Builder wins appeal against service tax demand on residential complex construction before July 2010

The CESTAT Bangalore allowed the appeal filed by a builder/developer against service tax demand on construction of residential complex for the period September 2006 to March 2010. Following the precedent in M/S. Shanmuga Construction Services case, the Tribunal held that no service tax could be levied on construction of residential complex prior to 01.07.2010. The appellant had engaged contractors for construction work and paid them including service tax, but the department demanded additional service tax on amounts paid to contractors. The Tribunal found the demand unsustainable and set aside the order confirming service tax demand with interest and penalty.

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Issues Involved:
1. Liability of the builder/developer for payment of service tax prior to 01.07.2010.
2. Applicability of the explanation added to Section 65(105)(zzzh) of the Finance Act, 1994.
3. Validity of invoking the extended period of limitation under Proviso to Section 73(1) read with Section 78.

Issue-wise Detailed Analysis:

1. Liability of the builder/developer for payment of service tax prior to 01.07.2010:
The appellant, a builder of immovable property, contended that they were not liable for service tax prior to 01.07.2010 based on various Circulars issued by the Board. Initially, they paid service tax under the category of 'Construction of Residential Complex Service' from December 2005 to August 2006 but discontinued based on the TRU Circular No.332/35/2006-TRU dated 01.08.2006. They resumed payment under the composition scheme from June 2007 to March 2008 when works contracts were brought under service tax. They again discontinued based on Circular 108/02/2009-ST dated 29.01.2009, which clarified that developers/builders were not liable for service tax. The Tribunal referenced the case of Commissioner of C.EX. & S.T., Bangalore-I Vs. Keerthi Estates Pvt. Ltd., where it was held that service tax on construction of complex by builders was taxable only from 01.07.2010, supported by the Board's Circular No. 151/2/2012-ST dated 10.02.2012.

2. Applicability of the explanation added to Section 65(105)(zzzh) of the Finance Act, 1994:
The explanation added by the Finance Act, 2010 to Section 65(105)(zzzh) deemed the construction of a complex intended for sale by a builder as a service provided to the buyer. The Tribunal cited the case of Maharashtra Chamber of Housing Industry Vs. Union of India, where the Bombay High Court ruled that the explanation was prospective, expanding the scope of taxable service but not clarifying the existing intent. Similarly, in the case of Krishna Homes, the Delhi Tribunal held that such contracts were not covered by Section 65(105)(zzzh) during the period prior to 01.07.2010. The Chennai Bench in Vijay Shanthi Builders Ltd. also followed this reasoning, confirming that service tax was not chargeable on construction of residential complexes before 01.07.2010.

3. Validity of invoking the extended period of limitation under Proviso to Section 73(1) read with Section 78:
The appellant challenged the demand on the grounds of limitation, arguing that they had been regularly informing the Department about their activities and statutory provisions. The Tribunal found that the appellant had engaged contractors for various works and paid service tax on these amounts. The demand for service tax was for the period September 2006 to March 2010. Given the consistent communication with the Department and the Tribunal's findings in similar cases, the invocation of the extended period of limitation was deemed unsustainable.

Conclusion:
The Tribunal concluded that prior to 01.07.2010, builders/developers were not liable to pay service tax for the Construction of Residential Complex Service. The impugned order was set aside, and the appeal was allowed with consequential relief. The Tribunal also dismissed the Revenue's appeals seeking imposition of penalty under Section 78. The decision was supported by various precedents and Circulars, affirming that the explanation to Section 65(105)(zzzh) was prospective and not applicable to the period in question.

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