judicial Member Ms. Sulekha Beevi C.S. and Technical Member Shri P. Anjani Kumar, allowed two connected appeals filed by SMS Gardens Pvt. Ltd. and V.R. Nachimuthu (CBE) concerning service tax demands arising from residential construction activities. The Tribunal delivered its common order on 15 January 2021. The principal legal question was whether construction contracts involving both the supply of materials and the rendering of services could be subjected to tax under Construction of Residential Complex Service after the separate statutory category of Works Contract Service had been introduced. Applying its earlier decision in Real Value Promoters Pvt. Ltd. and the Supreme Court’s judgment in Commissioner of Central Excise Vs Larsen & Toubro Ltd., the Tribunal held that the demands raised under an incorrect taxable-service classification were unsustainable.

In the appeal of SMS Gardens Pvt. Ltd., the Department alleged that the company had received payments and advances for construction of residential flats but had not correctly declared or discharged service tax in its ST-3 returns. For certain periods between April 2008 and March 2010, the returns reflected nil receipts or exempted services notwithstanding receipts from customers. The Department also disputed the valuation adopted by the appellant, particularly the exclusion of land value and the availment of 75% abatement instead of 67%. The computation extracted in the assessment order showed total service tax calculated at ₹5,27,43,653 against tax already paid of ₹1,36,62,624. The calculation included a separate component for Goods Transport Agency (GTA) services, which the appellant subsequently clarified was not being contested.

SMS Gardens resisted the demand by relying upon various Central Board of Excise and Customs clarifications governing construction undertaken by promoters and developers, including Circular No. 108/2/2009-ST dated 29 January 2009 and the subsequent clarification dated 10 February 2012. The company submitted that builder-developer construction activities during the period preceding 1 July 2010 were not taxable in the manner proposed by the Department. It also disputed the inclusion of land value and the denial of the claimed abatement. However, before the Tribunal, the appellant primarily challenged the very classification of its composite construction contracts as Construction of Residential Complex Service.

In particular, SMS Gardens relied upon Real Value Promoters Pvt. Ltd. Vs Commissioner of GST & Central Excise, Final Order Nos. 42436-42438/2018 dated 18 September 2018, which held that a composite construction contract involving the transfer of property in goods could not be taxed under the ordinary construction-service entries. The appellant also relied upon CCE, Bangalore-I Vs Keerthi Estates Pvt. Ltd., 2019 (26) G.S.T.L. 227, and Vijay Shanthi Builders Ltd. Vs Commissioner of Service Tax, Chennai, 2017-TIOL-3845-CESTAT-MAD. These authorities were invoked to demonstrate that a demand raised under Construction of Residential Complex Service could not be sustained where the contract properly answered the description of a composite works contract.

The second appeal, filed by V.R. Nachimuthu (CBE), concerned residential construction undertaken through joint venture arrangements with landowners. Under these agreements, the landowner received 35% of the super-built area, car parking and open space, while the builder or developer received 65%. The appellant obtained powers of attorney for dealing with undivided interests in the land and entered into construction agreements with prospective flat purchasers. Registered sale deeds relating to undivided land portions were generally executed after approximately 25% of the flat consideration was received, with the remaining consideration collected through instalments. The Department alleged short-payment of service tax in relation to activities undertaken between January 2009 and March 2013.

For the period January 2009 to March 2010, V.R. Nachimuthu reported receipts aggregating ₹23,22,57,112 but did not discharge service tax on those amounts, relying on CBEC Circular No. 108/2/2009-ST. According to the Department, the appellant was not entitled to the benefit of that clarification. A show cause notice dated 22 April 2014 therefore proposed recovery of short-paid service tax, interest and penalties. Before the Tribunal, the appellant argued that the Department had not established wilful suppression or misstatement sufficient to justify the extended limitation period. More importantly, it contended that the contracts were composite works contracts and that the demand under Construction of Residential Complex Service was legally untenable.

The Tribunal examined the nature of the transactions in both appeals and found that the construction contracts involved the transfer of materials along with the rendering of services. It then applied the legal reasoning in Real Value Promoters Pvt. Ltd., which had extensively considered the Supreme Court’s judgment in Commissioner of Central Excise Vs Larsen & Toubro Ltd., 2015 (39) S.T.R. 913 (SC). The Supreme Court had recognised that a composite works contract is legally distinct from a pure service contract. Accordingly, the ordinary construction-service entries could not be interpreted to cover the entire value of an indivisible transaction involving the transfer of property in goods.

The Tribunal reproduced the earlier judgment’s analysis explaining that, after Works Contract Service was introduced on 1 June 2007, taxable construction arrangements involving both materials and services had to be examined under that specific entry. Commercial or Industrial Construction Service and Construction of Complex Service continued to apply to services simpliciter, without a transfer of property in goods. The Tribunal also emphasised the fundamental procedural rule that an adjudicating authority cannot confirm a demand under a different taxable-service category when the show cause notice proposed tax only under the original category. A notice alleging Construction of Complex Service could not subsequently be converted into a demand under Works Contract Service merely because the original classification failed.

Applying that reasoning to the present appeals, the Tribunal held that the demands under Construction of Residential Complex Service could not survive because both appellants had undertaken composite construction contracts. It therefore set aside the impugned orders and allowed both appeals with consequential relief in accordance with law. Importantly, SMS Gardens had expressly accepted and paid the GTA service tax liability, which was outside the scope of its appeal. The decision accordingly concerns the validity of the contested residential construction service tax demands, rather than a general exemption from all tax liabilities arising from the appellants’ business activities.

Cases Discussed

1. Real Value Promoters Pvt. Ltd. Vs Commissioner of GST & Central Excise — 2018-TIOL-2867-CESTAT-MAD; Final Order Nos. 42436-42438/2018 dated 18/09/2018; CESTAT Chennai. The principal precedent followed by the Tribunal. Its relevant paragraphs concerning composite works contracts, statutory classification and the scope of show cause notices are extensively reproduced in paragraph 8 of the present order.

2. Commissioner of Central Excise & Customs, Kerala Vs Larsen & Toubro Ltd. — 2015 (39) S.T.R. 913 (SC); Supreme Court. Discussed within the reproduced Real Value Promoters decision. Applied for the proposition that composite works contracts are distinct from ordinary pure-service contracts and require the appropriate statutory charging and valuation framework.

3. Commissioner of Central Excise, Bangalore-I Vs Keerthi Estates Pvt. Ltd. — 2019 (26) G.S.T.L. 227 (Tri.-Bang.); CESTAT Bangalore. Cited by the appellant in support of its challenge to the classification of composite residential construction contracts.

4. Vijay Shanthi Builders Ltd. Vs Commissioner of Service Tax, Chennai — 2017-TIOL-3845-CESTAT-MAD; CESTAT Chennai. Cited by the appellant regarding the applicability of service tax to residential construction contracts.

FULL TEXT OF THE ORDER OF CESTAT CHENNAI

The issue involved in both these appeals being the same, they were heard together and are disposed by this common order.

2. In Appeal No. ST/40678/2015, the brief facts are as under:-

2.1 During the course of audit, it was noticed that the service provider was providing ‘Construction of Residential Complex Service’ and also receiving services under Transport of goods Agency Service. From April 2008 onwards, though they were receiving advances in the ST-3 returns for the period April 2008 to July 2008 and April 2009 to March 2010, they had shown ‘nil receipts’. Further, for the period February 2009 to March 2009, it was reflected in the column as ‘exempted services’. Though they have provided services and received payments for construction of flats during these periods under the taxable category of construction of residential complex service, they had not paid the service tax correctly. It was also noticed that they had not included the land cost in the taxable value of the flats for calculation of service tax. They had also availed abatement of 75% when the eligible abatement is only 67% on the gross amount. The summary of quantification of tax as shown in para 14 of the impugned order is as under:-

2.2 The department issued Show Cause Notice dated 10.10.2013 proposing to demand short-paid service tax along with interest and also for imposing penalties. The appellants defended the Show Cause Notice by raising the following contentions:-

➢ As per Government Circular F. No. B1/6/2005-TRU dated 27.7.2005, it was clarified that service tax would be eligible only for the gross amounts charged by the service provider and it will not include cost of land and stamp duty.

➢ In the Ministry’s letter F. No. 332/35/2006 TRU dated 1.8.2006, it was clarified what was in the above said circular. This was clarified in Circular No. 96/7/2007-ST dated 23.8.2007 amended on 4.1.2008.

➢ Circular No. 108/02/2009-ST dated 29.1.2009 clarified that only after the full payment for the service of construction or the sale deed is executed, service tax is liable for the service provider, till then the service is considered as ‘self service’.

➢ The Circular also clarified that if the service provider who provided services like planning and construction, over a contract with the ultimate owner that will be exclusion from the definition of ‘residential complex’ and will not attract service tax.

➢ Only after the entire payment is made by the buyer for the completion of construction, the activity of construction will be deemed liable for service tax as per the Government Circular DOF 334/1/2006-TRU dated 26.2.2010.

➢ Thus in view of clarifications provided by the circulars, there is no liability to pay service tax as it is only self service on the part as the ‘developer’ for the period prior to 1.7.2010.

➢ Pune Commissionerate issued Trade Notice dated 15.2.2011 which clarified that service tax on construction of residential complex would attract service tax from 1.7.2010 and if any amount collected prior to this date, the same was required to be deposited by the builder to the service tax department.

➢ As per the circular of 10.2.2012, the Government had clarified that no tax liability would arise on builder’s or developers for the period prior to 1.7.2010 because there were doubts and confusion, the Government’s intention was to introduce explanation clause for the sake of construction of complex service and there is no retrospective effect.

➢ The service provider has not received any full payment from the buyer and the flats were constructed from own capital fund.

➢ The abatement values under Notification 1/2006-ST to 75%.

➢ The question of excluding value of the land from taxable value for claiming abatement of 75% of value does not arise.

➢ The statement dated 10.12.2012 does not give the correct position about the abatement of 75% because of the value of the flat or construction service.

➢ This denial of abatement of 75% of the value is not correct.

➢ The non-payment of tax was based on the circular.

2.3 After due process of law, the original authority confirmed the service tax along with interest and imposed penalties. Against such order the appellants are not before the Tribunal.

3. On behalf of the appellant, ld. Counsel Shri M.N. Bharathi reiterated the submissions made in the reply to the Show Cause Notice. It is submitted by him that the appellant has accepted the liability of service tax under GTA service and also paid up this entire liability. The issue under GTA service is not contested in the present appeal. Further, that the demand is made under construction of residential complex service for the period from 1.4.2008 to 30.6.2012. The Tribunal in the case of Real Value Promoters Pvt. Ltd. had considered the issue whether construction services which are composite in nature involving both supply of materials and services are taxable under the category ‘Construction of Residential Services’. The Tribunal held that after the introduction of Works Contract Service, the demand under construction of residential complex service for composite contracts cannot sustain. In the present case also, the services are composite in nature and the demand being under Construction of Residential Complex Service, is hit by the position of law laid down in Real Value Promoters Pvt. Ltd. as reported in 2018-TIOL-2867-CESTAT-MAD. He also relied on the decisions of the Tribunal in the cases of CCE, Bangalore – I Vs. Keerthi Estates Pvt. Ltd. – 2019 (26) GSTL 227 (Tri. Bang.) and M/s. Vijay Shanthi Builders Ltd. Vs. Commissioner of Service Tax, Chennai – 2017-TIOL-3845-CESTAT-MAD.

4. In Appeal No. ST/40679/2015, the facts are as under:-

4.1 On the basis of the intelligence gathered and on scrutiny of ‘Nil ST3 returns’, filed by the assessee, investigations were conducted by the department. The appellants were rendering services under the category of construction of residential complex service for the period from January 2009 to March 2013. They were doing construction projects by executing joint venture agreement with the land owners to construct multi-storey residential complex. As per the joint venture agreement, the super-built area, car parking and open space will be shared in the ratio 35% for the land owner and 65% for builders / developers. Consequent to the joint venture agreement, power of attorney for the land was handed over to one of the partner Shri B.N. Subramani for the purpose of sale of undivided portion of the land to the prospective buyer of the flats. Thereafter, the company namely M/s. V.R. Nachimuthu (CBE), the appellant herein, would execute the construction agreement with the prospective buyer / owner for sale of undivided portion of the land for construction of multi-storey residential complex and allotment of flats to prospective buyers on payment in instalments. The flat will be handed over to the prospective buyer on payment of full amount or completion of construction works whichever is later. Registered sale deed for undivided portion of the land would be executed by the power of attorney in the name of the prospective buyer on receipt of approximately 25% of the cost of the flat. Afer that the balance amount will be received in instalments before sale of building / flat to the buyer. The sale value of the undivided portion of the land and cost of construction was received separately as per the agreement. For the period January 2009 to March 2010, they had not paid service ax on the gross amount received by availing the benefit of CBEC Circular No. 108/2/2009 ST dated 29.1.2009. After April 2010, they were paying applicable service tax. From the period January 2009 to March 2010, they had received total of Rs.23,22,57,112/-. The department was of the view that they are not eligible to take shelter of the said circular and have not discharged service tax correctly. Show Cause Notice dated 22.4.2014 was issued for the above period demanding short-paid service tax along with interest and also for imposing penalties. After due process of law, the original authority confirmed the demand, interest and also imposed penalties. Aggrieved by such order, the appellants are now before the Tribunal.

5. The ld. Counsel Shri M.N. Bharathi submitted that the arguments put forward in Appeal No. ST/40678/2015 would be applicable to the facts of this case also. The ld. Counsel pointed out that the extended period of limitation would not be applicable since there is no willful suppression or mis-statement of facts established by the department. That the appellant had paid service tax correctly as per the circulars existing at that time. He stressed that since the demand is under construction of residential complex service, the same cannot sustain as per the decision laid down in Real Value Promoters Pvt. Ltd. (supra).

6. The ld. AR Shri S. Balakumar supported the findings in both the impugned orders.

7. Heard both sides and perused the records.

8. From the facts itself, it is clear that the construction services rendered by the appellants are composite in nature involving materials as well as services. This Tribunal in the case of Real Value Promoters (supra) had analysed the issue whether the demand under construction of residential complex services is sustainable in services which are of composite in nature. After introduction of Works Contract Services, the demand can be made only under Works Contract Services in the case of construction services which are composite in nature. The relevant paragraphs of the said discussion which brings out in detail the issue is as under:-

“3.5 The issue as to whether a composite contract involving provision of service as well as transfer of property in goods could be covered under CICS and CCS from the date of introduction of service tax levy on such services was, being litigated upon which was finally settled by the Hon’ble Supreme Court in the case of CCE Vs. Larsen & Toubro Ltd. 2015 (39) STR 913 SC. The Apex Court has observed that in as much as section 67 of the Act, dealing with valuation of taxable services, refers to the gross amount charged for service, the services of CICS and CCS would cover only pure service activities, as any contrary view would imply that the Union Government can levy service tax on the gross amount, including the value of transfer of property in goods also, which is constitutionally impermissible. The exemption notifications issued at the discretion of the executive are not sufficient to sustain the levy. The Hon’ble Apex Court has also observed that only with the introduction of WCS as a separate taxable service, statutory mechanism to exclude the value of transfer of property in goods has been prescribed.

3.6 The effect of the above decision is that CICS and CCS, as defined under clauses (zzq) and (zzzh), respectively, of sub section (105) of the section 65 would cover only pure service contracts, without any transfer of property in goods.

3.7 In various decisions the importance of classification of services has been laid down and it has been held that once the show cause notice proposes demand of service tax under a particular category of taxable service, the adjudicating / appellate authorities cannot travel beyond the scope of allegations in the show cause notice and confirm the demand under a different category of taxable service as the assesse was not at all put on notice on the new category of taxable service. These decisions were based on various decisions of higher appellate forums, where it has been held that the show cause notice is the foundation of allegations and the adjudication should be limited to the allegations. Further, as per Section 65 A of the Act, classification of service shall be based on the specific entries and the more specific description has to be preferred. In this connection, he invited attention to CBEC’s Circular 128/10/2010 Dt. 24.08.2010.

3.8 If show cause notices are issued demanding service tax under CICS / CCS, on composite contracts, involving transfer of property in goods, for the period post 01.06.2007, the said demands of service tax cannot be sustained, as these services would cover only pure service activities, as held by the Hon’ble Supreme Court in Larsen & Toubro (supra). At the stage of adjudication or appeal proceedings, the demand cannot be confirmed under WCS, when the show cause notice raises demand on CICS/CCS. Such an attempt would amount to travelling beyond the scope of the show cause notice, which is not permissible.

3.9 Though the definition of WCS incorporates the definitions of CICS / CCS into it, the scope of coverage of these services are distinct. While the definition of CICS / CCS would cover such construction activities without involving any transfer of property in goods (Example:- Where all materials required for the construction are supplied by the service recipient and the service provider is engaged only for provision of construction service), a composite construction activity would fall only under WCS.

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3.11 In the subject appeal, all the demands confirmed are in respect of composite contracts (commercial buildings, residential buildings, service provided to buyers and service provided to landowners). If the plea that such demands under CICS and CCS for the period both prior to and post 01.06.2007 is not sustainable is upheld, there is no need to advance any further arguments specific to the projects in question.

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8. In the light of the discussions, findings and conclusions above and in particular, relying on the ratios of the case laws cited supra, we hold as under:-

a. The services provided by the appellant in respect of the projects executed by them for the period prior to 1.6.2007 being in the nature of composite works contract cannot be brought within the fold of commercial or industrial construction service or construction of complex service in the light of the Hon’ble Supreme Court judgment in Larsen & Toubro (supra) upto 1.6.2007

b. For the period after 1.6.2007, service tax liability under category of ‘commercial or industrial construction service’ under Section 65(105)(zzzh) ibid, ‘Construction of Complex Service’ under Section 65(105)(zzzq) will continue to be attracted only if the activities are in the nature of services’ simpliciter.

c. For activities of construction of new building or civil structure or new residential complex etc. involving indivisible composite contract, such services will require to be exigible to service tax liabilities under ‘Works Contract Service’ as defined under section 65(105)(zzzza) ibid.

d. The show cause notices in all these cases prior to 1.6.2007 and subsequent to that date for the periods in dispute, proposing service tax liability on the impugned services involving composite works contract, under ‘Commercial or Industrial Construction Service’ or ‘Construction of Complex’ Service, cannot therefore sustain. In respect of any contract which is a composite contract, service tax cannot be demanded under CICS / CCS for the periods also after 1.6.2007 for the periods in dispute in these appeals. For this very reason, the proceedings in all these appeals cannot sustain.”

9. We find that the decision in Real Value Promoters (supra) is squarely applicable to the facts of the case in both these appeals. The demand made under construction of residential complex service cannot therefore sustain. As already stated in Appeal No. ST/40678/2015, appellant is challenging only the demand under construction of residential complex service. The impugned orders are set aside and both the appeals are allowed with consequential relief if any, as per law.

(Operative portion of the order was pronounced in open court)