2025 (11) TMI 1705 - AT - Service Tax

Service tax relief on works contracts, no tax on pre-2010 and personal flats, extended limitation under section 73 rejected

M/s MVV Builders Versus Commissioner of Central Excise and Service Tax, Andhra Pradesh

CESTAT Hyderabad dismissed the Revenue's appeal and partly allowed the assessee's appeal. It held that the assessee may discharge service tax liability ... Allowing payment of service tax on composition scheme and consequently dropping part of the demand as asserted by the Revenue - Confirmation of demand for the period prior to 1.7.2010 when service tax could not have been imposed on services rendered by the builder before issue of completion certificates - confirmation of demands on that portion of the service charges received by the assessee appellant for completion of flats under contracts entered into by individual flat owners - invocation of extended period of limitation under section 73 of the Finance Act, 1994. Allowing the composition scheme - HELD THAT:- Hyderabad Bench in the case of M/s Pragati Edifice Pvt Ltd. [2019 (9) TMI 792 - CESTAT HYDERABAD], in this regard held that “the assessee has the option of paying service tax under the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007, if he chooses to do so. The mere fact that they have not opted for this earlier does not reduce their entitlement to opt for this scheme now. The demand of service tax needs to be recomputed as above, after following principles of natural justice and giving the assessee an opportunity to present their case including, indicating if they desire to avail the benefit of composition scheme”. The Department’s appeal has no force and is liable to be dismissed. Confirmation of demand prior to 1.7.2010 - HELD THAT:- From 1.7.2010, even if the builder constructed the building before selling it, such service shall be deemed to be service to the buyer if the buyer had received some amount from the prospective buyers for such construction. Before this amendment, such service was only self service because the builder was constructing his own building and hence service was not provided to any other person. Therefore, no service tax was payable as per section 65 (105) (zzzh). The Appellant was in the business of construction of residential complex and constructed several residential complexes during the period 2007-08 to 2011-12 and sold them to buyers. There is no dispute that “Construction of Residential Complex Service” or under the category of “Works Contract Service” prior to 01.07.2010 is not taxable as settled in the cases of Aditya Homes Pvt Ltd. [2019 (9) TMI 793 - CESTAT HYDERABAD], Aditya Construction Company India Pvt Ltd. [2025 (1) TMI 1376 - CESTAT HYDERABAD], and Krishna Homes, [2014 (3) TMI 694 - CESTAT AHMEDABAD]. In the case of Aditya Homes Pvt Ltd., it was held that “Thus, as far as service tax, under ‘construction of complex service’ in respect of residential complexes is concerned, prior to 1.7.2010 (when the explanation was inserted), no tax could be levied. This was also clarified by the CBEC in circular No. 108/2/2009-ST dated 29.1.2009 – thus, with respect to construction of complex services were rendered prior to 01.7.2010, no service tax is chargeable and the demand to this extent needs to be set aside”. The demand of service tax for services rendered before 1.7.2010 deserves to be set aside. Confirmation of demand on that portion of the services which were rendered as per individual contracts - HELD THAT:- Since the definition of residential complex itself excluded construction by a person for personal use, to the extent the demand of service tax has been made on the consideration received by the appellant for completion of flats as per contracts with individual buyers, is clearly out of the section 65 (91a). It is also an admitted fact that appellant sold the undivided share of land and semi-constructed house and then entered into an agreement with the buyer for construction of flat. Therefore, the construction of flat under individual works contract entered individually for each buyer of the flat for personal use. In the case of M/s Modi & Modi Constructions, supra, it was held that “The explanation to section 65(91a) categorically states that personal use includes permitting the complex for use as residence by another person on rent or without consideration. Therefore, it does not matter whether the individual buyer uses the flat himself or rents it out. There is nothing on record to establish that the individual buyers do not fall under the aforesaid explanation – thus no service tax is chargeable from the appellant on the agreements entered into by them with individual buyers for completion of their buildings”. Therefore, services rendered for construction of residential complex for personal use even after 01.07.2010 is not taxable. Invocation of extended period of limitation - HELD THAT:- The SCN completely ignored the fact that once the assessee files the ST-3 Returns, it is the responsibility of the Range officer to scrutinise them and that he could for that purpose, call for any records of the assessee and that he could also resort to Best Judgment Assessment under section 72. What is evident is that the appellant had filed returns but the range officer did not scrutinise them as he had to, call for records, as he could and raise a demand within time. It is this lapse of the range officer which resulted in some tax escaping assessment. As far as the classification of the services is concerned, the assessee can only classify them as per his understanding which may or may not be correct. The Range officer who is an expert in taxation should have examined and determined the correct classification. There are no grounds at all for invoking extended period of limitation. Therefore, the demand of service tax can only be confined to the normal period of limitation. Penalties - HELD THAT:- The penalties imposed on the appellant deserve to be set aside invoking section 80 of the Finance Act, 1994. The Department’s appeal is liable to be dismissed and the party’s appeal is liable to be partly allowed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether service tax was payable on construction of residential complexes for the period prior to 1.7.2010 under section 65(105)(zzzh) read with section 65(91a) of the Finance Act, 1994. (2) Whether service tax was chargeable on amounts received for completion/finishing of semi-constructed flats under individual agreements with flat buyers, treated as construction for 'personal use' under section 65(91a). (3) Whether the assessee was entitled to discharge liability under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, despite not having earlier exercised a formal option under Rule 3. (4) Whether the demand of service tax was sustainable for the extended period under section 73 of the Finance Act, 1994, and the consequential validity of penalties, in the facts of classification and disclosure in ST-3 returns. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Taxability of construction of residential complexes prior to 1.7.2010 Legal framework (as discussed) Section 65(105)(zzzh) of the Finance Act, 1994 taxed services 'to any person, by any other person, in relation to construction of complex.' An Explanation was inserted w.e.f. 1.7.2010 deeming construction intended for sale by a builder to be 'service to the buyer' where consideration was received before grant of completion certificate, except where no sum was received before such certificate. Interpretation and reasoning The Tribunal held that, prior to insertion of the Explanation (from 1.7.2010), where a builder constructed a residential complex before sale, the activity amounted to construction by the builder for himself and not to provision of service 'to any other person.' It was therefore treated as 'self-service' and outside the charging provision of section 65(105)(zzzh). After 1.7.2010, by virtue of the deeming Explanation, construction of a new building intended for sale (where consideration was taken before completion certificate) was statutorily treated as service by the builder to the buyer. The Tribunal followed precedent and CBEC Circular No. 108/2/2009-ST to hold that no service tax was leviable on 'construction of residential complex service' or under 'works contract service' prior to 1.7.2010 on such builder's own construction. Conclusions The demand of service tax on construction of residential complex for the period prior to 1.7.2010 was held to be unsustainable in law and was set aside, both on the ground that the activity was only 'self-service' prior to the deeming Explanation and because such period was also time-barred. Issue (2): Taxability of completion/finishing of flats under individual agreements with home buyers ('personal use' exclusion) Legal framework (as discussed) Section 65(91a) defined 'residential complex' and specifically excluded from its ambit 'a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.' The Explanation clarified that 'personal use' includes permitting the complex for residential use by another person on rent or without consideration. Interpretation and reasoning The factual finding was that the assessee sold undivided share of land and semi-constructed houses to buyers under sale deeds and thereafter executed individual works contracts with those buyers to complete and finish the flats as per each buyer's requirements. The Tribunal held that these post-sale completion contracts were in the nature of works contracts for individual buyers, treating the construction as intended for the buyer's personal residential use. By reason of the exclusion embedded in the definition of 'residential complex' in section 65(91a), such activity did not fall within the taxable service 'construction of residential complex', irrespective of whether the individual buyer personally occupied the flat or rented it out, as 'personal use' statutorily includes permitting use on rent. It was further held that there was nothing on record to show that the individual buyers did not fall within the said 'personal use' Explanation; hence the Department failed to displace the statutory exclusion. Conclusions Amounts received under individual contracts with home buyers for completion and finishing of their unfinished flats were held to be outside the scope of 'construction of residential complex' and not liable to service tax, even for the period after 1.7.2010. The demand relating to this component was set aside for the entire period falling within limitation. Issue (3): Entitlement to Works Contract (Composition) Scheme without prior formal option Legal framework (as discussed) The Department argued that under Rule 3 of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, the composition scheme could be availed only if the assessee specifically opted for it; lacking such option, the Commissioner could not grant composition benefits. Interpretation and reasoning The Tribunal noted that the Commissioner extended the composition rate following binding decisions of the same Bench, which held that an assessee has the option to pay service tax under the composition scheme if it chooses to do so, and that failure to earlier exercise such option does not extinguish entitlement, provided the liability is recomputed accordingly after affording opportunity and observing principles of natural justice. On this reasoning, the Tribunal accepted that the assessee's liability could correctly be determined under the composition scheme, notwithstanding the absence of a prior formal declaration, and that the recomputation in the impugned order was in line with the prevailing judicial view. Conclusions The Tribunal held that the Commissioner did not err in extending the benefit of the Works Contract (Composition) Scheme to the assessee and in recomputing the demand accordingly. The Department's challenge to grant of composition benefit and the consequential dropping of part of the demand was rejected, and the Revenue's appeal on this issue was dismissed. Issue (4): Validity of invoking the extended period of limitation and consequential penalties Legal framework (as discussed) Section 73 of the Finance Act, 1994 permitted recovery of service tax not levied/short-levied/not paid/short-paid within an ordinary limitation period (then 18 months), with an extended period of five years where such non-payment arose from fraud, collusion, wilful misstatement, suppression of facts, or contravention of provisions with intent to evade tax. Interpretation and reasoning - limitation The Show Cause Notice invoked the extended period on the allegation that the assessee had actually provided 'works contract service', but wrongly classified the activity as 'construction of residential complex' in its ST-3 returns and thereby failed to pay the correct tax, and that these facts came to light only during investigation. The Tribunal recorded that the assessee had been filing ST-3 returns and paying tax in accordance with its understanding and prevailing clarifications. It held that once returns are filed, it is the statutory duty of the Range Officer to scrutinise them, call for records, and, if necessary, resort to best judgment assessment under section 72. The non-detection of any short payment within the normal period was attributed to departmental inaction rather than any deliberate concealment by the assessee. The Tribunal held that mere incorrect classification or differing legal interpretation, disclosed in returns, cannot by itself constitute suppression, fraud, or wilful misstatement with intent to evade tax. In the impugned order, the Commissioner had not recorded cogent reasons justifying invocation of the extended period. In the light of this and precedent that extended limitation is not attracted in pure interpretation disputes, the Tribunal held that the conditions for extended limitation under section 73 were not satisfied. Interpretation and reasoning - penalties It was noted that the matter involved complex issues of taxability of construction of residential complexes, including the effect of the Explanation introduced on 1.7.2010 and the 'personal use' exclusion. The assessee had paid tax in part and filed returns, acting as per its understanding of the law and departmental clarifications and industry practice. Given: (i) the genuine interpretational nature of the dispute; (ii) the absence of any established intent to evade or suppression beyond what was disclosed in statutory returns; and (iii) the Tribunal's conclusions on limitation and non-taxability of major parts of the demand, the Tribunal held that this was a fit case to invoke section 80 of the Finance Act, 1994 to waive penalties. Conclusions (a) Invocation of the extended period of limitation under section 73 was held to be unsustainable. The demand was restricted only to the normal period of 18 months preceding the Show Cause Notice dated 28.9.2012; the entire portion of the demand for the extended period (beyond 18 months) was set aside as time-barred. (b) All penalties imposed on the assessee were set aside by exercise of discretion under section 80 of the Finance Act, 1994. (c) For the surviving period within the normal limitation, the demand was further reduced by excluding (i) all services prior to 1.7.2010 and (ii) all amounts relatable to individual completion contracts with home buyers for personal residential use, with only the balance, if any, remaining taxable along with applicable interest. The matter was remanded to the Commissioner solely for arithmetical recomputation of service tax and interest in terms of these findings, with consequential relief to follow.