2013 (4) ECS (206) (Tri Chen)
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
SOUTH ZONAL BENCH, CHENNAI
Jain Housing
Versus
Commissioner of Service Tax, Chennai
Application Nos. ST/S/354 356/12 in ST/448 450/12
Date of Hearing: 29.7.2013
Date of Decision:29.7.2013
PRESENT :
Smt. Radhika Chandrashekar, Advocate For the Appellant
Shri K. S. V. V. Prasad, JC (AR) For the Respondent
CORAM :
Hon'ble Shri P.K. Das, Judicial Member
Hon'ble Shri Mathew John, Technical Member
MISC ORDER NO. 41959 41961/2013
"Service tax liability cannot be determined based on what the applicant
calls itself, whether as a builder, a developer, a promoter etc. the liability is
to be determined with reference to the criterion whether there is a service
provider and service recipient. When UDS is sold the person to whom UDS
is sold becomes the legal owner of UDS. The facts that there is an
agreement giving possession to the applicant to do construction activity
cannot be interpreted to mean that the applicant continued to be the owner
of the land. Applicant's right to diminished to the extent UDS is sold. The
clause in the agreement for construction creates a lien on the land sold in
favour for the applicant who advances money for construction, if
necessary. In most cases money is collected in advance from the buyers of
UDS. But if there is no buyer for certain flats at initial stage or any buyer
defaults on payment of installments, the applicant had to advance his
money to carry on the construction activity. In such situation the lien only
him to take possession of land and sell it to another person. This clause
cannot be interpreted to mean that the initial transfer was not complete."
[Para 22]
Per Mathew John. Mr. :
1. The applicant is engaged in the business of Construction of Residential
Complexes and the applicant registered for payment of service tax. On
investigations conducted by Revenue, it appeared to the Revenue officers that
the applicant had not paid appropriate service tax on different projects executed
by them during the period Apr 06 to June 10. Three Show Cause Notices issued
in this regard have been adjudicated by a common order confirming a tax
demand of Rs. 11,21,54,460/- towards service tax and Rs. 7,11,365/- towards
Cenvat credit denied. Further there is demand for interest. Penalties are also
imposed. Aggrieved by the order, the applicant has filed these three appeals
before the Tribunal along with stay petitions which are presently under
consideration in this proceeding.
2. Arguing for the appellant, the Counsel submits that the impugned construction
was done on land of the applicant and hence applicant was doing activities for its
own benefit and there were no service provider and service recipient in this case
and hence demand for service tax is not sustainable. The Counsel submits that
the applicant has to be considered as a "Developer" of Housing project of CBEC
has clarified vide Circular 108/02/2009 dated 29.01.2009 and Circular
334/3/2010 dated 26.10.2010 and 151/2/2012 ST dated 10.02.2012 that there
was no liability on Developers to pay service tax. She submits that this position
changed only from 01.07.2010 when a new explanation was added in section 65
(105) (zzzh) of Finance Act, 1994, defining the relevant taxable service, and the
demands in the present appeals relate to periods prior to that date.
3. She did not contest the fact that the applicant's model of business was to first
enter into agreements with prospective buyers of flats for sale of Undivided
Shares (UDS) of land which were first registered in the name of the buyers.
Thereafter, construction was undertaken by the applicant and payments were
collected from the buyers of UDS in installments depending on the progress in
construction. On completion of construction and on receipt of full payment for the
cost of construction, the constructed flats were handed over. No registration was
done with local authorities for sale of the flat. She pointed out that majority of the
flats constructed are not yet sold. But the demand relates to cases where UDS
was sold and then construction undertaken and consideration received for such
construction.
4. The points contested by the Ld. Counsel are that even after UDS is sold, the
applicant continued to be in possession of the land for the purpose of
construction and the buyers of UDS had no right to interfere with the activity of
construction. Further she pointed out that as per the terms in the contract if any
buyer of UDS defaults in payment of any installment towards construction of the
building the applicant had the right to take back possession of land and sell it to
any other prospective buyer. So for all practical purpose the land continued to
belong to the applicant and hence there was no service being provided to
anybody else and there could be no levy of service tax, according to the counsel.
5. Further the Ld. Counsel submits that out of 4252 flats constructed only 843 flats
have been sold. She argues that at least for the unsold flats it is very clear that
there was no service receiver. Further because of the fact that the flats
constructed could not be sold because of the slump in the markets, the applicant
is facing acute financial constraints in making any pre deposit.
6. She points out that an explanation has been added on 01.07.2010 in section 65
(105) (zzzh) defining the relevant taxable service to the effect that even in a
situation where the land is in the possession of the developer and money is taken
for construction of flats to be sold there is a service involved. She argues that this
explanation could have only prospective effect. She relied on the decision of
CCE vs. Skynet Builders, Developers, Colonizers (2012) 27 STR 388. She
argues that this would imply that prior to 01.07.2010 no service tax could be
demanded from developers.
7. She also argues that the activity involved supply of material and labour and
therefore the contract could be vivisected only from 01.06.2007 when the entry
under section 65 (105) (zzzza) for "works contract" was introduced in Finance
Act, 1994.
8. She relies on the following decisions:
(i) Commissioner of Income Tax Vs. M/s Sanghvi and Doshi Enterprises in
TC (A) Nos. 581 and 582 of 2011 decided Hon 'ble Madras High Court on
01.11.2012;
(ii) CST Vs. Shrinandnagr IV Co op. Society Ltd (2011) 23 STR 439;
(iii) Mohitasham Complex (P) Ltd. vs. CCE (2010) TIOL 1750
9. The decision in the case of Sanghvi and Doshi Enterprises (supra) was
canvassed at length to argue that as per the decision the business risk of
constructing the residential complex was on the applicant and hence the
applicant should be considered as a developer. Then she relies on the
clarification of CBEC to argue that a developer need not have paid any service
tax.
10. She also pleaded that the demand is partly time barred because the Show Cause
Notice dated 24.03.2010 covered the period 01.04.06 to 30.09.08, SCN dated
15.07.2010 covered the period 01.10.08 to 30.09.09. and SCN dated 15.02.2011
covered period from 01.10.2009 to 30.06.2010. She argues that in view of the
circulars issued by CBEC the appellant was under the bonafide belief that
developers need not pay service tax.
11. The Ld. Counsel pleaded that the case may be admitted without any pre
deposit.
12. Opposing the prayer of the Counsel, the Ld. A.R. for Revenue submits that the
applicant simultaneously executed two agreements one to sell UDS in land and
another to do construction activity. Once UDS in land is sold, the applicant is not
the legal owner of the land sold. In respect of construction done for the
customers to whom UDS is sold there is a relationship of service provider and
service recipient between applicant and the person to whom UDS is sold. The
fact that there was no registration for sale of flat clearly demonstrates that
construction was a service rendered to the persons who brought the land.
13. The Ld. A.R. submits that the various clarifications issued by CBEC and quoted
by the Counsel are only to the effect that where someone constructs flats on his
land and sells constructed flat there is no service involved. In such a case the
registration with local authorities is done for sale of flat and not for sale of UDS.
The facts that there is proof of sale of land and registration thereof with local
authorities and there is no registration done for sale of flat are clinching proof that
there was a relationship of service provider and service recipient between
applicant and the persons to whom UDS was sold. He submits that the question
whether there service tax liability would arise in situations of the type under
consideration was examined by the Tribunal in the case of LCS City Makers Vs.
CST Chennai 2013 (30) STR 33 (Tri. Che.) and the issue is decided in favour
of revenue.
14. The Ld. A.R. further points out that the issue before the Hon'ble Madras High
Court in the case of Sanhvi and Doshi Enterprises (Supra) was whether a
developer of land was eligible for deduction from income earned under 80IB of
Income Tax Act, 1961. In that case, three parties were involved. A land owner
(Hotel Mullai Pvt Ltd.), a property Developer (Sanghvi and Doshi Enterprises, the
appellant therein) and prospective buyers of land (all taken together as one party
for discussion). In this case only two parties are involved. The applicant and the
buyers of UDS (all buyers taken together as one party). So the facts are different.
15. Further the question before the Hon'ble High Court was whether on the facts and
circumstances of the case, the Tribunal was right in not giving and finding any
finding about the difference between developers, builders and construction
contractors to claim deduction u/s 80 IB of the Income Tax Act.
16. The relevant part of section 80 IB (10) read as under :
"The amount of deduction in the case of an undertaking developing
and building housing projects approved before the 31st day of March,
2008 by a local authority shall be hundred per cent of the profits
derived in the previous year relevant to any assessment year from
such housing project if,....."
17. The Court decided that in the case land owner was to get Rs. 11,51,94,000/- as
per the agreement between the land owner and the developer. The job of finding
buyers for the UDS and also collecting money for construction was on the
developer. Revenue had argued that the appellant therein was only a developing
and not doing "developing and building". The court observed that when such a
project starts there may not be identified buyers for all flats to be constructed and
the risk due to such situation was on the developer ad not on the land owner.
Since the business risk was with the appellant therein the Court decided that the
appellant therein was eligible to get the deduction from income as per the
provisions of section 80 IB (10) and not the land owner who just sells his land for
a fixed consideration. He submits that the issue to be decided in this case is
whether there is a relationship of service provider and service recipient and not
whether the applicant was taking any business risk.
18. The Ld. A.R. also points out that demand has been confirmed only in respect of
cases where UDS was sold and consideration for construction received and
where there was no registration with local authorities for sale of constructed flats.
19. The Ld. A.R. points out that although the applicant took out registration in the
year 2005, the applicant was not paying tax and filling returns. It was only after
considerable investigation that data required to issue Show Cause Notice could
be unearthed. From their own arguments it is clear that they were aware of the
legal provisions but only mis interpreting circulars and not disclosing
information relevant for issue of show cause notice. So he argues that the
extended period is correctly invoked.
20. He further points out that Construction of Residential complex became taxable
from 16.06.2005. Article 366 (29A) of Constitution of India permitted bifurcation of
material and service in a composite contract. The scheme of levy provided relief
under notification 15/2004 ST and subsequent notification 01/2006 ST to
avoid taxation of material value. In the present demand also abatement for value
of materials is given and tax is demanded on the value of services only. The new
entry for "works contract" provided only for a few method for determining the
quantum of levy and this new entry cannot make the earlier entry ultra virus the
Constitution. In fact both entries at 65 (105) (zzzh) and section 65 (105) (zzzza)
make use of the same expressions as defined in section 65 (30a) and section 65
(91a). So the argument that the activity can be taxed from 01.06.2007 only is not
correct.
21. He submits that this bench has been consistently calling for 50% of the tax
demanded as pre deposit in such cases and the same type of order may be
passed in this case also.
22. We have considered arguments on both sides. Service tax liability cannot be
determined based on what the applicant calls itself, whether as a builder, a
developer, a promoter etc. The liability is to be determined with reference to the
criterion whether there is a service provider and service recipient. This is the
essence of the clarifications issued by CBEC. When UDS is sold the person to
whom UDS is sold becomes the legal owner of UDS. The facts that there is an
agreement giving possession to the applicant to do construction activity cannot
be interpreted to mean that the applicant continued to be the owner of the land.
Applicant's right is diminished to the extent UDS is sold. In the case of residential
complex constructed nobody gets full title to the land. Right of each buyer is
subject to the right of others. The clause in the agreement for construction
creates a lien on the land sold in favour for the applicant who advances money
for construction, if necessary. In most cases, money is collected in advance from
the buyers of UDS. But if there is no buyer for certain flats at initial stage or any
buyer defaults on payment of installments, the applicant had to advance his
money to carry on the construction activity. In such situation the lien only him to
take possession of land and sell it to another person. This clause cannot be
interpreted to mean that the initial transfer was not complete. The taking over is a
separate transaction arising because of subsequent financial transactions and
conditions attached to such transactions. So we are not prima facie in agreement
that the land continued to belong to the applicant and therefore, there was no
service provider and recipient.
23. The decision in the case of Sanghvi and Doshi Enterprises was not in the context
of service tax liability and on the issue whether there is a relationship of service
provider and service recipient in facts of the type being considered in this appeal.
At any rate in this appeal the dispute is only about cases where UDS was sold
and then construction done. When UDS is sold and construction is undertaken
for the person to whom UDS is sold the construction activity is done for a
consideration specified in an agreement and the question of business risk gets
diminished except in cases of default. Such default is more or less like non
receipt of payment for any service done and there is hardly any new aspect to be
considered.
24. The other issues raised by the Ld. Counsel are already decided against the
applicant in the case of LCS city Makers. That is, the Tribunal held the view that
construction of residential complex was taxable under section 65 (105) (zzzh)
prior to 01.06.2007.
25. The decision in the case of Srinandha Nagar IV Co operative society was
when a co operative society does construction activity for its members whether
there is any service involved. This is not the issue involved in this case. In the
case of Mohitasam Complexes (P) Ltd., the flats were constructed and sold. The
model followed was not one of selling UDS and then constructing the flats. So
these decisions prima facie are not applicable to the facts of the case.
26. At this stage we do not see much merit in the argument regarding time bar
because there was no adequate disclosure from the applicant to the department.
27. Considering the discussions above and also the financial hardship pleaded by
applicant and also the Revenue interest, we order the applicant to make a pre
deposit of Rs. 4,50,00,000/- (Rs. Four crore Fifty lakhs only) within 8 weeks and
report compliance on 10.10.2013. Subject to such deposit, pre deposit of
balance dues is waived for admission of appeal and its collection stayed during
the pendency of the appeal.
(Operative part pronounced in Court on 29.07.2013)
|
