2024 (11) TMI 1280 - AT - Service Tax

Classification of services - works contract services or Construction of Residential Complex service - valuation of services - values of sale of land and construction of framework were clubbed and abatement of 70% was deducted in order to arrive at the value of taxable services - clause (b) of section 66E of the Finance Act, 1994 - liability of service tax on the amount retained by the appellant upon cancellation of the booking by the buyer on which tax was paid earlier as part of works contract services. HELD THAT - The revenue has not disputed that the appellant has used own goods while carrying out the construction activities. It is also found that another aspect of the construction of villa, which relates to construction of balance works, was classified as works contract services and accepted by the revenue in impugned order. The appellant has vehemently pressed that the construction of balance works in indispensable part for construction of villa and which submission has not been controverted by the revenue with plausible explanations or contemporary evidences. It is also found that the revenue has not disputed that the activity of constructing framework was indivisible in nature with respect to goods and services and value of goods was not separately measured by the appellant. 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, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority . Needless to elaborate that the very applicability of clause (b) would also require services by way of construction of a complex or building and sale thereof before completion of construction, which apparently and unequivocally transpires from the plain language of clause (b). If the transaction, according to the adjudicating authority, is limited to that of sale of villa and not involving agreement to construct the same, the same cannot fall within the scope of clause (b) whereas the adjudicating authority has classified the transaction under clause (b) - the arguments and averments made by adjudicating authority in the impugned order to declassify the transactions under works contract and to classify them under the construction services are self-contradictory as well as preposterous. In view of decision of Supreme Court in case of Larsen Toubro v. State of Karnataka 1992 (11) TMI 254 - SUPREME 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 - there are 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. Inclusion of value of land in the value of construction services by the revenue - HELD THAT - Since there is no contention in the impugned order or allegation in the show cause notice to re-determine the value of works contract services under rule 2A to include the value of land, value determined by the appellant under rule 2A shall be accepted as final. However, it is found that the appellant has raised various grounds and substantiated with the help of logical interpretation that the value of land cannot be included in the value of works contract under rule 2A - there are force in the clarity brought on record by him that the service tax cannot be extended to the value of land which is not a necessary an integral element of works contract like goods. Since the land is subject matter of State levy, same cannot be deemed as part of the service so defined in section 65B(44) of the Act. Thus, it is necessarily transpiring that the works contract is comprised of only two elements i.e. goods and service and does not include land as integral part of it. However, this may not have any restriction to combine the works contract along with land under commercial arrangement and if that has been done the arrangement needs to be vivisected so as to separate the works contract from the land. It is a settled position of law that where the tax is imposed on the subject matter the measure for levying such a tax can only be the value of such subject matter. Though the works contract is a different and distinct specie of contracts and distinct from a contract for service simplicitor, measure of tax is considered divisible so as to ensure that the tax is imposed only on that value which attributes to the powers available with respective tax authority. The Supreme Court has categorically held that the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be stuck down. This necessitates a complete segregation of the elements involved in the works contract to ensure compliance with constitutional mandates. Any reference to the measure of taxable event 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 - it is not a case of revenue leading to overvaluation of land by the appellant. Accordingly, 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, there are 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 rule 2A. Re-determination of the value by the Revenue concerning the construction of balance works by treating them as finishing services under Rule 2A(ii)(B) instead of Rule 2A(ii)(A), as adopted by the appellant - HELD THAT - The transaction of constructing balance of works are in relation to construction of villa and which is classified as works contract. Construction of framework and construction of balance works collectively resulted into construction of villa which is a residential dwelling for the buyer. Thus, it is found that the treatment available to the construction of framework shall be the treatment for construction of balance work. Since it is 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). The construction of balance works merits classification under rule 2A(ii)(A) as per its plain language - it is observed that clause (B) of Rule 2A(ii) expressly begins with the words, 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) - 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. Demand of service tax amounting to Rs. 3,29,637/- confirmed in relation to cancellation charges - HELD THAT - The Revenue has treated the retained amounts as consideration for agreeing to an obligation, classifiable under clause (e) of Section 66E, and quantified the tax liability on the portion exceeding the value determined under works contract services at the rate of 40%. Since the Revenue itself, as evident from the facts stated in the show cause notice, has deducted the amounts on which service tax was paid under works contract services by the appellant, it follows logically that the amounts now subject to the impugned demand represent retentions from the payments originally received towards works contract services. Consequently, these amounts cannot simultaneously be treated as consideration for a new and distinct service provided by the appellant under clause (e) of Section 66E of the Act - the cancellation charges, even if considered distinct from their prior taxation under works contract services, do not fall within the ambit of clause (e) of Section 66E of the Act. Accordingly, the demand for service tax on cancellation charges is unsustainable and is liable to be set aside. Limitation for issuance of the show cause notice - HELD THAT - The period covered by the notice is 2015-16 to June 2017, while the show cause notice was issued on 22-12- 2020. Additionally, we find that the ST-3 return for the period ending June 2017 was filed on 27-09-2017. Thus, the entire demand is raised under the extended period of limitation. The Revenue has invoked the extended period on the grounds of alleged suppression of facts by the appellant - the appellant has clearly disclosed the amounts in Form ST-3 under the category of works contract services. These facts unequivocally demonstrate that the Revenue was aware of the appellant s business activities and the classification adopted - it would be inappropriate to attribute serious allegations of suppression of facts or an intent to evade payment of tax to the appellant - the invocation of the extended period of limitation is unsustainable. The impugned order and the demands arising from the impugned order are legally as well as factually incorrect and unsustainable and hence set aside - Appeal allowed.

Summary

Issues Involved:

1. Classification of services as 'works contract services' versus 'Construction of Residential Complex'.
2. Valuation of services and inclusion of land value.
3. Valuation of balance works under Rule 2A(ii)(A) versus Rule 2A(ii)(B).
4. Demand of service tax on cancellation charges.
5. Validity of the show cause notice and procedural compliance.
6. Invocation of the extended period of limitation for issuing the show cause notice.

Detailed Analysis:

1. Classification of Services:

The primary issue was whether the construction activities undertaken by the appellant should be classified as 'works contract services' under Section 66E(h) or 'Construction of Residential Complex' under Section 66E(b) of the Finance Act, 1994. The appellant argued, citing the Supreme Court's decision in Larsen & Toubro Ltd. v. State of Karnataka, that the construction of residential units constitutes a 'works contract'. The Tribunal agreed, noting that the adjudicating authority's classification under clause (b) was self-contradictory and inconsistent with the law. The Tribunal found that the sale of a building prior to completion constitutes a works contract, as per the Apex Court's ruling, and upheld the appellant's classification under clause (h).

2. Valuation and Inclusion of Land Value:

The Tribunal examined whether the value of land should be included in the taxable value of construction services. The appellant contended that land is neither goods nor services and should not be included in the valuation of works contracts. The Tribunal agreed, stating that the service tax is levied only on the service portion of works contracts, excluding land. It emphasized that the land is subject to state jurisdiction and cannot be taxed under service tax. The Tribunal found that the appellant correctly determined the value under Rule 2A, and the revenue's inclusion of land value was unjustified.

3. Valuation of Balance Works:

The issue was whether the balance works should be valued under Rule 2A(ii)(A) as original works or under Rule 2A(ii)(B) as finishing services. The Tribunal found that the construction of balance works was part of the original works of constructing villas and should be classified under Rule 2A(ii)(A). The revenue failed to provide evidence to support its classification under Rule 2A(ii)(B). The Tribunal concluded that the appellant's classification and valuation were correct, and the demand based on a higher rate under clause (B) was unsustainable.

4. Demand on Cancellation Charges:

The appellant argued that the retention of amounts upon booking cancellation, previously taxed as works contract services, should not be taxed again. The Tribunal agreed, noting that these amounts were already taxed and did not constitute a new service under clause (e) of Section 66E. It also referenced judicial precedents that cancellation charges do not fall under clause (e). The demand for service tax on cancellation charges was deemed unsustainable.

5. Validity of Show Cause Notice:

The appellant challenged the show cause notice on procedural grounds, asserting non-compliance with Rule 4 of the Service Tax (Determination of Value) Rules, 2006. The Tribunal found merit in this argument, highlighting the failure to follow prescribed procedures for revisiting the value. However, since the substantive demands were already dismissed, the Tribunal did not delve further into this procedural aspect.

6. Extended Period of Limitation:

The appellant contested the invocation of the extended period of limitation, arguing that there was no suppression of facts. The Tribunal found that the appellant had disclosed all material facts and that the issue was contentious, involving legal interpretation. Citing Supreme Court judgments, the Tribunal held that the extended period could not be invoked in such cases, rendering the demand time-barred.

Conclusion:

The Tribunal set aside the impugned order, finding the demands legally and factually incorrect. The appeal was allowed, granting consequential relief to the appellant.