No Service Tax Leviable On Residential Construction Prior To 1 July 2010 Even Under Works Contracts: CESTAT Bengaluru
Pranav B Prem
The Bengaluru Bench of the Customs, Excise and Service Tax Appellate Tribunal has held that no service tax is leviable on construction of residential complexes undertaken by builders or developers for the period prior to 1 July 2010, even where such construction activities were executed under works contract arrangements. The Tribunal set aside substantial service tax demands raised for the pre-1 July 2010 period, holding that the issue is no longer res integra and stands settled by judicial precedent. The Bench comprising Dr. D.M. Misra, Judicial Member, and R. Bhagya Devi, Technical Member, disposed of two appeals filed by Sobha Developers Ltd. challenging service tax demands confirmed by the Commissioner of Central Excise and Service Tax, Bengaluru
The appeals related to two distinct periods—February 2009 to December 2009 and January 2010 to May 2010. During the relevant period, the appellant was engaged in construction of residential and commercial buildings on a works contract basis and was duly registered under the service tax law as well as under the Karnataka Value Added Tax regime.
Relying on CBEC Circular No. 108/02/2009-ST dated 29 January 2009, the developer had discontinued charging and paying service tax on residential construction projects and had duly intimated the department. The Circular clarified that where a builder constructs residential units on its own account and transfers ownership only upon completion, the activity amounts to self-service and does not attract service tax prior to 1 July 2010.
Despite this clarification, the department issued show cause notices alleging that the benefit of the Circular was not available to the appellant since the construction activities were carried out under works contract arrangements. It was alleged that the services were classifiable as “works contract service” and therefore taxable. Accepting this view, the adjudicating authority confirmed service tax demands aggregating to more than ₹10.75 crore, along with interest and penalties under Sections 76 and 78 of the Finance Act, 1994.
The central issue before the Tribunal was whether service tax could be levied on construction of residential complexes by a builder or developer, whether under “construction of complex service” or “works contract service”, for the period prior to 1 July 2010.
After examining the statutory framework, Board Circulars and a consistent line of judicial authorities, the Tribunal held that the issue stood conclusively settled in favour of the assessee. The Bench relied on earlier decisions of the Tribunal in Krishna Homes v. CCE and Pragati Edifice Pvt. Ltd., as well as the judgment of the Supreme Court in Larsen & Toubro Ltd., to hold that prior to 1 July 2010, construction of residential complexes intended for sale was not a taxable service.
The Tribunal observed that the Explanation inserted to Section 65(105)(zzzh) by the Finance Act, 2010, which deemed construction intended for sale as a taxable service, was a substantive amendment and could only operate prospectively from 1 July 2010. Prior to the insertion of the Explanation, the prevailing legal position was that a builder constructing residential units for sale was essentially providing service to itself, since ownership of the property remained with the builder until completion and transfer. Such self-service could not be subjected to service tax.
Rejecting the department’s contention that works contract classification altered the taxability, the Tribunal held that the nature of the activity remained the same and could not be artificially taxed under a different service category for the pre-2010 period. Accordingly, the service tax demands confirmed for the period February 2009 to May 2010 were held to be unsustainable and were set aside.
While granting relief on the tax demands, the Tribunal noted that the appellant had utilised accumulated CENVAT credit amounting to approximately ₹7.97 crore to discharge the disputed service tax liability during the relevant period. Since the output services themselves were held to be non-taxable, the Tribunal ruled that the appellant could not retain the benefit of CENVAT credit availed in respect of such services.
However, as the exact quantum of CENVAT credit required to be reversed involved factual verification, the Tribunal remanded the matter to the original adjudicating authority for the limited purpose of re-determining the amount of credit to be reversed in accordance with the CENVAT Credit Rules, 2004. In the result, the service tax demands were quashed, penalties and interest were set aside, and the matter was remanded only for verification of CENVAT credit reversal, thereby granting substantial relief to the real estate developer.
Cause Title: M/s. Sobha Developers Ltd. Versus The Commissioner of Central Excise and Service Tax
Case No: Service Tax Appeal No. 2089 of 2011
Coram: Dr. D.M. Misra, Judicial Member, and R. Bhagya Devi, Technical Member
