2014 (10) TMI 98 - AT - Service Tax

Activity of development and construction of apartments - Whether service tax collected from the customers and kept in the escrow account and not paid to the Government would attract provisions of Section 73A of the Finance Act, 1994 or not - Held that - if a person has collected any amount as service tax, that amount has to be paid to the Government. In this case, question is whether that amount can be said to have been collected. Admittedly, the meaning of escrow account is that amount is kept with a third party and has to be disbursed to a person who is eligible to get the same as and when the issue attains finality. It is stated that the amount collected by the appellant was kept in escrow account and he has given an assurance to the buyer that if the amount is not liable to be paid, the same shall be paid with interest. It is only a deposit which is not taken into account of the appellant and kept in a separate account to ensure safety of money and to ensure disbursement to the ultimate customer. Needless to say that if the liability exists and if it is held that the appellant is liable to pay, the amount will have to be paid to the Government since it is in escrow account. Therefore Commissioner should have determined the liability and if there was liability, the amount in escrow account would have been paid to the Government. Therefore, at this stage, we cannot say that the amount has been collected as service tax and therefore, the clause (2) of Section 73A is attracted and the amount should have been paid to the Government by the appellant. It is not the case of the department that the appellant is liable to pay service tax on the service rendered - Decided in favour of assessee.

Summary

Issues:
1. Liability of service tax on the activity of development and construction of residential apartments.
2. Applicability of Section 73A of the Finance Act, 1994 on service tax collected and kept in escrow account.

Analysis:
1. The appellant, engaged in development and construction of residential apartments, did not charge service tax during 2006-2009. They collected an amount from apartment owners in an escrow account due to uncertainty regarding service tax liability. The dispute was about whether this amount should have been paid to the Government under Section 73A. The Tribunal noted the appellant's caution deposit claim and lack of clarity on service tax liability. The Commissioner's order demanding service tax and imposing a penalty was challenged. The Tribunal emphasized the need to determine liability before invoking Section 73A. The appellant's escrow arrangement indicated a cautious approach, not collection of service tax. Therefore, the Tribunal set aside the order, stating that the amount was not collected as service tax, and Section 73A did not apply.

2. Section 73A of the Finance Act, 1994 requires any person liable to pay service tax to deposit collected amounts with the Government. The Tribunal examined if the amount in the escrow account constituted collected service tax. The appellant's escrow account was a safeguard against potential service tax liability, ensuring funds' availability if required. The Tribunal highlighted that only upon determining liability, if any, the amount would be paid to the Government. Since the department did not establish service tax liability, the Tribunal concluded that the amount was not collected as service tax. Consequently, Section 73A did not apply, and the appellant was not obligated to pay the amount to the Government. The Tribunal allowed the appeal, emphasizing the importance of determining liability before invoking statutory provisions like Section 73A.

This detailed analysis of the judgment highlights the key issues of service tax liability in construction activities and the application of Section 73A in cases involving collected amounts held in escrow accounts.