2025 (3) TMI 683 - AT - Service Tax

Service tax not applicable on residential complex construction due to inability to separate service component from land value

CESTAT Allahabad held that the appellant was not liable for service tax on construction of residential complex service during April-June 2017. Following ... Short payment of service tax - construction of complex service on reverse charge basis - period April, 2017 to June, 2017 - Extended period of limitation - penalty. HELD THAT:- Hon’ble High Court in SURESH KUMAR BANSAL & ANUJ GOYAL & ORS. VERSUS UNION OF INDIA & ORS. [2016 (6) TMI 192 - DELHI HIGH COURT] has held that there was no statutory mechanism to ascertain the value of service component and that service tax could not be levied on value of undivided share of land. Neither Service Tax (Valuation Rules, 2006) nor Finance Act, 1994 have any provisions for determining value of service covered under Section 65(105)(zzzh) - the aforesaid decision of Hon’ble Delhi High Court, even though had been passed in the context of service tax provisions as applicable prior to 01.07.2012, is equally applicable to the period after 01.07.2012. Hon’ble Telangana High Court in the case of VASUDHA BOMMIREDDY, HYD ANOTHER VERSUS ASSISTANT COMMISSIONER OF SERVICE TAX, HYD -3- OT [2020 (2) TMI 632 - TELANGANA HIGH COURT]] held as 'the gross consideration charged by a builder/promoter of a project from a buyer would not only include an element of goods and services but also the value of undivided share of land which would be acquired by the buyer and 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.' Thus, the Appellant was not liable for payment of service tax on construction of residential complex service during April, 2017 to June, 2017 and the appeal is liable to be allowed on merits. Extended period of limitation - HELD THAT:- For demanding service tax for the period April, 2017 to June, 2017, SCN had been issued on 05.08.2020, by invoking extended period of limitation. The Commissioner (Appeals) has upheld the invocation of extended period by holding that the decision in the case of Suresh Kumar Bansal was for the period prior to 01.07.2012 and that the Appellant has been holding service tax registration for a long period, they were under legal obligation to file ST-3 Return and pay the service tax. The decision of the Tribunal in the case of M/S SHERVANI INDUSTRIAL SYNDICATE VERSUS CCE, C & SERVICE TAX, ALLAHABAD [2009 (1) TMI 44 - CESTAT, NEW DELHI], is applicable to the facts of the present case. In the above case it has been held that extended period of limitation is not invocable when there is scope of difference in interpretation - the demand of Rs.27,83,531/- is liable to be set aside on merits as well as on limitation. Penalties - HELD THAT:- As the demand itself is being set aside, penalties under 78(1) as well as under Section 77(2) are also liable to be set aside. Conclusion - The Appellant was not liable for payment of service tax on construction of residential complex service during April, 2017 to June, 2017 and the appeal is liable to be allowed on merits. The demand of Rs.27,83,531/- is liable to be set aside on merits as well as on limitation. The appeal filed by the Appellant is allowed on merits as well as on limitation. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the Appellant was liable for the payment of service tax on the construction of residential complex services for the period from April 2017 to June 2017.Whether the extended period of limitation was rightly invoked for the issuance of the Show Cause Notice (SCN) demanding service tax.Whether the penalties imposed under Sections 78(1) and 77(2) were warranted given the circumstances of the case.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Liability for Service Tax on Construction of Residential Complex ServicesRelevant legal framework and precedents: The primary legal framework involves the Finance Act, 1994, particularly Section 65(105)(zzzh) concerning taxable services related to construction. The case heavily references the decision in Suresh Kumar Bansal, where the Delhi High Court ruled that there was no statutory mechanism to determine the value of service components in composite contracts, thereby invalidating the levy of service tax on such contracts.Court's interpretation and reasoning: The Tribunal referred to the Delhi High Court's decision, which found that neither the Finance Act nor the Service Tax (Determination of Value) Rules, 2006, provided a mechanism to ascertain the value of services in composite contracts. This lack of a mechanism invalidated the service tax levy on the undivided share of land and goods incorporated into the project.Application of law to facts: The Tribunal applied the reasoning from Suresh Kumar Bansal and similar cases, concluding that the Appellant was not liable to pay service tax for the period in question as the statutory provisions failed to provide a mechanism for determining the value of services.Treatment of competing arguments: The Department's argument that the decision in Suresh Kumar Bansal was not applicable post-2012 was rejected. The Tribunal found that the legal principles laid down were equally applicable to the period after the introduction of the negative list regime.Conclusions: The Tribunal concluded that the Appellant was not liable for service tax on the construction services provided during the specified period.Issue 2: Invocation of Extended Period of LimitationRelevant legal framework and precedents: The Tribunal considered the legal standards for invoking the extended period of limitation, which typically requires evidence of suppression of facts or willful misstatement. The decision in Shervani Industries Syndicate Ltd. was referenced, emphasizing that differences in legal interpretation do not justify the extended period.Court's interpretation and reasoning: The Tribunal found that the Appellant's case involved a genuine legal interpretation issue, as evidenced by the decisions of the Delhi and Telangana High Courts. Therefore, the Appellant could not be accused of suppressing facts.Application of law to facts: Given the legal uncertainty and the Appellant's reliance on existing judicial decisions, the Tribunal determined that the extended period of limitation was improperly invoked.Conclusions: The invocation of the extended period of limitation was set aside, and the demand based on this period was invalidated.Issue 3: Imposition of PenaltiesRelevant legal framework and precedents: Penalties were imposed under Sections 78(1) and 77(2) of the Finance Act, 1994. The Tribunal considered whether these penalties were justified in light of the findings on the main issues.Court's interpretation and reasoning: Since the demand itself was set aside due to the lack of a statutory mechanism and improper invocation of the extended period, the basis for penalties was undermined.Conclusions: The penalties imposed on the Appellant were set aside as the underlying demand was invalidated.3. SIGNIFICANT HOLDINGSThe Tribunal held that the Appellant was not liable for service tax on the construction of residential complex services for the period in question, as there was no statutory mechanism to ascertain the value of services in composite contracts.It was determined that the extended period of limitation was improperly invoked due to the genuine legal interpretation issue, negating the allegation of suppression of facts.Penalties imposed under Sections 78(1) and 77(2) were set aside as the demand itself was invalidated.'The Appellant was not liable for payment of service tax on construction of residential complex service during April, 2017 to June, 2017 and the appeal is liable to be allowed on merits.''The demand of Rs.27,83,531/- is liable to be set aside on merits as well as on limitation.'The appeal was allowed on merits and limitation, with consequential relief as per law.