Construction activities for residential complexes qualify as works contract service, not construction of residential complex service

CESTAT Chennai held that construction activities for residential complexes constitute works contract service rather than construction of residential complex service. The tribunal found the consideration non-vivisectable as it included land value and registration charges, making it a composite contract. Despite presence of common areas, the service remained composite in nature. The demand for service tax under construction of residential complex service category was unsustainable and set aside. Appeal allowed.

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Issues Presented and Considered

The core legal questions considered by the Tribunal were:

• Whether the construction activities undertaken by the appellant in the form of residential complexes fall within the ambit of 'Construction of Residential Complex Service' liable to service tax under the Finance Act, 1994;
• Whether the contract for construction is a composite contract involving both service and sale of goods, thereby attracting service tax under 'Works Contract Service' instead of 'Construction of Complex Service';
• Whether the extended period of limitation for service tax demand under proviso to Section 73(1) of the Finance Act, 1994 is invokable in the facts of the case;
• Whether the appellant can raise the plea of composite works contract service and reliance on the Supreme Court's decision in Larsen & Toubro Ltd. at the appellate stage despite not raising it earlier;
• The applicability and extent of abatement under Notification No. 18/2005-ST dated 7.6.2005 in relation to composite contracts involving sale and service;
• Whether the penalty imposed under Section 78 of the Finance Act, 1994 is sustainable in light of the findings on service tax liability.

Issue-wise Detailed Analysis

1. Nature of Service: Construction of Residential Complex Service vs. Works Contract Service

Legal Framework and Precedents: The Finance Act, 1994 defines various taxable services including 'Construction of Complex Service' under Section 65(91a) and 'Works Contract Service' under Section 65(105)(zzzza). The Supreme Court's landmark judgment in Commissioner of Central Excise & Customs, Kerala v. Larsen & Toubro Ltd. clarified that where a contract is composite and indivisible involving transfer of property in goods along with service, the tax liability must be under 'Works Contract Service' rather than separately under construction service categories.

Court's Interpretation and Reasoning: The Tribunal noted that the Show Cause Notice itself acknowledged that the consideration involved the value of land and registration charges, indicating the contract was composite and not vivisectable into pure service and sale components. The presence of common areas and easement rights within the residential complexes was argued by Revenue to attract 'Residential Complex Service'. However, the Tribunal rejected this argument, holding that the mere presence of common areas does not convert a composite contract into a pure service contract under 'Construction of Residential Complex Service'.

Key Evidence and Findings: The Show Cause Notice detailed that the projects comprised multiple apartments constructed on subdivided plots with joint development agreements and builder/contractor agreements stipulating development over the entire land. The complexes had continuous compound walls and common areas accessible to residents. Despite this, the consideration was not segregated, and abatement of 67% was allowed, indicating recognition of composite nature.

Application of Law to Facts: Applying Larsen & Toubro's principle, the Tribunal held that prior to 1.6.2007, the services were composite works contracts not liable under 'Construction of Complex Service'. Post 1.6.2007, the liability under 'Construction of Complex Service' or 'Commercial or Industrial Construction Service' arises only where the service is simpliciter and not composite. Since the contract was composite and indivisible, service tax liability must be under 'Works Contract Service' and not under 'Construction of Residential Complex Service'.

Treatment of Competing Arguments: The Revenue's contention that common areas attract residential complex service was found unpersuasive. The Tribunal emphasized that the composite nature of the contract and non-vivisectability of consideration override the nominal classification of service. The appellant's reliance on Larsen & Toubro and subsequent CESTAT decisions including Jain Housing & Construction Ltd. was accepted as binding precedent.

Conclusion: The demand of service tax under 'Construction of Residential Complex Service' was unsustainable. The contract fell within the ambit of 'Works Contract Service' and the demand under the impugned category was set aside.

2. Invoking Extended Period of Limitation under Proviso to Section 73(1)

Legal Framework: Proviso to Section 73(1) allows extended period of limitation in cases of fraud, willful misstatement or suppression of facts.

Court's Interpretation and Reasoning: The Tribunal observed that the issue in the appeal was purely one of legal interpretation regarding classification of service and not one involving fraud or suppression. Therefore, extended period could not be invoked. The demand was barred by limitation for the periods prior to issuance of Show Cause Notice.

Conclusion: Extended period was not invokable and demand was liable to be set aside on limitation grounds as well.

3. Raising New Grounds at Appellate Stage

Issue: Revenue contended that the appellant did not raise the plea of composite works contract service during original or appellate proceedings and hence it should not be entertained at the Tribunal stage.

Court's Reasoning: The Tribunal held that since the issue was legal in nature and involved interpretation of statute and judicial precedents, the appellant could raise it at any stage. Denying such a plea would defeat the purpose of justice and annul the process of law. The Tribunal condoned the appellant's delay in raising this ground and allowed the plea.

Conclusion: The plea based on Larsen & Toubro was admitted and considered despite not being raised earlier.

4. Penalty under Section 78 of the Finance Act, 1994

The Commissioner (Appeals) had set aside the penalty imposed by the original authority. The Tribunal did not disturb this order, implicitly upholding the view that penalty was not sustainable given the legal nature of the dispute and the appellant's bona fide reliance on legal interpretation.

Significant Holdings

The Tribunal, relying on the Supreme Court's decision in Larsen & Toubro Ltd., held:

"The services provided by the appellant in respect of the projects executed by them for the period prior to 1-6-2007 being in the nature of composite works contract cannot be brought within the fold of commercial or industrial construction service or construction of complex service in the light of the Hon'ble Supreme Court judgment in Larsen & Toubro (supra) upto 1-6-2007."

"For activities of construction of new building or civil structure or new residential complex etc. involving indivisible composite contract, such services will require to be exigible to service tax liabilities under 'Works Contract Service' as defined under section 65(105)(zzzza) ibid."

"The show cause notices in all these cases prior to 1-6-2007 and subsequent to that date for the periods in dispute, proposing service tax liability on the impugned services involving composite works contract, under 'Commercial or Industrial Construction Service' or 'Construction of Complex' Service, cannot therefore sustain."

"The point being legal in nature can be taken at any point of time. The decision of the Hon'ble Supreme Court has now become the law of the land and therefore justice cannot be denied by holding that such a plea was not taken earlier."

The Tribunal concluded that the impugned order confirming service tax demand under 'Construction of Residential Complex Service' was unsustainable and set aside the demand along with interest and penalty. The extended period was held inapplicable. The appellant was entitled to consequential relief as per law.

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