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TMI Blog2024 (11) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... ensable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial 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 measur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llation 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 to sale. 1.3 Department raised objections as regards classification and valuation during the course of audit and consequently issued the show cause notice. It was alleged in the show cause notice that the appellant had adopted both the clauses of rule 2A for determination of value of works contract services insofar as first two transactions were concerned (i) sale of land (ii) construction of framework. It was also alleged that the activities carried out by the appellant was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contract services where the value of land is inseparably included. He explains that such a retrospective amendment was necessary to ensure parity in effective taxation between clause (b) and clause (h) and reflects the government s acknowledgment of the classification of building contracts as works contracts, as affirmed by the decision of the Apex Court. He emphatically submits that the retrospective amendment in 2017, introduced when GST was on the verge of implementation, specifically addressing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services rendered by way of a works contract. 2.5 He further submits with respect to the issue of valuation of balance works, by pointing out that the revenue has failed to establish the specific nature, scope and extent of the activities those were undertaken by the appellant under balance works which may be regarded as other than original works, that could attract rate of 70%. He explains that the appellant undertook the construction of villas, excluding the activity related to the sale of land, as single arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 jurisdiction to issue a show cause notice under Section 73, rendering the show cause notice bad in law. 3. Shri Rajesh Nathan, Ld. Assistant Commissioner(AR) on behalf of the revenue, reiterates the findings of the impugned order. 4. We have carefully considered the oral submissions made by both the sides and perused the records, including the written synopsis, written submissions and paper book furnished by the appellant. We have also carefully perused the facts presented in the impugned order and show cause notice and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted 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, 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 agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 included in the value of construction services by the revenue. From the impugned order and the show cause notice, we observe that the value of land was included in the value of construction services, and the taxable value was determined in terms of Sl. No. 12 of Notification No. 26/2012-ST dated 20.06.2012, which pertains to the valuation of construction services classifiable under clause (b) of Section 66E of the Act. Since we have found that the classification of works contract under clause (h) is correct and accordingly the value was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 same goes for the profit that is earned by the contractor. These deductions are ordinarily to be made from the contractor s accounts. However, if it is found that contractors have not maintained proper accounts, or their accounts are found to be not worthy of credence, it is left to the legislature to prescribe a formula on the basis of a fixed percentage of the value of the entire works contract as relatable to the labour and service element of it. This judgment, therefore, clearly and unmistakably holds that unless the splitting of an indivisible works contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 position is well reflected in Bharat Sanchar Nigam Limited v. Union of India, (2006) 3 SCC 1, as follows:- No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rule 2A. Similar view has been taken by this tribunal in case of Commissioner Of CGST Central Excise CGST Central Excise Ahmedabad Versus Shree Siddhi Infrabuild Pvt Ltd relevant para of which are as follows : 4. We have carefully considered the submission made by both the sides and perused the records. We find that as regard merit of the case the issue is whether in case of works contract service the value of land is includable or otherwise. To decide this issue, it is necessary to go through valuation provision as regard the works contract service. Hence, provision of Rule 2 A (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 value of land is not includible and service tax demand on this ground is not sustainable on merit. In view of above, the classification made by the revenue in impugned order is rejected and the demand of service tax of Rs. 1,20,74,334/- is accordingly deleted. 4.7 Regarding the issue of 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, we find that the controversy is confined to the classification under clause (A) or (B) of Rule 2A(ii) and does not pertain to the classification unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contract. (B) in case of works contract, not covered under sub-clause (A), including works contract entered into for, (i) maintenance or repair or reconditioning or restoration or servicing of any goods; or (ii) maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, service tax shall be payable on seventy per cent. of the total amount charged for the works contract Clause (A) determines the rate where works contracts are for original works which are defined in Explanation 1 as under : Explanation 1.- For the purposes of this r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding 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 service tax at the relevant time when initially received towards works contract services, and such tax was calculated at the rate of 40% as per Rule 2A. Despite this, 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 for issuance of the show cause notice as challenged by the appellant, we note 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. In this context, we find merit in the arguments presented by Shri Rahul Patel. The appellant s records were subjected to a service tax audit, and the final audit report for the period up to 2014-15, which has been placed on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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