Preferential Location Charges taxable at same rate as that of Construction of Residential Complex Service

Shreno Ltd Vs C.C.E. & S.T. (CESTAT Ahmedabad)

Preferential Location Charges were correctly subjected to Service Tax at same rate as that of Construction of Residential Complex Service by the Appellant and the differential demand of Service Tax alongwith interest and penalty therefore must be quashed and set aside. The Appellant also becomes entitled to consequential relief in form of refund as claimed for by them on this count, in terms of Section 11B of the Central Excise Act, 1944.

No Service Tax on Renting of immovable property which was used only as residential dwelling of the Director

As regards the demand of Service Tax on Renting of immovable property service, the SCN itself suggests that the demand is raised since the service availed is essentially a business entity and the property is to be used for accommodation of Directors/Senior Management personnel. This in itself, in our view, is not sufficient to hold that the nature of service was that of Renting of immovable property for commercial use. The Appellant has adduced evidence in form of Electricity bills and Certificate from Co-Op Housing Society, which shows that only one Director was permanently residing at the leased accommodation premises and the property had not commercial use. There is no dispute as such that the leased premises was used only as residential dwelling of the Director.

FULL TEXT OF THE CESTAT JUDGEMENT

These appeals have been filed by M/s. Alembic Ltd. and M/s. Shreno Ltd. The details of the period, issue and amount involved in these appeals are as follows :

A) Preferred Location Service:

B) Renting of Immovable Property Service:

2. The facts involved in the above appeals are more or less identical and they are otherwise interconnected and hence, the same are being taken up together for disposal.

2.1 The Appellants are engaged in real estate projects. The Appellants had recovered certain charges in the course of providing construction of residential complex Service, in the nature of preferential location charges such as garden view, road side location etc. They had discharged Service Tax at the same rate as applicable to Construction of residential complex Service, whereas the revenue authorities insist on payment of Tax at full rate. Hence, there is a demand for differential tax made against the Appellants. The Appellant, in the course of audit, had paid such tax with interest and have sought refund thereof, on the grounds that no such differential tax was payable, and which refund was also denied by revenue authorities.

2.2 In case of one M/s. Shreno Ltd., they had let out a residential property to M/s. Alembic Pharmaceuticals Ltd. for use by their Directors/Senior Management personnel for accommodation purpose. The revenue authorities raised demand of Service Tax thereon as renting of immovable property service. The Appellant had paid the said amount of tax and interest during the course of CERA audit and which was sought for as refund, which was also denied.

3. Shri. Saurabh Dixit, Learned Counsel appearing for the Appellants submitted that the issue on hand is no more Res Integra. He submitted that it stands decided in the following cases that any such preferential location charges are to be taxed at the same rate at which real estate transaction gets charged, i.e. as construction of residential complex service itself:

a. SJP Infracon Ltd. V/s. CST, Noida 2018(12) TMI 253-CESTAT ALLAHABAD

b. Logix Infrastructure Ltd. 2018(11) TMI 462-CESTAT ALLAHABAD

c. Friends Land Developers 2019 (22) G.S.T.L. 435 (Tri.- All.)

d. RadhekrishnaTechnobuild P. Ltd. 2020 (43) G.S.T.L. 549 (Tri. – All)

3.1 He further submitted that such preferential location is allowed only to those customers who procure property from the Appellant and not otherwise. Such Preferential location service is not provided on stand alone basis. The same is a part and parcel of Construction of Residential Complex Service provided in form of construction of complex and in terms of Section 66F(3) of the Finance Act, 1994, this being a bundled service, the preferential location charge had to be taxed at same rate as that of construction of Residential Complex Service of construction of complex. He also submitted that neither under Section 66F(3) nor Section 67 of the Finance Act, 1994 or any of the clarifications or decisions, it is required that only if there is a single composite value only then activity is to be treated as naturally bundled and in case if separate value is identifiable, the same should be taxed at higher rate.

3.2 He also relied upon the of Hon’ble Gujarat High Court in the case of Torrent Power Ltd. 2020(34) GSTL 385(Guj) to substantiate his claim.

4. On the other hand, Shri. Vinod Lukose, Learned Superintendent Authorised Representative) on behalf of the Revenue mainly submitted that since under pre-Negative list regime, Preferential Location Service was a separate service, it should be taxed separately from construction Service, at full rate. He also relied upon JS TRU-II Clarification dt.16.3.12 in support of his contention that the Preferential Location charges should not be treated as naturally bundled with main service of Construction of Residential Complex Service.

4.1 As regards Renting of Immovable property service related demand, he mainly submitted that such levy was constitutionally valid and the material period is not one which stood retrospectively amended. He further submitted that since demand stood confirmed, the refund thereof cannot be granted by refund sanctioning authority.

5. We have carefully considered the submissions made by both the sides and perused records. As regards the first issue, on Preferential Location Charges and natural bundling thereof with main service under Section 65(3) of the Finance Act, 1994, we find that the issue on hand is no more Res Integra, and stands concluded in favour of the Appellant vide the following decisions:

a. SJP Infracon Ltd. V/s. CST, Noida 2018(12) TMI 253-CESTAT ALLAHABAD

”2. Brief facts of the case are that the appellants were engaged in Construction of Residential Complex and were paying service tax at abated value as abated under Notification No. 26/2012-ST dated 20.06.2012. Appellant were paying service tax on the entire consideration received for construction of residential complex. The consideration also included charges on account of External Development Charges, Club Building Charges, Fire Fighting Charges, Electrification Fitting Charges, Park Facing Preferential Location Charges, Electrical Sub Station Charges and such other charges. It appeared to Revenue that above stated charges are not part of the consideration for construction of residential complex service and, therefore, the same were not eligible for abatement under the above said notification. Therefore, it appeared to Revenue that appellant was required to pay service tax on above stated charges without availing any abatement. The appellants were issued with a show cause notice dated 21.02.2017 through which a demand of service tax of Rs.5,26,10,083/- was raised for the period from October, 2012 to March, 2015 by invoking proviso to sub Section (1) of Section 73 of Finance Act, 1994. The appellant contested the said show cause notice before the Original Authority on the ground of applicability of provisions of Section 66F of Finance Act, 1994 which provided for Bundled Services. The Original Authority did not appreciate the contention and confirmed the demand with interest and imposed equal penalty. Aggrieved by the said order appellant is before this Tribunal.

3. Heard the learned Chartered Accountant on behalf of the appellant. He has submitted that provisions of sub Section (3)(a) of Section 66F of Finance Act have provided that the taxability of bundled service is based on a fiction that the bundled service is treated as provision of main service which is predominant. He has submitted that the charges for which the present demand is raised are such activities which cannot be independently provided and they are essentially to be provided along with provision of construction of residential complex service. Therefore the residential complex service is predominant and, therefore, the said charges should become part of the consideration for residential complex service. He has also submitted that the final sale deeds is executed in favour of the customers for the entire amount and there is no separate contact for providing above stated activities and that they are the part of the single contract.

4. Heard the learned AR, who has supported the impugned Order-in-Original.

5. Having considered the rival contention and on perusal of record, we find that it is undisputed fact that the sale deed does not separately mention above stated charges and the sale deeds are for the amount of entire consideration including above stated charges. We, further, note that provisions under sub Section (3) of Section 66F has provided that whenever in ordinary course of business some service is naturally associated with a single service which gives essential character to the entire package of service then such naturally associated service is treated as bundled service and the said bundled service is to be treated as single service which gives the entire package its essential character. In the present case construction of residential complex service is the service which gives essential character to the package of the service and, therefore, the charges as stated above are essentially required to be bundled with the single service namely construction of residential complex service. We, therefore, do not find any merit in the stand taken by Revenue.”

b. Logix Infrastructure Ltd. 2018(11) TMI 462-CESTAT ALLAHABAD

3. Heard the learned Chartered Accountant for appellants. He has submitted that provisions of Section 66F of Finance Act, 1994 provide for Bundled Service. He has explained that w.e.f. 01.07.2012 Section 66F was introduced to the statute which has provided that when there are various elements of services then they are to be bundled together and shall be treated as provision of the Single Service which gives such bundle its essential character. He argued that the charges collected by the appellant such as External Development Charges, Preferred Location Charges, Internal Development Charges, Legal Specification Charges etc. do not have independent existence and they are associated the provision of Residential Complex Service and therefore, essentially they are various element of the service which is predominant for Residential Complex Service and therefore they cannot be vivisected and cannot be treated as separate. He further submitted that the contract with the customer is for the complete amount and there is no separate contract with the client for base value and separate contract for other charges like External Development Charges, etc. He argued that therefore, all the considerations received by the appellant were in the course of provision of single service which is predominantly Residential Complex Service and therefore appellants were eligible for abatement as provided under said Notification No. 26/2012-ST for the entire consideration received from their clients.

4. Heard the learned A.R. for revenue who has supported the impugned orders.

5. Having considered the rival submissions from both the sides, we note that the CBEC‟s letter issued by TRU dated 26.02.2010 about the scope of valuation in respect of Residential Complex Service which was introduced in the year 2010, during such period when there was no provision of Section 66F dealing with bundled service on the statute. After the introduction of Section 66F on the statute, the provisions of Section 66F will prevail over any clarification or view taken by CBEC. We, therefore, hold that the components such as preferred location charges, external development charges etc. are part and parcel and for various elements of the main service which is Residential Complex Service and therefore the entire consideration received by the appellants are eligible for abatement under said Notification No.26/2012-ST. We, therefore, do not find any merit in the impugned orders.

c. Friends Land Developers 2019 (22) G.S.T.L. 435 (Tri.- All.)

“6. After considering the submission made by both sides, we find that Service Tax on construction of „Residential Complex Service‟ was introduced with effect from 16/06/2005 vide Notification No.15/2005-ST dated 07/06/2005. As per Section 59(91a) of the Finance Act, 1994 “Residential Complex” means any complex compromising of: (i) A building or buildings, having more than twelve residential units; (ii)A common area; and (iii) Any one or more of facilities or services such as park, lift, parking space…. .

7. As seen from the above definition of „Residential Complex Service‟, parking space specifically stands included in Serial No.(iii) of the definition. If that be so, it has to be held that parking space is a part and parcel of the services falling under the category of „Residential Complex Services‟. As regards the contention of the learned advocate that a new category of services were introduced with effect from 01/07/2012 as “Preferential Location Services & Development of Complexes”, which has been defined as under:-

“Taxable service” means any service provided or to be provided to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorized by such builder, for providing preferential location or development of such complex but does not include services covered under Subclauses (zzg), (zzq), (zzzh) and in relation to parking place.

Explanation – For the purposes of this subclause, “Preferential Location” means any location having extra advantage which attracts extra payments over and above the basic sale price.”

And inasmuch as parking place stands excluded, it has to be held that parking place falls under the said category, do not find any merit in the above contention of the learned advocate. As already observed parking space having been specifically included in the definition of „Residential Complex Service‟, the same would get covered by the definition of the said services. In fact the new definition of “Preferential Location Services” specifically excludes the parking place which means that parking services do not get covered by the new definition. As such, we hold that consideration received by the appellant from their buyer on account of sale of parking space is a part and parcel of the services falling under the category of „Residential Complex Construction Services‟ and its value has to be added in the value of above services.

8. However, we find that demand stands raised and confirmed by invoking longer period of limitation inasmuch as a show cause notice was issued on 24/07/2014 for the period July, 2010 to June, 2012. Apart from the fact that the Lower Authorities have alleged that the appellant did not file the returns and pay the Service Tax, there is otherwise no positive evidence adduced by the Revenue so as to justifiably invoke the longer period of limitation. The Service Tax law, during the relevant period, was still at the nascent stage and was not clear. The Board Circular referred by the learned advocate is to the effect that all peripheral activities provided by the builders would not be taxable under the category of „Residential Complex Construction Services‟. Inasmuch as admittedly the parking area is a separate area from flats sold by the appellant, there can be bona fide belief on the part of the assessee that such parking charges are not includible in the value of the services falling under „Residential Complex Construction Services‟. There is also no positive evidence indicating any mala fide on part of the appellant. Accordingly, we set aside the order on limitation and allow the appeal on the said ground.”

The Appellants have also rightly relied upon the judgment of the Hon’ble Gujarat High Court in the case of Torrent Power (supra), wherein the principles to consider a service naturally bundled with the main service and to be taxed at same rates as main service are discussed. The relevant portion of the judgment is reproduced below:

“24. It has been contended on behalf of the respondents that sub­section (3) of Section 66F of the Finance Act would not apply where the single service which gives the bundle of services its essential character is exempt from the levy of service tax. In the opinion of this Court, there is nothing in the language employed in sub-section (3) to Section 66F to read into it a requirement that such service should not be exempt from tax. All that the sub-section provides is that taxability of bundled services shall be determined in the manner provided therein. The term taxability means liability to taxation. Thus the term taxability would take within its sweep not being taxable also inasmuch as liability to taxation would also mean not being liable to any tax. Thus, the liability to tax of a bundled service has to be determined in the manner provided under sub-section (3) of Section 66F of the Finance Act. If the services are naturally bundled in the ordinary course of business, the bundle of services shall be treated as provision of the single service which gives the bundle its essential character and where the services are not naturally bundled in the ordinary course of business, the same is required to be treated as provision of the single service which results in highest liability of service tax. Accordingly, where the services are naturally bundled in the ordinary course of business and the single service which gives such bundle its essential character is exempt from tax, the entire bundle will have to be treated as provision of such single service.

25. Thus, insofar as the phase relating to the negative list regime is concerned, the services in question would fall within the ambit of bundled services as contemplated under sub-section (3) of Section 66F of the Finance Act, and would have to be treated in the same manner as the service which gives the bundle its essential character, namely, transmission and distribution of electricity and, would therefore, be exempt from payment of service tax.”

In light of the above, the Preferential Location Charges were correctly subjected to Service Tax at same rate as that of Construction of Residential Complex Service by the Appellant and the differential demand of Service Tax alongwith interest and penalty therefore must be quashed and set aside. The Appellant also becomes entitled to consequential relief in form of refund as claimed for by them on this count, in terms of Section 11B of the Central Excise Act, 1944.

5.1 As regards the demand of Service Tax on Renting of immovable property service, the SCN itself suggests that the demand is raised since the service availed is essentially a business entity and the property is to be used for accommodation of Directors/Senior Management personnel. This in itself, in our view, is not sufficient to hold that the nature of service was that of Renting of immovable property for commercial use. The Appellant has adduced evidence in form of Electricity bills and Certificate from Co-Op Housing Society, which shows that only one Director was permanently residing at the leased accommodation premises and the property had not commercial use. There is no dispute as such that the leased premises was used only as residential dwelling of the Director.

5.2 For the same reasons, in the facts and circumstances of the present case, the demand on this count also must be quashed and set aside. Since the Appellant has sought refund of such amount of tax and interest already paid, the same requires to be granted as consequential relief in accordance with Section 11B of the Central Excise Act, 1944 to them.

6. The appeals are allowed accordingly, along with consequential relief.

(Pronounced in the open court on 25.05.2021)