Modi Ventures Vs Commissioner of Central Tax (CESTAT Hyderabad)
The appellant, a builder of flats under the project named Gulmohar Gardens, acquired land, constructed flats to some extent and sold them to prospective buyers under two separate agreements: a sale deed for sale of undivided interest in land along with an incomplete structure, on which appropriate stamp duty was paid, and a construction agreement for completion of the flat according to the customers’ requirements. The appellant had initially registered under “construction of complex service” and discharged service tax, but subsequently discontinued payment after relying upon CBEC Circular No. 108/2/2009-ST dated 29.01.2009.
A show cause notice dated 24.10.2011 demanded service tax of Rs 1,38,13,576/- including cess for the period 01.06.2007 to 31.12.2010, together with interest and penalties under Sections 78 and 77(2) of the Finance Act, 1994. The adjudicating authority confirmed the demand, interest and penalties. Before the Tribunal, the appellant contended, inter alia, that service tax was not leviable before 01.07.2010; construction services provided for personal use were excluded from “construction of residential complex service”; certain amounts such as corpus fund, electricity charges, stamp duty, registration charges and VAT had been wrongly included in the taxable amount; the extended period was not invocable; and interest and penalties were not imposable.
The Tribunal first examined the constitutional and statutory framework governing works contracts. It referred to the Constitution Bench decision in State of Madras Vs Gannon Dunkerly & Company Madras Ltd [1959(SCR)379)], also reported in [2015(330)ELT 11 SC], concerning the treatment of indivisible works contracts. It noted that the Constitution (46th Amendment) Act, 1983 inserted Article 366(29A), enabling States to tax the transfer of property in goods involved in execution of works contracts. The Tribunal also referred to Builders Association of India Vs UOI (1989 2 SCC 645), which upheld the constitutional amendment.
The Tribunal thereafter considered the Supreme Court ruling in Commissioner of Central Excise & Customs Vs Larsen & Toubro Ltd [2015(39)STR 913(SC)]. It noted that works contract service was separately brought within the service-tax charging framework with effect from 01.07.2007 under Section 65(105)(zzzza) of the Finance Act, 1994. The relevant taxable category covered, among other specified contracts, construction of a new residential complex or a part thereof.
The Tribunal then examined Section 65(91a), which defined “residential complex” and expressly excluded a complex constructed by a person directly engaging another person for designing or planning the layout where the construction was intended for personal use as residence. It also considered Section 65(105)(zzzh), relating to construction of complex service, including the explanation inserted with effect from 01.07.2010. According to the Tribunal, prior to that amendment, construction undertaken by a builder before completion certificate and transfer to the buyer was treated as self-service and was not taxable under construction of complex service.
The Tribunal relied upon Krishna Homes Vs CCE Bhopal [2014 (34) STR 881(Tri-Del)], which had considered whether the limitation applicable to construction of complex service before 01.07.2010 also extended to construction undertaken as works contract service. The Tribunal noted that the issue had been answered in the affirmative and that the decision had subsequently been followed by various Benches, including the Hyderabad Bench.
The Tribunal summarised the applicable position as follows: prior to 01.06.2007, composite works contracts were not liable to service tax in view of Larsen & Toubro; from 01.06.2007, composite contracts were chargeable under works contract service while service simpliciter was covered under construction of complex service; however, between 01.06.2007 and 01.07.2010, construction rendered before completion certificate and transfer to the buyer was not taxable as self-service; construction or completion of a flat for the personal use of the service recipient was excluded from the residential complex definition; and after 01.07.2010, the applicable levy depended upon whether the activity was service simpliciter or a composite works contract, subject to the personal-use exclusion.
Applying this position, the Tribunal held that no service tax could be charged from the appellant for services rendered as works contract services during the period 01.06.2007 to 01.07.2010.
For the period from 01.07.2010 to 31.12.2010, the Tribunal found that the appellant had entered into two contracts with individual buyers—one for sale of land and the second for construction of the flat. It held that, for service tax to be levied under works contract service, the activity first had to constitute construction of a new residential complex or a part thereof or completion of unfinished services related to it. Since Section 65(91a) specifically excluded construction intended for personal use by an individual, and the builder had entered into separate construction agreements with individual flat owners, the activity fell outside the relevant definition.
Accordingly, the Tribunal held that no service tax was leviable even for the period after 01.07.2010. It therefore set aside the entire demand along with interest and penalties, allowed the appeal and set aside the impugned order.
Cases Discussed
- State of Madras Vs Gannon Dunkerly & Company Madras Ltd, [1959(SCR)379)] / [2015(330)ELT 11 SC] — considered in relation to the constitutional treatment of indivisible works contracts and taxation of goods involved therein.
- Builders Association of India Vs UOI, (1989 2 SCC 645) — considered in relation to the validity of the Constitution (46th Amendment) and Article 366(29A).
- Commissioner of Central Excise & Customs Vs Larsen & Toubro Ltd, [2015(39)STR 913(SC)] — considered on the levy of service tax on composite works contracts and the introduction of the specific works contract service category.
- Krishna Homes Vs CCE Bhopal, [2014 (34) STR 881(Tri-Del)] — relied upon for the proposition that the limitation on taxation of construction services before 01.07.2010 also extended to works contract services.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
Heard both sides and perused the records. This appeal has been filed against the impugned order No. 06/2013-Adjn (ST)Commr dated 17.01.2013. The appellant herein is a builder of flats under the project 2 named Gulmohar Gardens. He acquired the land, constructs flats to some extent and then sells them to the prospective buyers under two agreements
(1) the sale deed for sale of undivided interest in land along with an incomplete structure on which appropriate stamp duty is paid
(2) a construction agreement for completion of the flat as per the requirement of the customers. Initially, they got themselves registered for service tax under the category of “construction of complex service” and have been discharging service tax accordingly. Thereafter, based on a Circular No. 108/2/2009-ST dated 29.01.2009 issued by the CBEC, they came to the conclusion that they were not liable to pay service tax and discontinued paying service tax. A show cause notice dated 24.10.2011 was thereafter issued to the appellant demanding service tax of Rs 1,38,13,576/- including cess for the period 01.06.2007 to 31.12.2010 along with interest. It was also proposed to impose penalties upon the appellant under Section 78 of the Finance Act 1994 and also under Section 77(2) of Finance Act 1994. After following due process, the learned adjudicating authority passed the impugned order confirming the demands along with interest and imposing penalties as proposed in the show-cause notice. Aggrieved, the appellant challenged the demand on the following grounds:
(i) prior to 01.07.2010 no service tax could be levied on activities of the appellant,
(ii) Construction services provided for personal use are excluded from the definition of “construction of residential complex service”
(iii) There were some amounts such as those collected towards corpus fund, electricity charges, stamp duty, registration charges and VAT 3 which have been included in the taxable amount in the show-cause notice, which is unsustainable.
(iv) Extended period of limitation is not invokable.
(v) Interest and penalties are not imposable.
2. Learned A.R. supports the impugned order. We have considered the arguments on both sides and perused the records. Before proceeding to decide the demands on merit, it would be useful to review the appropriate legal provisions. The Constitution of India divided the legislative powers between Union of India and States listing them in three lists of the Seventh schedule. Service tax is levied by the centre as per its legislative competence under Article 265 read with entry 97 of list-1 of the schedule. Tax on sale or purchase of goods falls within the competence of States as per list-2. Initially, Constitution of India as well as its predecessor, the Govt of India Act-1935, did not provide for taxing the goods used in executing indivisible works contract. The provincial Govt of Madras had attempted to tax the goods used in works contract treating them as deemed sale of goods and this was struck down by Constitution Bench of the Hon’ble Supreme Court in the case of State of Madras Vs Gannon Dunkerly & Company Madras Ltd [1959(SCR)379)] also reported in [2015(330)ELT 11 SC].
3. After examining the above judgement the law Commission of India made suggestions to make amendments to the Constitution to bring the taxation of goods used in works contract within the legislative competence ofth States to tax. After examining the suggestions, the parliament passed 46 amendment to the Constitution in 1983 by inserting Clause (29A) to Article 366. The definition of clause is as follows: “tax on the sale or purchase of goods” includes- (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer. Delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.” This amendment was challenged in the case of Builders Association of India Vs UOI (1989 2 SCC 645) and it was upheld by the Apex Court.th
4. Thus the legislative competence to tax has been enlarged by the 46 Constitutional amendment and to that extent, the scope of the residual clause entry 97 of the Union List was truncated. In other words, prior toth 46 amendment, tax on composite works contract could be levied by theth Union (although they never levied it) and after 46 amendment, the Union was competent to levy the tax only on such contracts to the extent they did not represent deemed sale or purchase of goods under Article 366(29A). The legislative competence of the Union to tax “works contracts” per se was never in doubt.
5. The question as to whether taxation of works contracts is covered by the charging section of the service tax provisions (Finance Act 1994) or otherwise was examined by the Hon’ble Supreme Court in the case of Commissioner of Central Excise & Customs Vs Larsen & Toubro Ltd. Section 66 & 66A of this Act are the charging sections. Section 66 charges service tax on taxable services referred to in various sub-clauses of clause 105 of Section 65. Section 66A dealt with charging the service recipient under reverse charge mechanism in certain cases. The question before the Hon’ble Apex Court in the case of Larsen & Toubro Ltd (supra) was whether the service tax could be levied on contracts which involve both supply of goods and rendering of services. Initially, service tax was levied under various sub-clauses of clause 65 (105) of the 5 Finance Act 1994. Wherever such services also involved use of some material, exemption notifications were issued giving abatement towards cost of the material involved on actual or presumptive basis. Later, with effect from 01.07.2007 a separate entry called “works contract service” was introduced by way of Section 65(105)(zzzza). The Hon’ble Apex Court has decided that service contracts are a separate specie of contracts known to the trade and they cannot be equated with contracts for service simpliciter. Therefore such contracts can be charged to service tax only with effect from 01.07.2007 and as works contract service (when works contracts were brought under charging Section 66).
6. The definition of works contract service is as follows: Section 65(105)(zzzza) “any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, executing works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams, is a taxable service; Explanation.—For the purposes of this sub-clause, “works contract” means a contract wherein,—
(i) Transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and
(ii) Such contract is for the purposes of carrying out,—
(a) Erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
(b) Construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or
(c) Construction of a new residential complex or a part thereof; or
(d) Completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or
(e) Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;”
As may be seen, the charge of service tax on works contract service did not cover all types of works contract but only such contracts which are specified in the above definition. For the purpose of of this case the relevant clause is clause (c) “construction of new residential complex or a part thereof”.
6. It is therefore important to examine the scope of the term “residential complex”. It has been defined in section 65 (91a) as follows:
“residential complex” means any complex comprising 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, community hall, common water supply or effluent treatment system, located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.
Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this clause, —
(a) “personal use” includes permitting the complex for use as residence by another person on rent or without consideration;
(b) “residential unit” means a single house or a single apartment intended for use as a place of residence.”
For a charge to sustain under Works Contract Service, the nature of service must be one of construction of residential complex service. The charge for construction of complex service as service simpliciter is under Section 65(105)(zzzh) which reads as service “to any person by any other person in relation to construction of complex” an explanation was inserted with effect from 01.07.2010 in this clause as follows:- “Explanation: For the purposes
7 of this sub-clause construction of a complex which is intended for sale, wholly or partly by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer”.
The implication of this explanation is that before 01.07.2010, any service rendered by the builder for construction of complex before issue of completion certificate and handing it over to the buyer was treated as self- service and was not taxed. After 01.07.2010 if advances were received from prospective buyers by the builders and services were rendered before the issue of completion certificate then such services were brought within the scope of “construction of complex service.”
7. Thus, as far as service tax under “construction of complex services” is concerned, prior to 01.07.2010 (when the explanation was inserted), no tax could be levied. This was also clarified by the CBEC in Circular No. 108/2/2009/ST dated 29.01.2009. The question before the Tribunal Principal Bench in the case of Krishna Homes Vs CCE Bhopal [2014 (34) STR 881(Tri-Del)] was whether this limitation on taxation prior to 01.07.2010 also extends to cases where such services were rendered not as “construction of complex services” but as “works contract services” and it was answered in affirmative. To sum up, as far as construction of residential complex by builders are concerned:
(i) Prior to 1-6-2007, if it is a composite works contract, no Service Tax is leviable in view of the judgment of the Hon’ble Apex Court in the case of Larsen & Toubro (supra).
(ii) After 1-6-2007, it is chargeable under ‘works contract’ if it is a composite contract and under ‘construction of complex services’ if it is a service simpliciter.
(iii) However, after 1-6-2007 but prior to 1-7-2010, whether it is a service simpliciter or a works contract, if the service is rendered prior to issue of completion certificate and transfer to the buyer, it is not taxable the service being in the nature of self service.
(iv) Further, whenever the service is rendered for completion or construction of a flat for personal use of the service recipient, no Service Tax is payable in view of the exclusion in the definition of residential complex service.
(v) After 1-7-2010, Service Tax is chargeable under the head of ‘construction of complex services’ if it is service simpliciter and under ‘works contract service’ if it is a composite works contract unless it is for personal use of the service recipient.
8. The decision of the Principal bench of the Tribunal in the case of Krishna Homes (supra) was followed by various other benches including this Bench in several cases. We find no reason to take a different view in this case. Accordingly, we hold that no service tax could be charged from the appellant in respect of the services rendered by them as works contract services for the period 01.06.2007 to 01.07.2010.
9. This leaves us with the period from 01.07.2010 to 31.12.2010.
10. The undisputed fact is that appellant had entered into two contracts one for sale of land and the second construction agreement for the flat with individual buyers. For a tax to be levied under works contract service, in the first place, it must be either construction of a new residential complex or a part thereof or completion of unfinished services related to it. The term “residential complex” under Section 65(91a) specifically excludes any construction for personal use by an individual. This builder has planned his business with a separate construction agreement entered into with individual flat owners. Hence they get excluded from the definition of works contract service. Therefore no service tax can be levied even for the period post 01.07.2010.
11. In view of the above, we find that the entire demand needs to be set aside along with interest and penalties and we do so. The appeal is allowed and the impugned order is set aside.
(Operative portion of the order pronounced in open court on conclusion of the hearing)
