TaxTMI 
TaxTMI 
2024 (11) TMI 1280
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....bjections were raised with respect to the project of "The North Park". The appellant has undertaken development and construction of "The North Park" a scheme of residential bunglow. Arrangement with the buyers of the unit in the scheme comprised three distinct and discernible transactions (i) sale of land (ii) construction of framework and (iii) construction of balance work i.e. finishing works. Prices for each of the transactions were separately identified and agreed upon by the appellant with the buyer. 1.2 The appellant has classified construction of framework and construction of balance work as 'works contract services' under clause (h) of section 66E of the Act and determined the value at the rate of 40% as per rule 2A of the Service Tax (Determination of Value) Rules, 2006. Whereas sale of land was not subjected to service tax considering them as non-taxable activity. Value of two transactions namely (i) sale of land and (ii) construction of framework were separately determined and reduced in writing in agreement to sale entered into by the appellant with the buyer. Whereas the value of third transaction i.e. construction of balance works were not included in the agreement t....
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.... a "works contract" under Section 65B(44) of the Finance Act, 1994, is derived from Article 366(29A). Consequently, any activity qualifying as a "works contract" under Article 366(29A) would also be treated as a "works contract" for the purposes of service tax. Accordingly, the service portion involved in the execution of a works contract is deemed to be a "service" as defined under Section 65B(44) read with Section 66E(h) of the Finance Act, 1994. Since the Apex Court has unequivocally held that building contracts, i.e., the construction of residential or commercial units, constitute "works contracts" taxable under the respective VAT laws in terms of Article 366(29A), they must also be treated as "works contracts" for the purpose of service tax. Therefore, the decision of the Supreme Court squarely applies to the facts of the present case, particularly concerning transactions involving the construction framework and remaining works. 2.2 He refers to the provisions of Section 129 of the Finance Act, 2017, which retrospectively amended Rule 2A of the Service Tax (Determination of Value) Rules, 2006. This amendment introduced an additional option for determining the value of works c....
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....he subject matter of taxation is restricted to the "service portion involved in the execution of a works contract." Consequently, it cannot encompass land, which is neither goods nor services, within its ambit. He explains that service tax is a levy under Entry 97 of the Union List in the Seventh Schedule to the Constitution of India, and the scope of this levy is limited to subjects that do not fall within the jurisdiction of the State List. He further clarifies that "goods" fall under the jurisdiction of the State by virtue of Entry 54 of the State List, and "land" falls under the jurisdiction of the State by virtue of Entry 49 of the State List. Accordingly, service tax cannot be levied on goods or land, nor can it be construed to include them within its scope. To align with the constitutional framework, the provisions of Section 66E(h) have been specifically designed to limit their scope to the service portion involved in the execution of works contracts, which excludes land. Therefore, in the case of divisible contracts where the value of land is explicitly identified and agreed upon in the agreement with the buyer, such value cannot be included in the taxable value of service....
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....the show cause notice on the grounds of limitation as well as under Rule 4 of the Service Tax (Determination of Value) Rules, 2006 has been challenged forcefully. It is submitted that the appellant's records were subjected to periodic audits, and as evidence, he has furnished a copy of the final audit report for the period up to 2014-15, which raised no such objections. The demand involved in the impugned order pertains to the period 2015-16 to June 2017. It is also submitted that the issue of classification between clause (h) and clause (b) is highly contentious in nature and has been a subject of legal interpretation, with disputes escalating up to the Apex Court. Therefore, the invocation of an extended period of limitation while issuing the show cause notice is incorrect. 2.9 It is also submitted that the demand arises from the issue of valuation, which necessitates prior determination as per the procedures prescribed under Rule 4 of the Service Tax (Determination of Value) Rules, 2006. He highlights, by referring to the copy of the show cause notice and the impugned order, that the revenue failed to follow the procedure laid down in Rule 4. Consequently, they lacked the juris....
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....ound by referring to the definition of 'works contract' given in section 65B(44) that there are four elements of a works contract out of which element named as (d) in para 51.2 i.e. "The contract should be for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property." is not fulfilled in the agreement executed by the appellant. Adjudicating Authority also contended that there is no mention of the appellant agreeing to construct villa on behalf of the buyer and thus the agreement was to sale of villa solely and not for the purpose of carrying construction and thus the transaction cannot be classified as works contract. We find that the adjudicating authority has deemed the transaction as that of sale of villa instead of construction whereas the adjudicating authority has classified the transaction under clause (b) which deemed "construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, who....
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....s contract". The legal position summarized by us and the foregoing discussion would justify the view taken by the two-Judge Bench in Raheja Development (supra)." 4.3 In view of the above judgement of Apex court, it is abundantly clear that the sale of a building prior to completion of construction constitutes a works contract and the issue is no more res integra and thus contention made by adjudicating authority in impugned order to draw distinction between sale of villa prior to completion of construction and agreeing to construction activity is unacceptable and contrary to settled position of law. We also find force / merit in the argument placed by Shri Rahul Patel that amendment in rule 2A retrospectively by way of section 129 of Finance Act, 2017 shows the clear intention of the government to align the valuation machinery with the law settled by the Supreme Court. Thus, we do not find force / merit in the arguments and averments made by adjudicating authority in the impugned order and find that the classification adopted by the appellant under clause (h) is correct and lawful. 4.4 Another issue which requires due consideration is valuation, wherein the value of land has been....
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....ect matter. Supreme Court has in case of Commissioner, Central Excise & Customs versus M/s Larsen & Toubro Ltd. And Others referred to the principle elucidated in case of Gannon Dunkerley - (1993) 1 SCC 364 that the measure for levying sale tax / vat shall be the value of goods only and not the works contract. Relevant paras are as follows: "15. A reading of this judgment, on which counsel for the assessees heavily relied, would go to show that the separation of the value of goods contained in the execution of a works contract will have to be determined by working from the value of the entire works contract and deducting therefrom charges towards labour and services. Such deductions are stated by the Constitution Bench to be eight in number. What is important in particular is the deductions which are to be made under sub-paras (f), (g) and (h). Under each of these paras ,a bifurcation has to be made by the charging Section itself so that the cost of establishment of the contractor is bifurcated into what is relatable to supply of labour and services. Similarly, all other expenses have also to be bifurcated insofar as they are relatable to supply of labour and services, and the sa....
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....is as follows : "16. At this stage, it is important to note the scheme of taxation under our Constitution. In the lists contained in the 7th Schedule to the Constitution, taxation entries are to be found only in lists I and II. This is for the reason that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There is no concurrent power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be struck down. In the present case, the dichotomyis between sales tax leviable by the States and service tax leviable by the Centre. When it comes to composite indivisible works contracts, such contracts can be taxed by Parliament as well as State legislatures. Parliament can only tax the service element contained in these contracts, and the States can only tax the transfer of property in goods element contained in these contracts. Thus, it becomes very important to segregate the two elements completely for if some element of transfer of property in goods remains when a service tax is levied, the said levy would be found to be constitutionally infirm. This ....
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....t shall be on the basis of measure of works contract by excluding the actual value of goods involved or be on the basis of measured as per fictional machinery provided in rule 2A(ii), however measure of levy cannot solely depend upon the measure of a bundle comprising works contract and land. We also find that the value of land is identified in the agreement and clearly discernible therefrom and therefore the measure shall be construed as divisible in nature. We also find that the appellant had vehemently argued before the adjudicating authority that the value of land agreed upon by the parties in the agreement had not been challenged or disputed by revenue in the show cause notice. Thus, it is not a case of revenue leading to overvaluation of land by the appellant. Accordingly, we hold that the value agreed upon with the buyer with respect to land and indicated in the agreement shall be the value of land required to be separated from the works contract. Accordingly, we find force in the argument that the land value is not includable in the value of works contract irrespective of and regardless of the option exercised by the appellant for valuation of works contract services under ....
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....orks contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause. (ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:- (A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract; 3G[Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent. of the total amount charged for the works contract.]" From the above Rule 2A(i), it is clear that for the purpose of value of service in the execution of works contract the gross value shall not include the value of land or undivided share of land. In view of this provision the val....
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....ailable to the construction of framework shall be the treatment for construction of balance work. Since we have already decided that the construction of framework is works contract and the appellant has classified them as original works under rule 2A(ii)(A), construction of balance works deserves classification under same machinery and not under the rule 2A(ii)(B). 4.8 In addition to foregoing, we also find that the construction of balance works merits classification under rule 2A(ii)(A) as per its plain language. Rule 2(A)(ii) reads as follows : "(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:- (A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract; Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent. of the total amount charged for the works ....
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....ords, "in the case of works contract, not covered under sub-clause (A)," which implies that clause (B) applies exclusively to works that do not qualify under clause (A). Given that the construction of balance works, even if involving finishing services, qualifies as "original works," their valuation must be determined under clause (A) and not clause (B). Therefore, the contention of the Revenue in the show cause notice and the impugned order, which seeks to determine the value under Rule 2A(ii)(B), is incorrect. Accordingly, the demand for service tax amounting to Rs. 1,53,07,940/- based on the higher rate of valuation under clause (B) is unsustainable and is liable to be set aside. 4.9 Regarding the demand of service tax amounting to Rs. 3,29,637/- confirmed in relation to cancellation charges, we note that the Revenue contends the appellant claimed an abatement of 60% while determining the tax liability. However, from the facts of the case, it is evident that the cancellation charges represent the amounts retained by the appellant after refunding the balance to the buyer upon cancellation of the booking. The appellant asserts that these retained amounts were already subjected to....
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....ugned order, that the show cause notice did not challenge the value of services but addressed an alleged incorrect abatement. However, we find this reasoning to be both blatant and absurd. The central issue in the case pertains to the valuation of taxable services, as the appellant had determined the value under Rule 2A, which was subsequently challenged by the Revenue on the grounds of both classification and the rate of deduction applied. Thus, the contention of the adjudicating authority is entirely baseless and does not warrant further consideration. 4.12 Regarding the appellant's challenge, we find substantial merit in the argument that the show cause notice was issued without adhering to the procedure prescribed under Rule 4, which mandates that the central excise officer issue a notice to justify revisiting the value specified. The show cause notice, as evident from the records, fails to demonstrate compliance with this procedural requirement. However, given that the demands raised in the impugned order have already been found unsustainable on substantive grounds, we do not find it necessary to delve further into this procedural aspect. 4.13 Regarding the limitation fo....