Aparna Constructions & Estates Pvt. Ltd. Vs Commissioner of Central Tax (CESTAT Hyderabad)
Summary: The CESTAT Hyderabad Bench, in Aparna Constructions & Estates Pvt. Ltd. Vs Commissioner of Central Tax, examined whether service tax was payable on residential flats constructed and allotted to landowners under a joint development arrangement before 1 July 2010. The appellant, engaged in developing and constructing flats and villas, challenged an adjudication order dated 10 September 2015 confirming service tax of ₹3,18,64,753, together with interest and an equal penalty under Section 78 of the Finance Act, 1994, for the period 2005 to June 2009. The dispute concerned the Aparna Towers project, developed pursuant to a Development Agreement-cum-General Power of Attorney dated 25 November 2004 and a supplementary agreement dated 10 August 2005. Under these agreements, the landowners were entitled to 32.5% of the constructed area, while the developer retained 67.5%. The landowners’ share was handed over in June 2009.
The Department alleged that the developer had provided taxable construction services to the landowners in consideration of development rights over the land. It proposed valuation under Section 67 of the Finance Act, 1994 read with Rule 3 of the Service Tax (Determination of Value) Rules, 2006. Relying on the total construction cost of ₹95,18,97,000, the Department calculated the cost attributable to the landowners’ 32.5% share at ₹30,93,66,525 and demanded service tax of ₹3,18,64,753 under Works Contract Service. The appellant disputed the demand, arguing that construction had been completed and the landowners’ flats handed over before 1 July 2010, when the statutory explanation concerning construction intended for sale was introduced. It relied upon CBEC Circular No. 151/2/2012-ST dated 10 February 2012, read with Circular No. 108/2/2009-ST dated 29 January 2009, to contend that construction services provided to landowners before 1 July 2010 were not taxable.
The appellant also relied upon CC, CE & ST, Visakhapatnam Vs Pragati Edifice Pvt. Ltd., 2019 (31) G.S.T.L. 241, in which the Tribunal had examined service tax liability on residential construction under composite works contracts and construction-of-complex services. That decision distinguished the periods before 1 June 2007, between 1 June 2007 and 30 June 2010, and from 1 July 2010 onwards. The appellant further submitted that the joint development arrangement operated on a principal-to-principal basis for the mutual benefit of the landowners and developer, without creating an independent service-provider and service-recipient relationship. It also challenged the extended limitation period, pointing out that it was registered with the Service Tax Department, maintained records, filed returns and discharged service tax on other construction activities.
The Tribunal accepted the appellant’s submissions on merits. Referring to the explanation inserted in Section 65(105)(zzzh) with effect from 1 July 2010 and CBEC Circular No. 151/2/2012-ST, it held that residential construction activity undertaken before 1 July 2010 did not attract service tax in the circumstances of the case. The Tribunal independently observed that the landowners and developer had acted on a principal-to-principal basis and that no relationship of service provider and service recipient existed between them. Consequently, it set aside the entire adjudication order confirming service tax of ₹3,18,64,753 and the associated penalty. Since the appeal succeeded on merits, the Tribunal expressly left the limitation issue open and allowed consequential benefits in accordance with law.
Cases Discussed
- CC, CE & ST, Visakhapatnam Vs Pragati Edifice Pvt. Ltd. (CESTAT Hyderabad); 2019 (31) G.S.T.L. 241: Relied upon for the distinction between composite works contracts and construction-of-complex services, particularly the non-taxability of residential construction undertaken before 1 July 2010 in the circumstances discussed in that decision.
- Larsen & Toubro (Supreme Court): Referred to within the quoted findings of Pragati Edifice concerning non-leviability of service tax on composite works contracts before 1 June 2007. The supplied order does not provide a full reporter citation for this decision.
FULL TEXT OF THE ORIGINAL ORDER OF CESTAT HYDERABAD
The Appellant – M/s Aparna Constructions & Estates Pvt Ltd is engaged, amongst others, in the activity of development and construction of flats and villas and are registered with the Service Tax Department under the category of ‘Construction of Residential Complex Services’, ‘Works Contract Services’ among other services. The appellant is in appeal against OIO dt.10.09.2015 by which service tax has been demanded of Rs.3,18,64,753/- along with equal amount of penalty under section 78 of the Act for the period 2005 to June 2009.
2. Based on the audit of the accounts of the appellant’s records by the Revenue, SCN dt.23.10.2012 was issued invoking the extended period of limitation inter alia alleging as follows:
(i) The appellant did not pay service tax on the flats belonging to land owner’s share in respect of the venture – Aparna Towers, which has been taken up on development basis.
(ii) Works Contract Service is brought under service tax net w.e.f. 01.06.2007 by insertion of section 65(105)(zzzza) in the Finance Act 1994.
(iii) As regards service tax liability in respect of ongoing works contract entered into before 01.06.2007, Board Circular No. 12/10/2010-ST dt.24.08.2010 has clarified that the long terms works contract which were entered into prior to 01.06.2007, all those services falling under ‘Construction of Residential Complex services’, ‘Construction of Commercial Complex services’, etc., would be classifiable under ‘Works Contract Services’.
(iv) It is further clarified by the Board Circular No. 128/10/2010-ST dt.24.08.2010, in case of a contract where the provision of service commenced prior to 01.06.2007 and any payment of service tax was made under the respective taxable service prior to 01.06.2007, no portion of that contract would be eligible for Composition Scheme under WCS.
(v) As the appellant has paid service tax on their share of flats under ‘Construction of Complex service’ prior to 01.06.2007, thus, they are not entitled to benefit of Composition Scheme for payment of service tax on the land owner’s share, which post 01.06.2007 is liable to be classified under WCS.
(vi) As per the Development Agreement cum General Power of Attorney, being document dt.25.11.2004, read with Supplementary Agreement dt.10.08.2005, land owner and the developer’s share of the constructed area is in the ratio of 32.5% and 67.5% respectively.
3. It was further urged in the SCN that as per the agreement, it is clear that 32.5% of the constructed area will be given by the appellant – Aparna Constructions to the land owner, in lieu of the land given to them/builder towards their share. Thus, the appellants are the service providers and the land owners of the said venture are the service recipients for the taxable services rendered to the extent of flats allotted to them in the said venture. It further appeared that the appellant received no monetary consideration for rendering the services to the land owner. It was received in the form of land made available to them. In view of this position, the valuation of the service rendered to the land owner has to be determined in terms of section 67 of the Finance Act read with Rule 3 of Service Tax (Determination of Value) Rules 2006. Further, on verification of ledger, it was observed that the appellant has received an amount of Rs.26,80,36,375/- towards sale deed amount against their share of flats at different point of time. The service tax liability on the said amount works out to Rs.99,13,937/- as per the prevailing rates of tax during the relevant period. As per the Certificate of Chartered Accountant submitted by the appellant, the total cost of construction is declared at Rs.95,18,97,000/-. The total built-up area, as certified by the Municipal Authorities, is 55,267.19 sq mts or 5,94,674.96 sq ft. Accordingly, the cost of construction in land owner’s share was worked out as 32.5% of Rs.95,18,97,000/- or Rs.30,93,66,525/-. Further, admitted fact is that the constructed area towards land owner’s share was handed over in the month of June, 2009. Accordingly, service tax was demanded of Rs.3,18,64,753/- under the head WCS with proposal to impose penalty under section 78 of the Act.
4. The SCN was adjudicated on contest and the proposed demand was confirmed with interest and further equal amount of penalty was imposed under section 78 of the Act by the Commissioner. Being aggrieved, the appellant is in appeal before this Tribunal.
5. Learned Counsel for the appellant – Mr. B. Venugopal inter alia urges that under the admitted facts that the construction was completed prior to 01.07.2010 and the land owner’s share was handed over in the month of June 2009, the demand in the instant case under the head WCS is not tenable and fit to be set aside. In view of clarification vide Board Circular No. 151/2/2012-ST dt.10.02.2012, wherein it has been provided/ clarified that construction of complex services provided by the builder/developer to the land owner will not be taxable for the period prior to 01.07.2010, being self service as has been explained in Board’s earlier Circular No. 108/2/2009-ST dt.29.01.2009. It is only after 01.07.2010, the construction of complex services, either under ‘Construction of Complex services’ or WCS are liable for service tax.
5. The aforementioned Circular dt.10.02.2012 was issued pursuant to amendment in section 65(105)(zzzh) whereby explanation was added w.e.f. 01.07.2010 vide Notification No. 24/2010-ST, which reads as follows:
“Explanation: For the purposes of this sub-clause, the construction of a new building 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 the person authorised by the builder before 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.”
6. Learned Counsel further relies on the ruling of the Coordinate Bench of this Tribunal in the case of CC,CE & ST, Visakhapatnam vs Pragati Edifice Pvt Ltd [2019 (31) GSTL 241]. This Tribunal summing up its findings has held as follows:
“(n) To sum up, as far as construction of ‘residential complexes’ by the 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 as ‘works contract’ only 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 customer, it is not taxable 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.”
7. Learned Counsel further urges that admittedly appellant was registered with the Service Tax department and has been filing their returns regularly and were maintaining proper books of accounts and records in respect of their transactions. The appellant was also discharging service tax on the construction services under the head ‘Construction of Complex services’ as is evident from the narrations in the SCN. The demand with respect to land owner’s share has been raised by way of change of opinion. The appellant was under bonafide belief that since the development of land was for mutual benefit (principal to principal basis) for both land owner and the developer, there is no service inter se between them and accordingly, did not pay the service tax. The bonafide view is also fortified as Revenue also entertained similar opinion which is evident from Board Circular No. 151/2/2012-ST dt.10.02.2012. Thus, no case is made out in the facts and circumstances of any suppression, fraud or misstatement with intention to evade payment of service tax. It has been held in several judicial precedents that for change of opinion, extended period is not invokable.
8. Accordingly, learned Counsel prays for allowing the appeal with consequential benefits.
9. Learned AR for Revenue relies on the findings in the impugned order.
10. Having considered the rival contentions, we are satisfied in view of the explanation introduced in section 65(105)(zzzh) w.e.f. 01.07.2010 and clarification issued by the Board vide Circular No. 151/2/2012-ST dt.10.02.2012 that there is no tax liability to service tax for the construction activity of residential nature prior to 01.07.2010. Even otherwise, we find that the land owner and the appellant, as developer, have worked on principal to principal basis and there is no relation of service provider and service recipient between them.
11. In view of our findings and observations, we allow the appeal and set aside the impugned order. As we have allowed the appeal on merits, we leave the ground of limitation open. The appellant shall be entitled to consequential benefits, in accordance with law.
12. Appeal allowed.
(Pronounced in the Open Court on 08.04.2024)
