Construction company wins partial relief from Rs. 1 crore service tax demands including CENVAT credit reversal and penalty cancellation

Tata Housing Development Company Limited Versus Commissioner of Central Tax GST Bengaluru North Commissionerate

Tata Housing Development Company Limited Versus Commissioner of Central Tax GST Bengaluru North Commissionerate - TMI The core legal questions considered by the Tribunal in this appeal concern the liability to pay service tax and related reversal of CENVAT credit by a construction company engaged in residential complex development. The issues examined include: (a) whether reversal of CENVAT credit is warranted for flats sold post-issuance of completion certificates; (b) applicability of service tax on consideration received for construction/development of parking areas; (c) classification and taxability of amounts received as development costs from a third party under a Development Agreement; (d) service tax liability on compensation received for cancellation/termination of Joint Development Agreements under declared services; (e) taxability of forfeiture income on cancellation of bookings under declared services; (f) short payment of service tax on interior design consultancy services received from a foreign entity; (g) requirement to reverse proportionate input service credit attributable to retention charges withheld from contractors; and (h) validity of penalties imposed and invocation of extended limitation period based on alleged suppression of facts.

Regarding reversal of CENVAT credit for flats sold after issuance of completion certificates, the Tribunal analyzed the relevant statutory provisions including Section 65B(44) and Section 66E of the Finance Act, 1994, and the CENVAT Credit Rules, 2004 as amended. The Court noted that sale of flats post-completion certificate is exempt from service tax as it constitutes transfer of immovable property, which is excluded from the definition of 'service'. The appellant had availed CENVAT credit on input services related to such exempted sales without reversing proportionate credit. The Court examined the insertion of Explanation 3 to Rule 6 of the CENVAT Credit Rules effective 1st April 2016, which retrospectively deemed such activities as exempted services for credit reversal purposes. However, the Tribunal held that prior to this amendment, such sales were 'non-services' and did not attract Rule 6's credit reversal provisions. Reliance was placed on a series of precedents including decisions of the Tribunal and High Courts that had settled this issue in favor of the appellant, recognizing the vested right of credit availed before the amendment. Nevertheless, since the appellant had not maintained separate accounts or availed only proportionate credit post-completion certificate, the Tribunal remanded the matter for re-quantification of proportionate credit reversal, reducing the demand from Rs.63,07,843/- to Rs.29,67,608/-.

On the issue of service tax on consideration received for construction/development of parking areas, the appellant accepted the demand of Rs.3,19,777/- and agreed to pay it. The Tribunal confirmed this amount along with interest but set aside penalty, as the appellant was unable to contest effectively due to loss of documents.

The demand of service tax on consideration received as development costs from a third party under the Development Agreement was contested by the appellant on the ground that the transaction was a transfer of development rights, essentially a sale of immovable property, hence not taxable as service. The Revenue contended that the amount represented remuneration for works contract services including construction, marketing, and development, inherently taxable. The Tribunal carefully examined the Development Agreement and Supplementary Agreement clauses, noting that the appellant and the third party jointly executed sale deeds to transferees and shared gross proceeds. The agreement involved development activities and revenue sharing rather than outright sale of a going concern. The Tribunal concluded that the amount received was consideration for works contract service and not merely a transfer of immovable property. The demand was upheld for the normal period but remanded for re-quantification of the service tax liability, recognizing the need to exclude land cost and apply appropriate abatements.

Regarding service tax on compensation received for cancellation/termination of Joint Development Agreements, the appellant argued that the amount was liquidated damages and not consideration for any service. The Revenue relied on Section 66E(e) declaring 'agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act' as a declared taxable service. The Tribunal referred to the Board's Circular No. 214/1/2023-S.T. and Circular No. 178/10/2022-GST, which clarify that liquidated damages paid for breach of contract are not consideration for a service and thus not taxable. The Deed of Cancellation evidenced compensation for relinquishment of rights and reimbursement of costs, not for any service rendered. The Tribunal set aside the demand of Rs.24,72,000/- on this ground.

Similarly, the demand on forfeiture income arising from cancellation of bookings was contested as liquidated damages for breach of contract. The Tribunal examined the terms of the Agreements for Sale and Construction Agreement, which stipulated forfeiture of 10% of consideration upon default or cancellation by the buyer. Following the Board's clarifications, the Tribunal held such forfeiture amounts as compensation for breach and not consideration for any service under Section 66E(e). Consequently, the demand of Rs.2,06,186/- was set aside.

The short payment of service tax on interior design consultancy services received from a foreign entity was accepted by the appellant and paid along with interest. Only penalty was disputed, but the Tribunal upheld the demand of Rs.1,27,726/- with interest.

On the non-reversal of proportionate input service credit attributable to retention charges withheld from contractors, the appellant contended that Rule 4(7) of the CENVAT Credit Rules during the relevant period linked credit eligibility to the date of invoice/bill and not payment, and that service tax had been paid in full to service providers. The Tribunal relied on precedents including CCE vs. Thermax Engineering Construction Co. Ltd. and Board Circular No. 122/03/2010, which support credit availability where service tax is paid to the supplier despite retention of part payments. The Tribunal set aside the demand of Rs.5,80,728/- for reversal of credit on this ground.

On the invocation of extended period of limitation and penalties, the Revenue alleged suppression of facts and wilful misstatement by the appellant in not disclosing taxable services and availing ineligible credit. The appellant argued that it had filed returns regularly, disclosed all relevant facts to the best of its understanding, and that the issue was a difference of opinion on credit eligibility. The Tribunal extensively analyzed the legal principles governing extended limitation under Section 73 of the Finance Act, 1994, emphasizing that extended period can be invoked only upon proof of fraud, collusion, wilful misstatement, suppression of facts with intent, or violation of law with intent to evade tax. Mere difference of opinion or self-assessment error does not constitute suppression. The Tribunal cited Supreme Court precedents and recent decisions of the Tribunal emphasizing that suppression requires deliberate concealment with intent to evade tax. It also noted that the appellant's failure to seek clarifications or disagreement with audit findings cannot be construed as intent to evade. The Tribunal underscored the statutory responsibility of tax officers to scrutinize returns and make best judgment assessments within limitation periods, and that failure to do so results in loss of revenue attributable to the department's policy risk, not the appellant's fault. Accordingly, all penalties under Sections 77 and 78 were set aside, and demands beyond the normal limitation period were disallowed.

In conclusion, the Tribunal held that reversal of proportionate CENVAT credit on flats sold post-completion certificate is warranted but must be re-quantified; service tax on parking area development and interior design consultancy short payment is confirmed; service tax on development costs received from the third party is upheld but remanded for re-quantification; demands on compensation for cancellation of Joint Development Agreements and forfeiture income on booking cancellations are set aside as liquidated damages not taxable as services; reversal of credit on retention charges is disallowed; and penalties and extended limitation demands are set aside due to absence of suppression or intent to evade tax.

Key legal principles established include the recognition that sale of flats post-completion certificate is exempted from service tax and credit reversal rules apply prospectively; liquidated damages and forfeiture amounts are not consideration for declared services under Section 66E(e); retention of payment to service providers does not mandate reversal of credit if service tax is paid; and extended limitation cannot be invoked without concrete proof of deliberate suppression or intent to evade tax.

Verbatim from the judgment encapsulating crucial reasoning includes:

"Section 65B(44) of the Finance Act, 1994 w.e.f. 01.07.2012 does not include an activity which constitutes merely a transfer of title in goods or immovable property, by way of sale, gift or in any other manner... Since, the clearance of flats after the receipt of completion certificate are considered to be sale of immovable property, they are not liable to pay service tax."

"Liquidated damages... are payments for not tolerating the breach of contract. They do not act as a remedy for the breach of contract. They do not restitute the aggrieved person... Such payments do not constitute consideration for a supply and are not taxable."

"Extended period of limitation cannot be invoked unless there is evidence of fraud or collusion or wilful misstatement or suppression of facts or violation of the provisions of Act or Rules with an intent... Intentional and wilful suppression of facts cannot be presumed because (a) the appellant was operating under self-assessment or (b) because the appellant did not agree with the audit and claimed that CENVAT credit was admissible."

"The appellant held a different view about the eligibility of CENVAT credit than the Revenue. Naturally, the appellant self-assessed duty and paid service tax as per its view. Such a self-assessment, cannot, by any stretch of imagination, be termed deliberate and wilful suppression of facts."