Service tax refund allowed on construction contracts as agreements for residential complexes excluded before July 2010

CESTAT Ahmedabad ruled in favor of the assessee regarding service tax refund on construction contracts. The tribunal held that agreements between builders/developers and prospective buyers for residential units in complexes with more than 12 units were works contracts not covered under Section 65(105)(ZZZh) prior to July 1, 2010. The explanation added to this section effective July 1, 2010 expanded its scope and was not clarificatory, thus cannot have retrospective effect. Since service tax was paid under protest, limitation period did not apply. The tribunal rejected unjust enrichment claims as no evidence showed service tax was charged to customers, making refund allowable.

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1. ISSUES PRESENTED and CONSIDERED

- Whether the appellant builders/promoters/developers providing construction of residential complexes with more than twelve residential units by engaging contractors are liable to pay service tax under Section 65(105)(ZZZh) of the Finance Act, 1994 on amounts charged from prospective buyers during the period December 2005 to October 2006.

- Whether the Circular No. 332/35/2006-TRU dated 01/08/2006 issued by the CBEC Tax Research Unit, which clarifies that the contractor, and not the builder/promoter/developer, is liable to pay service tax on construction services, applies to the facts of these cases.

- Whether the explanation added w.e.f. 01/07/2010 to Section 65(105)(ZZZh), deeming the builder as the provider of construction service to buyers, has retrospective effect and applies to the period prior to 01/07/2010.

- Whether the agreements entered into by the builders/promoters/developers with prospective buyers for construction of residential units constitute works contracts attracting service tax liability under Section 66 read with Section 65(105)(ZZZh).

- Whether the refund claims filed by the appellants/respondents for service tax paid during the disputed period are barred by limitation.

- Whether the refund claims are hit by the principle of unjust enrichment, i.e., whether the appellants/respondents have passed on the incidence of service tax to their customers, thereby disentitling them from refund.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability of builders/promoters/developers to pay service tax under Section 65(105)(ZZZh) during the period December 2005 to October 2006

Legal Framework and Precedents: Section 65(105)(ZZZh) of the Finance Act, 1994, introduced by the Finance Act, 2005, defines taxable service in relation to construction of complex. The expression 'construction of complex' is defined in Section 65(30a) and includes construction, finishing, repair, alteration, renovation or restoration of residential complexes having more than twelve residential units as defined in Section 65(91a). The Circular No. 332/35/2006-TRU dated 01/08/2006 clarifies that when a builder/promoter/developer engages a contractor for construction of a residential complex having more than twelve units, the contractor alone is liable to pay service tax on the gross amount charged for construction service provided to the builder/promoter/developer.

Court's Interpretation and Reasoning: The Tribunal observed that both appellants had engaged contractors for construction and finishing of residential complexes. The Circular clarifies that the contractor is liable to pay service tax and not the builder/promoter/developer in such cases. The Tribunal emphasized that during the disputed period, the Government's intention was not to tax the builder/promoter/developer on amounts received from prospective buyers under such contracts. The explanation added to Section 65(105)(ZZZh) w.e.f. 01/07/2010, which deems the builder as the service provider to the buyer, was held to be a prospective amendment expanding the scope of taxable services and not clarificatory.

Key Evidence and Findings: The appellants entered into two agreements with buyers - one for sale up to structural completion and another for finishing works. The possession was handed over only after full payment. The Circular and the statutory definitions were pivotal in determining the liability. The Tribunal relied on the Circular and prior case law.

Application of Law to Facts: Since the appellants engaged contractors who paid service tax on construction services, the appellants themselves were not liable to pay service tax on amounts charged from buyers during the disputed period. The explanation inserted w.e.f. 01/07/2010, which expanded the scope, cannot be applied retrospectively to impose liability for the earlier period.

Treatment of Competing Arguments: The Department argued that the agreements were works contracts and service tax was payable by the builders under Section 66 read with Section 65(105)(ZZZh). However, the Tribunal distinguished the effect of the explanation inserted in 2010 and held that prior to that, such contracts were not taxable as services provided by the builder to buyers. The Department's reliance on the Apex Court judgment in Larsen & Toubro was noted but held not to impose retrospective tax liability.

Conclusion: The Tribunal held that during the period December 2005 to October 2006, the appellants were not liable to pay service tax under Section 65(105)(ZZZh) on amounts charged from prospective buyers for construction of residential complexes where contractors were engaged for construction services.

Issue 2: Effect of Explanation to Section 65(105)(ZZZh) added w.e.f. 01/07/2010

Legal Framework and Precedents: The Explanation to Section 65(105)(ZZZh) inserted by Finance Act, 2010, states that construction of a new building intended for sale by a builder or authorized person shall be deemed to be service provided by the builder to the buyer. The Tribunal referred to the judgment in CCE, Chandigarh vs. U.B. Construction (P) Ltd., which held that this Explanation is a prospective amendment expanding the scope of taxable services and not clarificatory.

Court's Interpretation and Reasoning: The Tribunal agreed with this view and emphasized that the Explanation cannot be given retrospective effect. Prior to 01/07/2010, the builder/promoter/developer was not deemed to be the service provider to the buyer under Section 65(105)(ZZZh).

Key Evidence and Findings: The Tribunal relied on the Circular, statutory provisions, and the cited precedent to hold that the Explanation expanded the scope of taxable services and was prospective.

Application of Law to Facts: The appellants' activities during the disputed period fell outside the ambit of taxable services under Section 65(105)(ZZZh) as it stood before the Explanation was inserted.

Conclusion: The Explanation added w.e.f. 01/07/2010 does not apply retrospectively to impose service tax liability on builders/promoters/developers for the period prior to that date.

Issue 3: Whether the agreements constitute works contracts attracting service tax liability

Legal Framework and Precedents: The Apex Court judgment in Larsen & Toubro Ltd. vs. State of Karnataka held that contracts comprising both works contract and transfer of immovable property are works contracts under Article 366(29A)(b) of the Constitution. The Department argued that such agreements attract service tax under Section 66 read with Section 65(105)(ZZZh).

Court's Interpretation and Reasoning: The Tribunal acknowledged the Apex Court's ruling but held that the service tax liability under Section 65(105)(ZZZh) for builders/developers was introduced prospectively by the Explanation in 2010, and therefore, the agreements during the disputed period did not attract service tax liability on the builders/promoters/developers.

Key Evidence and Findings: The Tribunal noted that the agreements were for construction of residential units with staged payments and possession after completion, but the statutory scheme and Circular indicated that contractors, not builders, were liable for service tax during the disputed period.

Application of Law to Facts: Despite the agreements being works contracts, the builders were not liable to pay service tax on amounts charged from buyers before 01/07/2010.

Conclusion: The agreements, although works contracts, did not impose service tax liability on the builders/promoters/developers during the disputed period prior to the Explanation's insertion.

Issue 4: Limitation for refund claims

Legal Framework and Precedents: Section 11B of the Central Excise Act prescribes limitation for refund claims. However, service tax paid under protest is not subject to limitation.

Court's Interpretation and Reasoning: The Tribunal held that the refund claim by M/s Krishna Homes was within limitation as it was filed shortly after payment. For M/s Raj Homes, who paid service tax under protest, limitation did not apply.

Key Evidence and Findings: The refund claim by Krishna Homes was filed on 06/11/2006 for payments made up to October 2006. Raj Homes' refund claim was filed on 14/11/2006 for payments from June 2005 to July 2006.

Application of Law to Facts: Both refund claims were held to be timely and not barred by limitation.

Conclusion: The refund claims are not barred by limitation.

Issue 5: Unjust enrichment and passing on of service tax incidence

Legal Framework and Precedents: Section 12A and 12B of the Central Excise Act, 1944, as made applicable to service tax by Section 83 of the Finance Act, 1994, provide that the burden of proof lies on the assessee to prove that the incidence of service tax has not been passed on to customers. The presumption that the incidence is passed on is rebuttable.

Court's Interpretation and Reasoning: The Tribunal found that in the case of M/s Raj Homes, sample invoices did not show any amount charged towards service tax. Similarly, no evidence was produced to show that M/s Krishna Homes charged service tax to customers. Therefore, the presumption under Section 12B was rebutted, and the burden shifted to the Department to prove incidence was passed on, which it failed to do.

Key Evidence and Findings: Sample invoices and affidavits from customers supported the appellants' claim that service tax incidence was not passed on.

Application of Law to Facts: Since the Department failed to produce evidence to the contrary, the refund claims were not hit by unjust enrichment.

Conclusion: Refund claims are not barred by unjust enrichment.

3. SIGNIFICANT HOLDINGS

- "In terms of Circular No. 332/35/2006-TRU dated 01/08/2006, when a builder/promoter/developer builds a residential complex having more than 12 residential units by engaging a contractor, it is the contractor who shall be liable to pay service tax on the gross amount charged for construction service provided to the builder/promoter/developer under Section 65(105)(ZZZh) of the Finance Act, 1994."

- "The Explanation added w.e.f. 01/07/2010 expands the scope of Clause (ZZZh) of Section 65(105) and is a prospective amendment and cannot be given retrospective effect."

- "During the period prior to 01/07/2010, agreements entered into by builders/promoters/developers with prospective buyers for construction of residential units do not attract service tax liability under Section 65(105)(ZZZh) despite being works contracts."

- "Refund claims filed within limitation or for service tax paid under protest are maintainable and not barred by limitation."

- "The presumption under Section 12B of the Central Excise Act, 1944, as applied to service tax, that the incidence of service tax is passed on to customers is rebuttable; where invoices show no service tax charged and no evidence is produced by the Department, refund claims are not hit by unjust enrichment."

- Final determinations: The appeal filed by the Revenue against M/s Raj Homes was dismissed, confirming that no service tax liability existed on the builder for the disputed period and refund was allowed. The appeal filed by M/s Krishna Homes was allowed, granting refund of service tax paid during the disputed period.

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