Service tax on cancellation of a flat booking

[Anand Nahar]

My client sold a flat and received a cheque for advance booking amounts on 27.05.2016. He did not pay service tax on this amount. Subsequently, a flat booking was cancelled, and my client returned the advance booking amounts on 29.03.2019. Kindly suggestions grounds, cases for filing appeal.

[KASTURI SETHI]

Dear Querist,

Peruse the following judgement. The issue is same.

Guardian landmarks LLP Versus Commissioner of Central Excise & Service Tax, Pune II - 2023 (6) TMI 309 - CESTAT MUMBAI

 

[Sadanand Bulbule]

Well guided Sir.

[YAGAY and SUN]

The impugned demand is unsustainable both on facts and in law. Under the Finance Act, 1994, Service Tax is attracted only on consideration retained towards provision of taxable service. In the present case, the amount received on 27.05.2016 represented advance booking consideration for a flat, but the booking was subsequently cancelled and the entire advance amount was refunded to the customer on 29.03.2019. Once the transaction itself stood rescinded and no service was ultimately rendered, the consideration ceased to have the character of taxable value. It is a settled principle that Service Tax is a levy on rendition of service and not on mere receipt of advances where the underlying transaction fails and the amount is returned. Consequently, no taxable event survives after cancellation of booking and refund of the entire consideration. Reliance may be placed on the ratio laid down in CCE v. Reliance Industries Ltd. and other decisions holding that tax cannot be retained where consideration is refunded and the service is not provided. The Department cannot seek to tax a transaction that ultimately resulted in no provision of taxable service and no retention of consideration.

Without prejudice, even assuming tax was initially payable on receipt basis under the Point of Taxation Rules, once the booking stood cancelled and the amount was refunded, the assessee became entitled to adjustment/refund in terms of Rule 6(3) of the Service Tax Rules, 1994, which specifically contemplates situations where services are not provided wholly or partially and the value thereof is refunded. The substantive benefit of adjustment/refund cannot be denied on procedural grounds when the fact of cancellation and refund is undisputed. It is well settled by judicial authorities, including CCE v. Nahar Industrial Enterprises Ltd., that tax cannot be collected on amounts not constituting consideration for taxable services. Further, retention of Service Tax in such circumstances would amount to unjust enrichment of the revenue contrary to the scheme of the Finance Act, 1994. Accordingly, the demand, interest and consequential penalties deserve to be set aside in entirety, as no taxable value ultimately accrued to the appellant on account of the cancelled flat booking and the refunded advance consideration.

[Kashish Gupta]

From above we understand your client received advance booking amounts on 27.05.2016 without paying service tax, and refunded the entire amount on 29.03.2019 upon cancellation. It is important to first understand what the correct legal position ought to have been. Your client should have paid service tax on the advance received in May 2016, since liability arises on receipt of consideration under Section 66E of the Finance Act, 1994. Thereafter, upon cancellation and refund of the entire amount including service tax to the buyer in March 2019, your client should have claimed credit or adjustment under Rule 6(3) of the Service Tax Rules, 1994. Rule 6(3) expressly provides that where a taxable service is not provided wholly or partially for any reason, and the amount along with service tax is refunded to the customer, the service provider is entitled to take credit of such tax paid or adjust it against future liability. The CBIC addressed this exact situation in Circular No. 151/2/2012-ST dated 10.02.2012, clarifying that amounts received by a builder after 01.07.2010 are to be treated as advance consideration for construction services, and where a booking is subsequently cancelled before completion of the project and the entire booking amount including service tax is refunded to the buyer, the developer is entitled to service tax credit on such cancellation. This circular is binding on Revenue. The net tax liability, had this procedure been followed, would have been nil. What was payable in 2016 would have been fully absorbed by the credit in 2019.

On the substantive question, a consistent line of CESTAT decisions holds that service tax cannot survive a cancellation where the entire consideration is refunded. In Credence Property Developers Pvt. Ltd. Versus Commissioner of CGST & Central Excise, Mumbai East reported as 2023 (1) TMI 252 - CESTAT MUMBAI, the Hon'ble Tribunal allowed the appeal and directed that the service tax collected in respect of the cancelled flat bookings, which was returned to the buyer, is refundable to the appellant as no taxable service was provided and the department cannot retain the amount.

[Kashish Gupta]

Further, in Guardian Landmarks LLP v. Commissioner of Central Excise and Service Tax, Pune II reported as 2023 (6) TMI 309 - CESTAT Mumbai, the Hon'ble Tribunal held that once the buyer cancels the booking and the consideration is returned, the service contract stands terminated, and once it is established that no service is rendered, the refund of tax becomes admissible. The Tribunal further held that retaining such amounts would violate Article 265 of the Constitution of India, since no tax can be levied or collected except by authority of law.

On further grounds, it may be submitted that it is a well settled principle that tax can be imposed only when a taxable event occurs. The taxable event under service tax is rendition of service. Since no service was ultimately rendered and the contract stood cancelled, the very foundation of the levy disappears. The demand is unsustainable both on the ground that no taxable service was provided and on the ground that no amount remained chargeable in the hands of your client after the full refund was made to the buyer. At max, your client may be mulcted with demand of penalty for not following the statutory provisions in accordance with law.

[Shilpi Jain]

Looks like a revenue neutral situation whichis what you should press in litigation.

[KASTURI SETHI]

Flat booking was cancelled by prospective buyer,

Advance amount was refunded Hence consideration is absent.

No service was provided to your client. Hence 'service'' is absent. 'consideration" does not exist. Thus in the absence of taxable service and 'consideration'' Service Tax is not payable.

Out of the definition of Section 65B(44) of the Finance Act.

 

AI Summary

Service tax on cancelled flat bookings turns on whether consideration was refunded and no taxable service was ultimately rendered.
Service tax on advance booking amounts is discussed where a flat booking is cancelled and the entire consideration is refunded. The commentary states that, once the transaction is rescinded and no service is ultimately rendered, the amount no longer has the character of taxable value and the levy on the cancelled booking does not survive. It further notes that, even if tax was initially payable on receipt of the advance, adjustment or credit may be available under Rule 6(3) of the Service Tax Rules, 1994 when the service is not provided and the amount is refunded.