2020 (2) TMI 632 - HC - Service Tax

Telangana HC grants service tax refund of Rs. 33.77 lakh with 9% interest under Section 66E(b)

The Telangana HC allowed a petition for service tax refund of Rs. 33,77,539/- with 9% interest from payment date. The court held petitioners were not ... Refund of service tax - commercial and industrial construction service - time limitation - failure to furnish documents to prove that the said service tax amount had actually been deposited with the Central Government - Section 11B of the Central Excise Act, 1944 - HELD THAT:- If the petitioners were not liable to pay ‘service tax’ on the transaction of the purchase of the constructed area along with goods apart from undivided share of land at all, the payment which was made by the petitioners would not be a payment of service tax at all; that the department also could not have demanded payment of the same from the petitioners; and merely because the petitioners made the payment, it would not partake the character of ‘service tax’ and the department cannot retain the amount paid by the petitioners which was in fact not payable by them. Allegation that Documents were not produced before it as proof of payment of ‘service tax’ - HELD THAT:- The petitioners did not furnish any document to prove that the said service tax amount was actually deposited with the Central Government by 4th respondent is concerned, it is not in dispute that the 1st respondent never asked the petitioners to produce such material in the first place. It is also not the case of the 1st respondent that it had asked the 4th respondent, who according to the petitioner received the said payment on 19.06.2014, as to whether the 4th respondent had credited the same to the Central Government or not - Nothing prevented the 1st respondent from verifying whether the said payment of ₹ 33,77,539/- made by the petitioners on 19.06.2014 was passed on by the 4th respondent to the Central Government by verifying the Service Tax Returns filed by the 4th respondent. The third ground raised by the 1st respondent in the impugned order for rejecting the claim of the petitioners, the 1st respondent had relied upon the decision in GD. BUILDERS AND OTHERS VERSUS UOI AND ANOTHER [2013 (11) TMI 1004 - DELHI HIGH COURT], but the said decision was overruled by the Supreme Court in COMMISSIONER, CENTRAL EXCISE & CUSTOMS VERSUS M/S LARSEN & TOUBRO LTD. AND OTHERS [2015 (8) TMI 749 - SUPREME COURT] specifically. The Supreme Court held that the judgment in GD Builders’s case was wholly incorrect in its conclusion that the Act contains both the charge and machinery for levy and assessment of service tax on indivisible works contracts - the said ground of rejection of the claim of the petitioners also cannot be accepted. No mechanism for ascertaining value of service component in contracts for construction of complexes - HELD THAT:- Section 66E lays down what constitute “declared services”. Clause (b) thereof mentions construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale by a buyer fully or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority - the Service Tax (Determination of Value) Rules, 2006 were notified vide Notification No.12/06-ST, dt.19.04.2006 and were amended vide Notification No.11/2014-ST, dt.11.07.2014 w.e.f. 01.10.2014. The said Rules were framed in exercise of power conferred on the Central Government by clause AA of sub-Section (2) of Section 94 of the Act - Rule 2A of the Service Tax (Determination of Value) Rules, 2006 deals with determination of value of service portion in the execution of a works contract mentioned only in clause(h) of Section 66E of the Act. Rule 2A of 2006 Rules deals only with determination of the value of the service portion in execution of a works contract referred to clause(h) of Section 66E of the Act; and even as of date, no rule has been enacted by the Central Government dealing with determination of value of service portion in a composite contract of sale involving not only a service component but also sale of built up area along with undivided share of land involving also sale of goods included in the total consideration paid for their purchase falling in clause (b) of Sec.66 E, as in the instant case. Since the claim for refund is based on the decision of the Delhi High Court in Suresh Kumar Bansal’s case (1 supra) which was decided on 03.06.2016, and since the application for refund was filed on 19.08.2016, barely two months after the decision of the Delhi High Court in Suresh Kumar Bansal’s case (1 supra), it cannot be said that there is any inordinate delay in the petitioners seeking refund of the tax paid by them to the 4th respondent. Petition allowed - the 1st respondent is directed to refund a sum of ₹ 33,77,539/- to the petitioners with interest @ 9% per annum from the date of payment of the same by the petitioners to the 4th respondent i.e., 19.06.2014 till the date of payment to the petitioners. The core legal questions considered in this judgment revolve around the entitlement to refund of service tax paid on the purchase of immovable property, specifically:Whether service tax is leviable on the composite contract involving sale of immovable property along with undivided share of land and goods incorporated therein.Whether the claim for refund of service tax paid is barred by limitation under Section 11B of the Central Excise Act, 1944.Whether the petitioners furnished sufficient proof that the service tax amount was deposited with the Central Government by the vendor.The applicability and interpretation of relevant legal provisions and precedents concerning the valuation and levy of service tax on such composite contracts.The maintainability of the writ petition for refund of service tax paid without authority of law under Article 265 of the Constitution of India.Issue-wise Detailed Analysis:1. Levy of Service Tax on Composite Contracts Involving Sale of Immovable PropertyThe petitioners purchased office space along with undivided share of land and paid service tax on the transaction, which was demanded by the vendor under the classification of 'commercial and industrial construction' service as per Section 65(105)(zzq) of the Finance Act, 1994.Petitioners contended that service tax could not be levied on the composite contract price as the statute lacked a mechanism to bifurcate the value of goods, land, and service components for the purpose of taxation. They relied on the Delhi High Court decision in Suresh Kumar Bansal v. Union of India, which held that the contract for purchase of immovable property is composite and involves goods, services, and land, and that service tax cannot be levied on the entire composite price without a mechanism to segregate the service component.The respondents relied on the decision in GD Builders v. Union of India, which supported bifurcation of composite contracts and levy of service tax on the service portion. However, this decision was overruled by the Supreme Court in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Limited, which held that the Act lacked machinery provisions for levy and assessment of service tax on indivisible works contracts.Section 65-BB(44) of the Finance Act defines 'service' excluding transfer of title in immovable property by way of sale. Section 66E declares certain services taxable, including construction of complexes (clause b) and service portion of works contracts (clause h). The Service Tax (Determination of Value) Rules, 2006, particularly Rule 2A, provide for valuation of service portion only in execution of works contracts under clause (h), not for composite contracts involving sale of immovable property under clause (b).The Court agreed with the Delhi High Court's view that no machinery exists to determine the service element in a composite contract involving sale of immovable property and undivided land. Consequently, levy of service tax on the entire composite price was not sustainable. The Court rejected the respondents' argument that construction of a complex falls under works contract services, emphasizing that separate categories under Section 66E(b) and (h) cannot be rendered otiose.2. Limitation under Section 11B of Central Excise Act, 1944The respondents contended that the refund claim was barred by limitation as per Section 11B, which requires filing refund applications within one year from the relevant date with documentary proof that the duty was paid and not passed on.The petitioners argued that Section 11B applies only to refund of 'duty of excise' and not to amounts paid under mistake of law or without authority of law. Reliance was placed on Madras High Court's decision in Natraj and Venkat Associates, which held that if the amount paid cannot be construed as duty of excise, the limitation under Section 11B does not apply.The Karnataka High Court's decision in Commissioner of Central Excise (Appeals) v. KVR Constructions was also cited, which held that amounts paid without authority of law do not become service tax merely by payment and are refundable despite limitation provisions.The Court held that if the petitioners were not liable to pay service tax at all, the amount paid cannot be considered service tax, and the department cannot retain it. Hence, the limitation bar under Section 11B was not applicable to the petitioners' refund claim.3. Proof of Payment of Service Tax to Central GovernmentThe 1st respondent rejected the refund claim partly on the ground that petitioners failed to produce documents proving that the vendor had deposited the service tax with the Central Government.The Court noted that the 1st respondent never requested such proof from the petitioners or the vendor, nor did it verify the vendor's service tax returns. The petitioners had provided the vendor's service tax registration number and payment receipt. Further, the petitioners subsequently filed proof of payment of service tax by the vendor to the Central Government, which was undisputed.The Court rejected this ground of refusal as untenable.4. Applicability of Precedents and Interpretation of Legislative ProvisionsThe respondents relied on GD Builders' case to justify levy of service tax on composite contracts. The Court clarified that this decision was overruled by the Supreme Court, which held that the Act does not provide for levy and assessment of service tax on indivisible works contracts.The Court emphasized that Section 66E(b) and (h) create distinct categories of taxable services, and the Service Tax (Determination of Value) Rules, 2006, only provide valuation methodology for works contracts under clause (h), not for composite contracts involving sale of immovable property under clause (b).The Court's interpretation aligns with the constitutional principle under Article 265 that no tax shall be levied or collected except by authority of law. It held that the absence of machinery provisions to ascertain the service component in composite contracts renders the levy of service tax without authority of law.5. Maintainability of Writ PetitionThe Court held that the writ petition for refund of service tax paid without authority of law is maintainable. It relied on the Supreme Court's decision in Corporation Bank v. Sarawati Abharawsala, which held that claims for refund of tax paid in excess or without authority of law are maintainable by writ petition.Since there were no disputed questions of fact, and the refund claim was filed shortly after the relevant Delhi High Court decision, the Court found no inordinate delay or procedural bar to maintain the petition.Significant Holdings:'If the petitioners were not liable to pay 'service tax' on the transaction of the purchase of the constructed area along with goods apart from undivided share of land at all, the payment which was made by the petitioners would not be a payment of service tax at all; that the department also could not have demanded payment of the same from the petitioners; and merely because the petitioners made the payment, it would not partake the character of 'service tax' and the department cannot retain the amount paid by the petitioners which was in fact not payable by them.''Section 65-BB(44) of the Act defines 'service'... but would not include an activity which constitute merely a transfer of title in case of immovable property by way of sale... The Service Tax (Determination of Value) Rules, 2006... Rule 2A deals only with determination of the value of the service portion in execution of a works contract... and even as of date, no rule has been enacted... dealing with determination of value of service portion in a composite contract of sale involving not only a service component but also sale of built up area along with undivided share of land involving also sale of goods...''The levy itself would fail, if it does not provide for a mechanism to ascertain the value of the services component which is the subject of the levy... since neither the Act nor the Rules framed therein provide for a machinery provision for excluding all components other than service components from ascertaining the measure of service tax, the same cannot be levied.''The claim of the petitioner for refund can be entertained by the High Court as there was no dispute about the fact that no service tax was payable by the petitioner on the transaction in question and what was paid by them was not therefore service tax.''Article 265 of the Constitution of India states that 'no tax shall be levied or collected except by authority of law'... all acts relating to the imposition of tax... must be carried out strictly in accordance with law.'Final determinations:The petitioners were not liable to pay service tax on the composite contract involving sale of immovable property with undivided share of land and goods, due to absence of machinery provisions to segregate the service component.The payment made by petitioners was not service tax payable under law; hence, the department could not retain the amount.The claim for refund was not barred by limitation under Section 11B of the Central Excise Act, 1944.The petitioners had furnished sufficient proof of payment of service tax by the vendor to the Central Government.The writ petition for refund of service tax paid without authority of law was maintainable.The 1st respondent was directed to refund the amount of Rs. 33,77,539/- with interest at 9% per annum from the date of payment till refund.