Commissioner of Central Tax Vs C S K Realtors Ltd. (CESTAT Hyderabad)
Summary: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad Regional Bench, comprising Judicial Member Shri Anil Choudhary and Technical Member Shri A.K. Jyotishi, dismissed two appeals filed by the Commissioner of Central Tax, Hyderabad-GST, against C S K Realtors Ltd. The controversy concerned the construction of independent row houses and villas situated within gated residential developments, and whether such construction attracted service tax as Construction of Residential Complex Service or Works Contract Service. The disputed period was Financial Year 2009-10 to March 2013, covering both the earlier service-tax regime and the negative-list framework introduced on 1 July 2012. The Department had proposed recovery of ₹5,27,13,977, with penalties, by invoking the extended period of limitation. The Commissioner had dropped the proceedings, and the Revenue challenged that decision before the Tribunal.
C S K Realtors Ltd. developed residential projects known as Prestige County and CSK Green Villas at Shamshabad and Shadnagar, respectively. Its business model involved acquiring and developing land, preparing layouts, securing approvals and providing common facilities such as internal roads, parks, parking areas, overhead water tanks, underground utilities, sewage arrangements and streetlights. The developer then sold individual developed plots to customers through registered sale deeds. Only after the purchaser became the owner of the land did the developer enter into a separate agreement for construction of an individual house or villa, based on the purchaser’s requirements and the building plan approved in the purchaser’s name.
The assessee maintained that the transaction involved two distinct stages: sale of a developed plot and construction of an individual residential unit for its owner. The developer did not retain an enforceable right to compel the purchaser to construct a villa through it. Indeed, the original order records the example of a purchaser who chose to construct a mosque independently on a plot purchased from the developer. The assessee contended that the independent construction contracts were entered into for the personal use of the respective landowners and did not amount to construction of a taxable residential complex within the meaning of Section 65(91a) of the Finance Act, 1994.
The adjudicating Commissioner accepted that contention. For the period preceding 1 July 2012, the Commissioner held that individual houses constructed on land already belonging to their respective purchasers, through separate construction agreements, were excluded from the taxable residential-complex category. The Commissioner referred to CBEC Circular No. 108/2/2009-ST dated 29 January 2009, dealing with construction undertaken for the personal use of the ultimate owner. The Commissioner also relied upon Macro Marvel Projects Ltd. Vs Commissioner of Service Tax, Chennai, 2008 (12) S.T.R. 603 (Tri.-Chennai), whose decision had been affirmed by the Supreme Court through dismissal of the Department’s appeal.
For the period beginning 1 July 2012, the Commissioner considered the exemption under Entry 14(b) of Notification No. 25/2012-ST dated 20 June 2012, relating to construction of a single residential unit otherwise than as part of a residential complex. Each individual house was approved and constructed for the particular plot owner, and the Commissioner considered it a self-contained residential unit. On that reasoning, the Commissioner dropped the service-tax proceedings for the entire disputed period.
The Revenue appealed on the ground that the projects were large gated developments rather than isolated independent houses. It referred to information suggesting that Prestige County had approximately 300 residential plots and CSK Green Villas approximately 1,500 plots or villas. The Department emphasised the presence of common amenities, including gardens, recreation facilities, a swimming pool, gymnasium, clubhouse, security and other services. It also highlighted separate versions of construction agreements, one of which expressly mentioned the purchasers’ entitlement to common facilities. According to the Revenue, these features brought the projects within the statutory definition of residential complex and disqualified the assessee from the single-residential-unit exemption.
The Revenue further relied upon the revised definition of residential complex under Notification No. 25/2012-ST, which referred to a complex comprising a building or buildings having more than one single residential unit. It submitted that the existence of separate buildings within the gated community did not prevent the entire development from qualifying as a residential complex. It also relied upon the decisions in Esha Homes Vs Commissioner and Modi & Modi Constructions to support its interpretation of the residential-complex definition.
The assessee opposed the appeals and maintained that the controversy had already been settled by binding precedents. It relied principally upon Macro Marvel Projects Ltd., in which the Tribunal had held that individual residential units were not intended to be taxed as construction of a residential complex under the relevant statutory entry. The assessee also referred to Baba Construction Pvt. Ltd., 2018 (15) G.S.T.L. 345, which addressed individual houses constructed within a gated community and whose result had been affirmed by the Supreme Court, reported as 2018 (15) G.S.T.L. J120 (SC). Both authorities, according to the assessee, supported exclusion of separately constructed houses from the proposed levy.
The Tribunal examined the actual transactional structure and found it decisive that C S K Realtors had first sold developed plots to individual purchasers. Thereafter, each purchaser entered into a separate contract for construction of a single house or residential unit, with the approved house plan issued in the purchaser’s name. The Tribunal concluded that the relevant activities fell within the exclusion or exemption for individual residential construction under the applicable legal frameworks. It held that there had been no significant change, relevant to the facts of this case, warranting a different result merely because the disputed period extended beyond 1 July 2012. The Tribunal followed the decisions in Macro Marvel Projects Ltd. and Baba Construction Pvt. Ltd., noting their approval by the Supreme Court.
Consequently, the Tribunal held that the construction of these independent houses or villas did not attract service tax in the circumstances established on record, notwithstanding their location within larger gated communities having shared amenities. The Revenue’s objections based upon the size of the developments and common facilities did not displace the significance of separate ownership and individual construction arrangements. By Final Order Nos. A/30185-30186/2024 dated 6 March 2024, CESTAT Hyderabad found no merit in either departmental appeal and dismissed both appeals, thereby sustaining the Commissioner’s decision to drop the proposed demand of ₹5,27,13,977 and related proceedings.
Cases Discussed
1. Macro Marvel Projects Ltd. Vs Commissioner of Service Tax, Chennai — 2008 (12) S.T.R. 603 (Tri.-Chennai); affirmed by Supreme Court, 2012 (25) S.T.R. J154 (SC). Relied upon by the adjudicating Commissioner and the respondent; followed by the Tribunal for the treatment of individual residential units. Related TaxGuru judgment.
2. Esha Homes Vs Commissioner — 2012 (25) S.T.R. 465 (Tri.-Chennai); interim stay order dated 20/10/2011. Cited by the Revenue as a basis to distinguish Macro Marvel Projects.
3. Modi & Modi Constructions Vs Commissioner — 2021 (45) G.S.T.L. 398 (Tri.-Hyderabad). Discussed in the Revenue’s arguments, including the separate plot-sale and construction-agreement structure and differences expressed by Tribunal members. Related TaxGuru judgment.
4. Baba Construction Pvt. Ltd. Vs Commissioner — 2018 (15) G.S.T.L. 345 (Tri.-All.); affirmed by Supreme Court, 2018 (15) G.S.T.L. J120 (SC). Relied upon by the respondent and followed by the Tribunal concerning individual houses constructed in gated communities. Related TaxGuru judgment.
FULL TEXT OF THE ORDER OF CESTAT HYDERABAD
As the respondent assessee is engaged in construction & sale of flats, villas and plots. In this appeal by Revenue, the issue involved is whether vide impugned Order-in-Original, the Learned Commissioner have rightly dropped the demand/proceedings vide Show Cause Notice Dated 20.04.2015 by which it was proposed to demand service tax on the row houses constructed in a gated community.
2. The brief facts are – respondent assessee is registered with the service tax department for payment of service tax under the head Works Contract Service etc. Pursuant to enquiry and calling for records including recording of statement of Shri Suresh Kumar Agarwal, Director of the Company, it appeared to Revenue that the respondent assessee is liable to pay service tax under the head Works Contract Service as defined under Section 65 (105)(zzzza) read with Section 65(30a) on the activity of row houses in a gated community. Accordingly, show cause notice dated 13.08.2014 was issued invoking the extended period of limitation demanding service tax for the period 2009-10 to March 13 for Rs. 5,27,13,977/- under the composition scheme, further penalty was also proposed under Section 78 and 77 of the Act.
3. The show cause notice was adjudicated on contest. The appellant had in their reply to show cause notice interalia urged that after acquiring land they prepare the lay out by dividing into plots as well as space for common amenities like roads, park, parking space etc. After getting the required permission from the Local Authorities, they sell developed plot(s) to individual buyers. Thereafter, the appellant enters into agreement with the buyer of the plot for undertaking construction of the single house/villa. The respondent have developed two projects namely i) Prestige County and ii) CSK Green Villas at Shamshabad and Shadnagar Villages respectively.
4. It was further urged by the respondent that all the facilities such as Internal Roads, Parks, Overhead Water Tank, underground electricity, water and sewage lines and Street Lights were provided during the course of plotting of the land and the fully developed Plots were sold to the buyers. These facilities are pre-existing the sale of the Plot, after payment of appropriate Stamp Duty to the Government. After this, basing on the requirement, the buyer of the vacant Plot enters into an agreement for construction. The Respondent submitted that in some cases, the buyer of the Plot may not opt for construction of a Villa at all, and may opt to construct a Civil Structure as per his requirement/religious belief. The Respondent submitted that in one of the Plots sold by them, the buyer opted to construct a Masjid on his own and the Respondent has no legal right to stop such construction or to insist that such construction shall be made only by them.
5. It was further urged by the respondent that they have not constructed a complex or building comprising of 12 or more dwelling units. So accordingly, they are not liable to pay service tax.
6. The Learned Commissioner observed that with effect from 01.07.2012, when negative list regime was introduced, the activity of appellant is covered under Works Contract Service as per Section 66E read with Section 65B(54). It is further observed that vide serial no. 14(b) of Notification No. 25/2012-ST the construction of a Single Residential Unit, otherwise than as a part of residential complex, has been exempted. Further, residential complex for the purpose of the exemption notification has been explained as – means any complex comprising of a building or buildings having more than 1 single residential unit.
7. Further, for the period prior to 30.06.2012, it was held, that where construction of the building is intended for personal use of the owner, same is not taxable. In the instant case, construction activity has been rendered after the transfer of ownership of the plot to the buyer through sale deed. Thereafter separate construction agreement have been entered, after the change of the ownership. Further observed that all the residential units are constructed with prior approved plan in the name of the buyer of the plot. Thus in the facts, the construction of the building/house/villa on the land belonging to buyer, amounts to construction of a single residential unit. Further, admittedly construction of such house/villa is for personal use of the buyer and is excluded from the purview of service tax. Reliance was placed on Board Circular No. 108/2/2009 dated 29.01.2009, wherein it was clarified by the Board – if the ultimate owner enters into a contract for construction of a residential complex with the promoter/builders/developer, who himself provides service of design, planning and construction and after such construction, the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’.
8. It was further held, that the activity of construction of single residential unit is excluded from payment of service tax, as per definition of service tax itself.
9. So far taxability with effect from 01.07.2012 is concerned it was observed that the individual buyers of the plot have got the building plan approved in their name, and there after got the house/villa constructed from the respondent assessee. It was observed that the assessee after approval of layout, have sold developed plots to individual buyers. Such buyers have thereafter got the house/villa constructed from the respondent as per the building plan approved in their own names. Each such building is a single residential unit and cannot be considered as part of any residential complex. Further observed, a ‘single residential unit’ is explained as a self contained residential unit which is used wholly or principally for residential purpose of one family. Further observed that vide clause 14(b) of Notification No. 25/2012-ST, the construction of a single residential unit/house is exempted. Learned Commissioner also relied on the ruling in the case of M/s Macro Marvel Projects Ltd., Vs Commissioner of Service Tax, Chennai [2008 (12) STR 603 (Tri-Chennai)]. In this ruling, the Tribunal on appreciation of the provisions of law held that – construction of residential complex/building having not more than 12 residential units, is not sought to be taxed under service tax. For the levy it should be a residential complex comprising of more than 12 residential units. It is evident that the law makers did not want construction of individual residential units to be subject to levy of service tax.
10. The said ruling of Tribunal have been upheld by Hon’ble Supreme Court as reported in [2012 (25) STR J154 (SC)]. Accordingly, the Learned Commissioner was pleased to hold that the appellant is not liable to service tax in the facts and circumstances for the period prior to 01.07.2012 as well as after 01.07.2012. Accordingly, dropped the proceedings.
11. Being aggrieved, Revenue is in appeal on the ground(s) interalia that respondent assessee have developed 2 projects, i) Prestige County – having 300 residential plots and ii) CSK Green Villas – having 1500 plots/villas as per the information available on internet. Further in the said complex, various common facilities are available like garden, recreation facility, 24 hour power backup, common security, club service, swimming pool, gymnasium, air water harvesting etc.
12. Further urges that the purchaser(s) of plot is entitled to free membership of the common amenity of swimming pool and club house in the gated community.
13. The respondent has prepared the construction agreement in two sets of even or the same date. While in one set of construction agreement the clause relating to free membership of the buyer to the common amenities in the gated community is mentioned, the other set does not mention the same. Admittedly, each of the gated community consists of more than 12 residential units/houses and thus the activity fits into the definition of residential complex.
14. Further urges that the Learned Commissioner have erred in not considering the common facilities in the gated community, jogging park, swimming pool etc., which respondent assessee had agreed to provide to the buyer as per the construction agreement. Further, reliance is placed on the definition of residential complex under Section 65(91a) of the Act which reads as followed:
“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;
15. Further, with effect from 01.07.2012 residential complex is defined vide Clause 2(zc) of Notification No. 25/2012-ST as – any complex comprising of a building/buildings, having more than one single residential unit.
16. Thus due to change in the definition from 01.07.2012 it is evident that residential complex can comprise of a building/buildings. Hence to fall under the definition it is not mandatory to have all the residential units in a single building. In other words, in a gated community, if there are more than 12 residential houses/units, the same will fall under the service tax net, when constructed by a builder/developer.
17. It is further urged with reference to construction agreement dated 27.04.2011 entered into by the assessee with one Shri China Kotya Naik, approval of layout have been obtained from HMDA vide Letter dated 19.07.2009 in respect land measuring 71 acres 19 Guntas in respect of CSK Green Villa Project. Further, from the construction agreement dated 23.10.2012 entered between the respondent with Shri Venkat Appa Rao, the layout plan was approved from the Gram Panchayat in respect of M/s Prestige County Project. Section 65(91a) (with respect to period upto 13.06.2012) provides for common amenities located within the layout of premises approved by the competent authority, but not about the building plan.
18. It is further urged that exemption under Clause 14(b) of Notification 25/2012 exempts construction of a single residential house or unit and thus is not available to a house/unit, which is part of a residential complex.
19. It is further urged that the ruling of M/s Macro Marvel Project is not applicable in the facts of the instant case as the said case only deals with the construction of individual houses, and it is not a case of construction of group of individual houses with common facilities. The same have been distinguished by this Tribunal in Esha Homes Vs Commissioner [2012 (25) STR 465 (Tri-Chennai)] in the Interim Stay Order dated 20.10.2011. Reliance is also placed on the ruling of Co-ordinate Bench in the case of M/s Modi and Modi Constructions [2021 (45) GSTL 398 (Tri-)] wherein the dispute under similar facts was for the period January 2009 to December 2011. This Tribunal have held that “the construction of houses in a gated community, being more than 12 with common facilities, will qualify as a residential complex, observing that in the case of Micro Marvel Projects, the full definition under Section 65(91a)” was not considered, as is evident from the Final Order of the said case. Further, in that case the Tribunal held that the show cause notice itself states that the plots along with semi finished buildings were sold to the buyers under sale agreement/deed. Thereafter, a separate agreement was entered with the individual plot/home owners for completion of the building. In other words, there is no agreement for completion of the entire complex, but there are a number of agreements with each individual owner for completion of their building. In other words, the individual owner is engaging the assessee for construction of the complex for his personal use as residence, which activity is categorically excluded under the definition in Section 65(91a). Accordingly, the Tribunal set aside the demand allowing the appeal of Modi and Modi Constructions.
20. In the said judgment, the Learned Member (Judicial) differed with the observations of the Member (Technical) – that in case of houses in a gated community, the same being held taxable by the Member (Technical), inspite of ruling in Macro Marvel Projects of Apex Court.
21. Accordingly, Learned AR for Revenue prays for allowing their appeal and to confirm the taxing proposal in the show cause notice.
22. Opposing the appeal, Learned Counsel for the respondent assessee states that the issue in appeal is no longer res-integra. Admittedly, the Order of this Tribunal in M/s Macro Marvel Projects Ltd.,(supra) have been approved by the Apex Court by dismissing the appeal of Revenue. There is no presumption in law, that explanation to Section 65(91a) was not considered by Apex Court in Macro Marvel Projects Ltd. Further urges that in similar facts and circumstances, in the matter of Baba Construction Pvt Ltd., the Allahabad Bench also held that where individual houses are constructed in a gated community, the same is excluded under the definition in Section 65(91a) as reported at [2018 (15) GSTL 345]. The said ruling was also upheld by Apex Court against Revenue and the appeal was dismissed, reported at [2018 (15) GSTL J120 (SC)]. Accordingly, prays for dismissing the appeal of Revenue.
23. Having considered the rival contentions, we find that there is no significant change in the definition of residential complex as defined in Section 65(91a) of the Act both before and after 01.07.2012. Admittedly, the Respondent have sold developed plots to the buyers. Thereafter they have entered into agreement with the buyer/owner of plot to construct single house or residential unit. The house plan is also approved in the name of owner/buyer of the plot. Thus the activity is excluded or exempt both before and after 01.07.2012. Further, we find that the said issue is no longer res integra, in view of the ruling of this Tribunal in Macro Marvel Projects Ltd., & Baba Construction (supra) and which have been approved by the Apex Court.
24. In view of our findings and observations, we find no merit in these appeals by Revenue, and we dismiss the same.
(Order Pronounced in open court on 06.03.2024)
