Silver City Construction Ltd. Vs Commissioner of Central Excise, Chandigarh-I (CESTAT Chandigarh)
Summary: The Customs, Excise and Service Tax Appellate Tribunal, Chandigarh Regional Bench, comprising Judicial Member Shri Ashok Jindal and Technical Member Shri P.V. Subba Rao, allowed the appeal filed by Silver City Construction Ltd. against the confirmation of service tax on construction of residential flats for the period April 2005 to February 2008. The dispute principally concerned whether a builder who constructs residential apartments on land owned by it, enters into agreements with prospective purchasers, receives advances and subsequently executes sale deeds after completion of construction can be regarded as providing taxable Construction of Complex Service to those purchasers. The Tribunal held that, in the circumstances established on record and under the law applicable to the disputed period, the construction undertaken before sale constituted self-service and did not attract the service tax demand confirmed against the appellant.
Silver City Construction Ltd. was registered with the Central Excise Department as a provider of construction of complex services and had undertaken residential projects known as Silver Heights, Silver Themes and Silver Green at Zirakpur, Punjab. The developments comprised more than twelve apartments within a common area. According to the assessment proceedings, the appellant constructed the flats itself or through contractors engaged by it on land belonging to the company. It entered into agreements with allottees, received advances during the course of construction and executed sale deeds transferring the flats only after completion. The Department alleged that these transactions constituted taxable services rendered by the appellant to prospective purchasers under Section 65(105)(zzzh) of the Finance Act, 1994, and issued a show cause notice dated 8 October 2008 demanding tax for the period April 2005 to February 2008.
The adjudicating authority confirmed the service tax demand along with interest, although it dropped the proposed penalty. The Commissioner (Appeals) upheld the adverse determination, leading Silver City Construction Ltd. to approach CESTAT. The appellant argued that its relationship with the purchasers was that of a seller and buyers, not that of a service provider and service recipients. It retained ownership of the land and the flats during construction and transferred the completed immovable property only through registered sale deeds. Any construction undertaken before that transfer was therefore performed on the appellant’s own property and could not be treated as a taxable service provided to another person merely because the ultimate purchasers had made advance payments.
The appellant principally relied upon CBEC Circular No. 108/2/2009-ST dated 29 January 2009, which clarified the treatment of construction activities undertaken by builders and developers prior to the transfer of ownership to the ultimate purchasers. The appellant submitted that the Circular treated such construction as self-service where ownership remained with the builder until execution of the sale deed. It also relied upon the Tribunal decisions in Skynet Builders, Developers, Colonizer and Bairathi Developers Pvt. Ltd., which supported its interpretation of the pre-2010 service tax position.
The Department opposed the appeal by relying on the Supreme Court’s decision in Raheja Development Corporation Vs State of Karnataka, reported in 2005 NTC Vol. 27, page 273. According to the Revenue, construction undertaken by a developer for prospective purchasers against consideration, whether received immediately or deferred, was in the nature of a works contract rather than a simple sale transaction. The Department argued that the appellant’s arrangements were therefore capable of attracting service tax notwithstanding the eventual execution of sale deeds.
The Tribunal examined the actual business model and found that the flats were completed before sale deeds were executed in favour of the purchasers. Until that stage, the builder retained ownership, and the construction was undertaken on its own account. Applying CBEC Circular No. 108/2/2009-ST, the Tribunal held that the appellant was not providing a taxable service to the allottees before execution of the sale deeds. It consequently treated the appellant’s construction activity during the disputed period as self-service, outside the service tax levy sought to be imposed by the Department.
The Tribunal found support in Skynet Builders, Developers, Colonizer, Bairathi Developers Pvt. Ltd. and Indo Global Estates Vs CCE, Chandigarh. In the latter decision, the Tribunal had held that advances received from prospective purchasers towards the sale consideration of flats did not, by themselves, establish that builders were providing taxable construction services to those customers. The contractual and proprietary relationship had to be examined in the context of the actual ownership and transfer of the property.
The Tribunal further rejected the Revenue’s reliance on the earlier Raheja Development Corporation ruling for three separate reasons. First, the relevant CBEC Circular expressly recognised the self-service character of construction by builders before sale. Secondly, the correctness of the earlier Supreme Court decision had been questioned in the subsequent Larsen & Toubro Vs State of Karnataka proceedings. Thirdly, even if the appellant’s transactions were regarded as composite works contracts, the Supreme Court in Commissioner of Central Excise & Customs, Kerala Vs Larsen & Toubro Ltd., 2015 (39) S.T.R. 913 (SC), had recognised works contracts as a distinct category for service tax purposes. The Tribunal observed that the present demand had been confirmed under Construction of Complex Service with a 67% abatement, whereas Works Contract Service became a specifically taxable category only from 1 June 2007.
On these grounds, the Tribunal concluded that the demand confirmed under Construction of Complex Service was unsustainable. By Final Order No. 60874/2021 dated 10 August 2021, CESTAT Chandigarh set aside the impugned order and allowed Silver City Construction Ltd.’s appeal with consequential relief. The decision is relevant to the historical service tax treatment of builder-owned residential projects, especially where construction was completed before sale deeds were executed and where the Department sought to tax the activity under a classification inconsistent with the statutory treatment of composite works contracts. The ruling concerns the pre-July 2010 legal framework and should not be extended automatically to later statutory regimes.
Cases Discussed
1. Skynet Builders, Developers, Colonizer — (2012) 21 taxmann.com 439 (CESTAT New Delhi). Relied upon by the appellant and considered by the Tribunal regarding the absence of taxable construction service where the builder retains ownership until sale.
2. Bairathi Developers Pvt. Ltd. Vs Commissioner of Central Excise — 2016 (43) S.T.R. 455 (Tri.-Delhi). Relied upon by the appellant and followed in examining construction undertaken by developers for their own account before sale.
3. Indo Global Estates Vs Commissioner of Central Excise, Chandigarh — (2014) 46 taxmann.com 254 (CESTAT New Delhi). Followed by the Tribunal for the proposition that advances towards sale of flats do not necessarily represent consideration for a taxable service.
4. K. Raheja Development Corporation Vs State of Karnataka — (2005) 5 SCC 162; also cited in the source as 2005 NTC Vol. (27)-273 (SC). Relied upon by the Department for the proposition that construction arrangements with prospective flat purchasers may constitute works contracts. The Tribunal distinguished its applicability to the present service tax demand. The linked TaxGuru PDF is a later Supreme Court decision discussing this precedent, not the original Raheja judgment.
5. Larsen & Toubro Ltd. Vs State of Karnataka — 2008 (12) S.T.R. 257 (SC), as cited in the original order, concerning the earlier reference questioning Raheja Development Corporation. The matter was subsequently considered by a larger Bench of the Supreme Court.
6. Commissioner of Central Excise & Customs, Kerala Vs Larsen & Toubro Ltd. — 2015 (39) S.T.R. 913 (SC); decided on 20/08/2015. Applied by the Tribunal to distinguish composite works contracts from ordinary service contracts and to invalidate the demand under the construction-of-complex classification.
7. State of Madras Vs Gannon Dunkerley & Co. (Madras) Ltd. — 1959 SCR 379 (SC). Referred to within the Supreme Court passage reproduced in paragraph 10 regarding the distinct legal nature of works contracts.
FULL TEXT OF THE ORDER OF CESTAT CHANDIGARH
The appellant is in appeal against the impugned order wherein the demand on construction of complex and work contract service for the period April, 2005 to February, 2008 has been confirmed against the appellant.
2. The brief facts of the case are that the appellant is engaged in construction of complex services and is registered with the Central Excise department as service provider under the category of construction of complex services. The appellant constructed more than 12 apartments in a common area at Zirakpur-Ambala Road, Zirakpur (Punjab) under the name “Silver Heights, Silver Themes and Silver Green. The appellant is engaged in selling of flats to the allottees/customers construed by self or through contractor engaged by it on land owned by it. The appellant has also entered into agreement with various allottees/customers and advance receipt has been issued and after completion of sale deeds were executed handed over the possession of flats to the prospective allottees/customers. Revenue is of the view that under the category of construction of complex services with effect from 16.6.2005 vide Notification No.15/2005 (ST) dated 7.6.2005 wherein it has been defined under section 65 (105) (zzzh) of the Finance Act, 1994 and means „any service provided or to be provided to any person by any other person, in relation to construction of complex‟, the appellant was providing Construction of Complex service, therefore, it has been alleged that that appellant is providing service to the prospective buyer of construction of complex service. Accordingly, a show cause notice dated 8.10.2008 was issued to the appellant for the period April, 2005 to February, 2008 to demand of service tax under the category of construction of complex service and to impose penalty. The matter was adjudicated and the demand of service tax was confirmed along with interest but penalty was dropped. Against this order, the appellant is before us.
3. Ld. Counsel for the appellant submits that the appellant is engaged in selling flats constructed through contractors engaged by it on land owned by it.
4. It is his submission that the appellant is not rendering any service to its allottees/customers and as such there is no relation of service provider and service recipient between the appellant and its allottees/customer, a pre-requisite to get covered under the purview of service tax. The actual relationship between the appellant and its allottees/customers is of seller and buyer. He also relied on the CBEC‟s Circular No.108/2 of 2009-ST dated 29.1.2009 which explained that till the time the sale deed is not executed, it is the builders who will be regarded as the owners and not the allottees. Since till completion of construction and execution of sale deed, the ownership remains with the builder, the construction of residential complex would be in nature of self service and it cannot be said that the appellant is the service provider and doing construction on behalf of the allottees.
5. It is his submission that in view of the circular, no service tax is payable by the appellant as they executed sale deed and the relationship between buyer/allottee or customer is buyer and seller. To support his contention, he relied on the decision of this Tribunal in the case of Skynet Builders, Developers, Colonizer reported as 2012 (21) taxmann.com 439 (New Delhi – CESTAT). He also relied on the decision of this Tribunal in the case of Bairathi Developers Pvt.Ltd. vs. CCE- 2016 (43) STR 455 (Tri.-Del.). He prayed that the impugned order be set aside.
6. On the other hand, Ld.AR opposed the contention of ld. Chartered Accountant and submits that the appellant is builder and as per decision of Hon‟ble Supreme Court in the case of Raheja Developers Corporation vs. State of Karnataka reported as 2005 NTC Vol.(27)- 273 (SC) “that the activity undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under the works contract and not under sale.” Therefore, the appeal is to be dismissed.
7. Heard and considered the submissions.
8. On careful consideration of the submissions, reliance placed and arguments adduced by both sides, we find that it is fact on record that for the period April, 2005 to February, 2008 the model of work by the appellant is that they executed sale deed to the allottees/customer after completion of flats. They were not providing any service to the allottees/customers prior to execution of sale deed by the appellant. Any service rendered by the appellant prior to the sale of the flats is self-service in terms of CBEC‟s Circular No.108/2 of 2009-ST dated 29.1.2009 and hence is not chargeable to service tax.
9. This issue has been examined in detail by this Tribunal in the case of Skynet Builders, Developers, Colonizer (supra) wherein this Tribunal clarified. Further, the same view was taken by this Tribunal in the case of Bairathi Developers Pvt.Ltd.(supra). Further, in the case of Indo Global Estates vs. CCE, Chandigarh- 2014 (46) taxmann.com.254 (New Delhi-CESTAT), this Tribunal held that “when construction of residential complex is for sale of flats and same is ultimately sold to customer under agreement, it cannot be held that there were any service being provided by builders to their customer, even if, a part amount of cost of flats is being received in advance. Such advance amount is against sale consideration of flat and building and not for obtaining any service, so as to make it leviable to service tax”.
10. The case law of Raheja (supra) relied upon by Ld.AR is not relevant to this case firstly, because, there is CBEC‟s Circular No.108/2 of 2009-ST dated 29.1.2009 which clarified that any service by a builder prior to sale of the flats is a self service and hence is no exigible to service tax. The circular of the Board is binding on the Revenue and it is not open for the Revenue to take a different stand. Secondly, this judgment was doubted by the Supreme Court in a subsequent case of Larsen and Toubro vs State of Karnatak 2008 (12) S.T.R. 257 (S.C.) and referred to a larger bench of the Supreme Court. Thirdly, even if the argument is carried that the nature of contract is not one of sale of flats but one of works contract is considered, service tax can be demanded only under „Works Contract Service‟ from 1.7.2007 as held in the Commissioner of Central Excise Kerala vs Larsen and Toubro 2015 (39) S.T.R. 913 (S.C.). The current demand is under Construction of Complex Services giving 67% abatement on the gross amounts charged. It has been held by Supreme Court in para 17 of this judgment that “a works contract is a separate species of contract distinct from contracts for services simpliciter recognized by the world of commerce and law as such, and has to be taxed separately as such. In Gannon Dunkerley, 1959 SCR 379, this Court recognized works contracts as a separate species of contract”. For all these three reasons, the impugned order confirming a demand of service tax under construction of complex services is not sustainable and is liable to be set aside.
11. In the result, the appeal is allowed with consequential relief, if any.
(pronounced in the open court on 10.08.2021)
