CESTAT Hyderabad Sets Aside Service Tax on Residential Construction Before 01.07.2010

Aruna Constructions Vs Commissioner of Central Excise And Service Tax (CESTAT Hyderabad)

M/s Aruna Constructions, Visakhapatnam, challenged the Order-in-Original dated 30.01.2013 confirming Service Tax demand along with interest and equal penalty. The dispute concerned construction of residential complexes and the Department’s classification of the activity under “Works Contract Service” for the period 2007-08 to December 2011. The appellant had deposited Rs. 2,00,000/- during investigation and sought the benefit of the composition scheme, which the Department denied on the ground that the option had not been exercised before payment of Service Tax.

The appellant submitted that, prior to insertion of the explanation to Section 65(105)(zzzh) with effect from 01.07.2010, construction of residential complexes undertaken for personal use was not taxable, relying upon CBEC Circular No.108/2/2009-ST dated 29.01.2009 and various Tribunal decisions. It was also submitted that the demand had been computed on gross value without allowing deduction for the material portion or the benefit of the composition scheme and that there was no suppression of facts since the transactions were duly recorded. The Department submitted that the appellant had failed to exercise the option for the composition scheme within the prescribed time and reiterated the findings of the impugned order.

The Tribunal identified three issues: taxability of construction of residential complexes prior to 01.07.2010; entitlement to the composition scheme or deductions; and sustainability of the extended period and penalties. It held that the demand for the period prior to 01.07.2010 would not sustain. For the period beyond 01.07.2010, the Tribunal noted that the retrospective amendment to Rule 2A required the amount payable to be recalculated and that the amendment had not been taken into account in computing the liability. The matter was therefore remanded for re-computation, including adjustment of any amount already paid towards the relevant demand.

The Tribunal further held that denial of the composition scheme merely on procedural grounds had been consistently disapproved in similar matters. It concluded that the appellant was entitled to appropriate abatement/deduction and re-computation of the demand, particularly as the Show Cause Notice had computed liability on the gross value without allowing deduction for materials. On limitation, the Tribunal found that divergent views had prevailed during the relevant period and that the Government had itself introduced a retrospective amendment. In the absence of cogent and strong evidence indicating deliberate intent or an attempt to evade tax, the extended period was held to be not invokable. Following the cited decision in Uniflex Cables Ltd., the Tribunal also held that penalty was not imposable where the issue was interpretational.

Accordingly, the demand for the period prior to 01.07.2010 was set aside; the remaining matter was remanded to the Adjudicating Authority for re-computation after granting the benefit of the composition scheme/deductions in accordance with law; and the penalty was set aside. Appeal Nos. ST/26532/2013 and ST/22393/2014 were partly allowed, while the Revenue’s Appeal No. ST/21969/2014 was disposed of accordingly.

Background and Proceedings

M/s Aruna Constructions, Visakhapatnam, was engaged in construction of residential complexes. The Department initiated an investigation alleging Service Tax liability on the activities undertaken during 2007-08 to December 2011. During the investigation, the appellant deposited Rs. 2,00,000/- proposed to be appropriated.

The Show Cause Notice classified the activity under “Works Contract Service”. The appellant sought to discharge the liability under the composition scheme, but the Department denied the benefit on the ground that the option had not been exercised prior to payment of Service Tax.

The impugned Order-in-Original confirmed Service Tax demand along with interest and equal penalty. The adjudicating authority confirmed demand both on consideration received from clients and on service provided to the land owner, taking the rate at which the appellant sold flats to its clients. On the extended-period issue, the Commissioner held that the extended period was applicable on account of misclassification of the service and non-payment of full tax even under Construction of Residential Complex Service.

The appeals were heard together as the issues involved were stated to be substantially the same.

Appellant’s Submissions

Taxability Before 01.07.2010

Learned Counsel for the appellant submitted that, prior to insertion of the explanation to Section 65(105)(zzzh) with effect from 01.07.2010, construction of residential complexes undertaken for personal use was not taxable. Reliance was placed on CBEC Circular No.108/2/2009-ST dated 29.01.2009 and the decisions cited before the Tribunal.

Composition Scheme and Deduction of Materials

The appellant submitted that the demand had been computed on the gross value without allowing deduction for the material portion or the benefit of the composition scheme.

It was further submitted that the transactions were duly recorded and, therefore, there was no suppression of facts.

Department’s Submissions

The learned Authorized Representative for the Department reiterated the findings of the impugned order and submitted that the appellant had failed to exercise the option for the composition scheme within the prescribed time.

Issues for Determination

The Tribunal identified the following issues for determination:

1. Whether construction of residential complex undertaken by the appellant prior to 01.07.2010 is liable to Service Tax.
2. Whether benefit of composition scheme or deductions is to be extended.
3. Whether invoking of extended period and penalty are sustainable.

Tribunal’s Findings

Demand Prior to 01.07.2010

The Tribunal held that, insofar as the period prior to 01.07.2010 was concerned, the matter was no longer res-integra and the demand would not sustain. The Tribunal relied upon the judgments cited by the appellant and referred to the legal position concerning construction of residential complexes undertaken for personal use prior to 01.07.2010.

The Tribunal also referred to CBEC Circular No.108/2/2009-ST and held that the demand for the period prior to 01.07.2010 was not sustainable.

Re-computation for the Remaining Period

For the period beyond 01.07.2010, the Tribunal noted that the amount payable would have to be recalculated in view of the amendment brought in Rule 2A retrospectively for the relevant period. Since that provision had not been taken into account while calculating the liability, the Tribunal remanded the matter to the Adjudicating Authority.

The Adjudicating Authority was directed to take the amendment into account and re-calculate the amount recoverable. Any amount already paid towards the duty liability for the period covered by the demand was also required to be adjusted against the re-calculated demand.

Composition Scheme and Material Deduction

The Tribunal observed that denial of the composition scheme merely on procedural grounds had been consistently disapproved by the Tribunal in similar matters. Referring to Pragati Edifice Pvt Ltd., the Tribunal noted that the benefit of the composition scheme was allowable and that the matter had been remanded for re-computation.

Accordingly, the Tribunal held that the appellant was entitled to appropriate abatement/deduction and re-computation of the demand. It noted that the Show Cause Notice had computed the liability on the gross value without allowing deduction of materials. Since the activity involved transfer of property in goods, the valuation required reconsideration.

Extended Period of Limitation

On limitation, the Tribunal found that divergent views had prevailed during the relevant period. It also noted that the Government itself had brought out a retrospective amendment for the same period.

The Tribunal held that, in the absence of other cogent and strong evidence clearly indicating deliberate intent or an attempt to evade tax, the extended period was not invokable in the facts of the case.

Penalty

Relying upon Uniflex Cables Ltd., Vs Commissioner of Central Excise [2011 (271) ELT 161 (SC)], the Tribunal held that penalty was not imposable where the issue was interpretational. The penalty imposed in the impugned order was consequently set aside.

Final Decision and Directions

The Tribunal issued the following directions:

1. Demand for the period prior to 01.07.2010 was set aside.
2. For the remaining period, the matter was remanded to the Adjudicating Authority for re-computation after granting the benefit of the composition scheme/deductions in accordance with law.
3. The penalty imposed was set aside.

Appeal Nos. ST/26532/2013 and ST/22393/2014 were partly allowed accordingly. The Revenue’s Appeal No. ST/21969/2014 was also disposed of accordingly.

The order was pronounced in the open court on 13.03.2026.

Cases Discussed

• Aditya Homes 9P) Ltd., Vs Commissioner of Central Excise, Hyderabad – II [2019 (9) TMI 793 CESTAT]
• Commissioner of Central Excise, Visakhapatnam – I Vs Pragati Edifice Pvt Ltd., (Vice-Versa) [2019 (9) TMI 792 – CESTAT Hyderabad]
• Modi Ventures Vs Commissioner of Service Tax, Hyderabad by this Hon9ble Tribunal vide Final Order No.30882/2020 dated 03.03.2020.
• Modi & Modi Constructions Vs Commissioner of Central Excise, Hyderabad – II [2021 (45) GSTL 398(Tri-Hyd)].
• Casa Grande Pvt Ltd., Vs Commissioner of Service Tax, Chennai [2023 (4) TMI 349 – CESTAT, Chennai]
• Uniflex Cables Ltd., Vs Commissioner of Central Excise [2011 (2710 ELT 161 (SC)]

FULL TEXT OF THE CESTAT HYDERABAD ORDER

M/s Aruna Constructions, Visakhapatnam (hereinafter referred to as appellant) has filed this appeal against the Order-in-Original No.VIZ-STX- 001-COM-003-13 dated 30.01.2013 (impugned order) whereby, Service Tax demand along with interest and equal penalty has been confirmed.

The fact in brief is that the appellant is engaged in construction of residential complexes. Investigation was initiated by the Department alleging that the activities under taken by the appellant were liable to Service Tax for period 2007-08 to December, 2011. During investigation, the appell ant deposited an amount of Rs. 2,00,000/- proposed to be appropriated.
The Show Cause Notice classified the activity under 8Works Contract Service9. The appellant sort to discharge liability under the composition scheme; However, the Department denied the benefit on the ground th at the option was not exercised prior to payment of Service Tax.
Appeal No. ST/21969/2014 by Revenue and appeal No.ST/22393 /2014 has been filed by the appellant M/s Navya Infracon Projects (I) Pvt Ltd., against same Order-in-Original No.VIZ-STX-001-COM-007-14 dated 27.01.2014.
The appeal filed by the appellant M/s Navya Infracon Projects (I) Pvt Ltd., against demand of Service Tax on the consideration received for construction of industrial complexes during the period 2008-09 to 2011-1 2 under the category for 8Works Contract9 and imposed penalties under Section 77(1)(a), Section 77(2) and 78 of the Finance Act, whereas, Revenue filed appeal against extending the rate of tax under the valuation Rules without opting by the same appellant.
The fact in brief that the appellant provider of 8Construction of Residential Complex Service9 (CRCS) and paying Service Tax applicable and availing the abatement as provided for the said service i.e., on 25% of the consideration. With the clarifications issued by CBEC vide various circulars stating that if a builder undertakes constructions of residential complex without engaging a contractor then Service Tax is not liable to tax, the appellant stopped collecting Service Tax and paying to the Department, though he was registered with the Department and filing returns claim ing exemption to the said service in the returns. The Department issued Show Cause Notice proposing change of classification of service under works contract since construction of complex falls under the definition of the 8works contract9, without giving any abatement.
Vide the impugned order, the Learned Adjudicating Authorit y confirmed demand on both the consideration received from the clients and on service provided to land owner by taking the rate at which the appellant sold flats to his clients. On the issue of demand for the extended period of the Commissioner held that same is applicable on account of misclassification of the service and also not paying full tax even under CRCS.
Being aggrieved as above they have filed appeal before the Tribunal.
In all appeals, issues involve almost same so heard simultaneously to decide the appeals together.
Learned Counsel for the appellant submits that prior to inser tion of explanation to Section 65(105)(zzzh) with effect from 01.07.2010, construction of residential complex undertaken for personal use was not taxable. Learned Counsel for the appellant place reliance on CBEC Circular No.108/2/2009-ST dated 29.01.2009.
Learned Counsel for the appellant also relied upon the followin g decisions:

(i) Aditya Homes 9P) Ltd., Vs Commissioner of Central Excise, Hyderabad – II [2019 (9) TMI 793 CESTAT]

(ii) Commissioner of Central Excise, Visakhapatnam – I Vs Pragati Edifice Pvt Ltd., (Vice-Versa) [2019 (9) TMI 792 – CESTAT Hyderabad]

(iii) Modi Ventures Vs Commissioner of Service Tax, Hyderabad by this Hon9ble Tribunal vide Final Order No.30882/2020 dated 03.03.2020.

(iv) Modi & Modi Constructions Vs Commissioner of Central Excise, Hyderabad – II [2021 (45) GSTL 398(Tri-Hyd)].

(v) Casa Grande Pvt Ltd., Vs Commissioner of Service Tax, Chennai [2023

(4) TMI 349 – CESTAT, Chennai]

(vi) Uniflex Cables Ltd., Vs Commissioner of Central Excise [2011 (2710 ELT 161 (SC)]

12. Learned Counsel for the appellant submits that the demand h as been computed on gross value without allowing deduction for material port ion or benefit of composition scheme.
Learned Counsel for the appellant submits that there was no suppression of facts since all transactions were duly recorded.
Learned Authorized Representative (AR) for the Department reit erates the findings of impugned order and submits that the appellant fai led to exercise the option for composition scheme within prescribed time.
Heard Learned Counsel for the appellant C.S. Srinivasa Rao and Learned Representatives of the Department Shri V.R. Pavan Kumar and Shri B. Sangameshwar Rao and perused the records with their submissions.
In the present case, following issues arise for determination: i) Whether construction of residential complex undertaken by the appellant prior to 01.07.2010 is liable to Service Tax. ii) Whether benefit of composition scheme or deductions is to be extended. iii) Whether invoking of extended period and penalty are sustainable.
In so far as the period prior to 01.07.2010 is concerned, matte r is no longer res-integra and demand will not sustain. Reliance is placed on various judgments cited by the appellant. For the period beyond 01.07.2010, it is on the record that in terms of the amendment brought in Rule 2A retrospectively for the period beyond 02.07.2010, the amount payable would have to be re-calculated. Admittedly, this provision has not been taken into account while calculating the duty liability for the appellant during relevant period. Therefore, we consider that this aspect needs to be remanded back to the Adjudicating Authority, who shall take into account the amendment provision and re-calculate the amount of duty recoverable from the appellant. Further, if any amount has been paid towards duty liabilities for the period for which the demand has been made, this also needs t o be adjusted against re-calculated demand.
We find that denial of composition scheme merely on procedural grounds has been consistently disapproved by the Tribunal in similar matters. In Pragati Edifice Pvt Ltd., supra, wherein, it was held that benefit of composition scheme is allowable and matter has been remanded for re- computation.
Accordingly, the appellant is entitled for appropriate abate ment / deduction and re-computation demand. The Show Cause Notice computed liability on gross value without allowing deduction of materials. Since, the activity involves transfer of property in goods, valuation requires reconsideration.
The issue regarding taxability of construction of residential complex prior to insertion of explanation to Section 65(105)(zzzh) stands settled by Tribunal decisions including Aditya Homes (P) Ltd., and Pragati Edifice Pvt Ltd., supra, wherein, it has been held that such activity under t aken for personal was not taxable prior to 01.07.2010.
CBEC Circular No.108/2/2009-ST also clarifies the legal position. Hence, demand for period prior to 01.07.2010 is not sustainable.
On the issue of limitation also, we find that there was divergent views prevailing during the relevant period. The Government itself brought out certain retrospective amendment for the same period. We find that in t he absence of any other cogent and strong evidence clearly indicating any deliberate intent or attempt to evade the tax, the extended p eriod is not invokable in the facts of the case.
Hon9ble Supreme Court in Uniflex Cables Ltd., Vs Commissioner of Central Excise [2011 (271) ELT 161 (SC) it was held that the penalty is not imposable where, issue is interpretational. Hence, penalty is not imposable.
(i) Demand for period prior to 01.07.2010 is set aside.

(ii) For remaining period, matter is remanded to Adjudicating Authority for re-computation after granting benefit of composition scheme / deductions in accordance with law.

(iii) Penalty imposed is set aside.

25. Appeal Nos.ST/26532/2013 and ST/22393/2014 are partly all owed as above. Appeal filed by the Revenue in Appeal No.ST/21969/2014 is also disposed off accordingly.

(Pronounced in the open court on_13.03.2026_)