2024 (12) TMI 1407 - AT - Service Tax

Classification of service - construction of complex service or works contract services? - Appellant owns the land which is being developed by them for residential purposes - Extended period of limitation - penalty. Classification of service - HELD THAT - The similar question arose before the Principal Bench of this Tribunal at New Delhi in case of M/S KRISHNA HOMES VERSUS CCE, BHOPAL AND CCE, BHOPAL VERSUS M/S RAJ HOMES 2014 (3) TMI 694 - CESTAT AHMEDABAD wherein it is observed that ' the agreements entered into by a builder/promoter/developer with prospective buyers for construction of residential units in a residential complex against payments being made by the prospective buyers in instalments during construction and in terms of which the possession of the residential unit, is to be handed over to the customers on completion of the residential complex and full payment having been made, are to be treated as works contracts, it has to be held that during the period of dispute, there was no intention of the Government to tax the activity in terms of such contracts a builder/developer with prospective customers for construction of residential units in a residential complex. Such works contracts involving transfer of immovable property were brought within the purview of taxable service by adding explanation to Section 65(105)(zzzh) w.e.f. 1-7-2010, and therefore, it has to be held that such contracts were not covered by Section 65(105)(zzzh) during the period prior to 1-7-2010.' Further, if the activity of the Appellant is classified under the taxable category of construction of complex service then abatement from the value of services is applicable. This itself demonstrates that the contracts are composite in nature and it would be classifiable as works contract services appropriately. It is also pertinent to note that if the activity of the Appellant is classifiable under the taxable category of works contract services then the question would arose that in absence of any mechanism for deduction of the value of land whether service tax is leviable or not. This question was raised before Hon ble Delhi High Court in case of SURESH KUMAR BANSAL ANUJ GOYAL ORS. VERSUS UNION OF INDIA ORS. 2016 (6) TMI 192 - DELHI HIGH COURT wherein it is observed ' we accept the petitioners contention that no service tax under Section 66 of the Act read with Section 65(105)(zzzh) of the Act could be charged in respect of composite contracts such as the ones entered into by the petitioners with the builder. The impugned explanation to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service is set aside.' Thus, even if the category of service is held as construction of complex services as alleged by the revenue department in the show cause notice dated 29.09.2015 then also the demand of service tax is not sustainable in the facts of the present case - the demand of service tax in the present case is not sustainable. Time limitation - HELD THAT - The issue involved in the present case is classification of services. The very same issue has come up before this Tribunal and higher judicial forums and the issues involved are pure interpretation of complex legal provisions. Therefore, the demand of service tax would be hit by limitation as well. The extended period of limitation is also not invocable in the facts of the present case. Penalty imposed on the partner of the Appellant firm under Section 78A of the Finance Act, 1994 - HELD THAT - The main Appellant in the present case is a partnership firm and therefore, the provisions of Section 78A of the Finance Act, 1994 is not applicable and therefore, the penalty under Section 78A of the Finance Act, 1994 on partner of main Appellant firm is also not sustainable - since the demand of service tax on the main Appellant firm itself has been set aside there is no question of penalty on the partner of the Appellant firm. Conclusion - The contracts are composite in nature and it would be classifiable as works contract services appropriately. The demand of service tax would be hit by limitation as well. Since the demand of service tax on the main Appellant firm itself has been set aside there is no question of penalty on the partner of the Appellant firm. The impugned order is set aside - appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the service tax is liable to be paid by the Appellant under the category of "construction of complex" service or under the taxable category of "works contract" services.
• Whether the demand of service tax, interest, and penalties imposed on the Appellant and its partner are sustainable under the Finance Act, 1994.
• Whether the extended period of limitation for the demand of service tax is applicable in the present case.
• Whether the penalty imposed on the partner of the Appellant firm under Section 78A of the Finance Act, 1994 is valid.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Services

• Relevant legal framework and precedents: The classification dispute hinges on whether the services fall under "construction of complex" or "works contract" services. The Appellant relied on the Supreme Court decision in Larsen & Toubro Ltd. vs. State of Karnataka, which clarified the scope of works contracts.
• Court's interpretation and reasoning: The Tribunal noted the composite nature of the contracts, involving both goods and services, which aligns with the definition of "works contract" services.
• Key evidence and findings: The Tribunal referenced similar cases, including Krishna Homes and ETA Constructions, where the nature of the contract determined the classification.
• Application of law to facts: The Tribunal found that the contracts were composite, involving supply of materials and services, thus fitting the "works contract" category.
• Treatment of competing arguments: The Tribunal considered the Revenue's classification under "construction of complex" but found it unsustainable due to the composite nature of the contracts.
• Conclusions: The Tribunal concluded that the services should be classified under "works contract" services, making the demand under "construction of complex" unsustainable.

Issue 2: Demand of Service Tax and Penalties

• Relevant legal framework and precedents: Section 65(105) of the Finance Act, 1994, and related rules on service tax applicability and valuation.
• Court's interpretation and reasoning: The Tribunal found that the demand was not sustainable due to incorrect classification and lack of a mechanism for land value deduction.
• Key evidence and findings: The Tribunal relied on precedents like Suresh Kumar Bansal, which highlighted the need for a mechanism to exclude non-service elements from taxable value.
• Application of law to facts: The Tribunal applied the principles from previous judgments to determine that the demand was unsustainable.
• Treatment of competing arguments: The Tribunal rejected the Revenue's arguments due to the lack of statutory provisions for including land value in service tax calculations.
• Conclusions: The demand of service tax, interest, and penalties was set aside.

Issue 3: Extended Period of Limitation

• Relevant legal framework and precedents: The Tribunal considered the applicability of the extended period of limitation under the Finance Act, 1994.
• Court's interpretation and reasoning: The Tribunal found that the issues were purely interpretative, involving complex legal provisions, thus the extended period was not applicable.
• Conclusions: The demand was time-barred, and the extended period of limitation was not invocable.

Issue 4: Penalty under Section 78A

• Relevant legal framework and precedents: Section 78A of the Finance Act, 1994, applies to directors and officers of a company, not partners of a partnership firm.
• Court's interpretation and reasoning: The Tribunal found that the penalty under Section 78A was misapplied as it pertains to company officers, not partners of a firm.
• Conclusions: The penalty on the partner was not sustainable.

3. SIGNIFICANT HOLDINGS

• Core principles established: The classification of services must reflect the composite nature of contracts involving both goods and services. The lack of statutory mechanisms for land value exclusion renders the demand unsustainable.
• Final determinations on each issue: The Tribunal set aside the demand for service tax, interest, and penalties, and held that the extended period of limitation was not applicable. The penalty under Section 78A was also set aside.
• Verbatim quotes of crucial legal reasoning: "The demand under such composite contracts can only be made under the category of WCS... the Tribunal set aside the demand following the decision in the case of Real Value Promoters Pvt. Ltd."

In conclusion, the Tribunal allowed the appeals, setting aside the impugned order and granting consequential relief to the Appellant.