Mantri Developers Pvt Ltd (vs.) Commissioner of Customs ,Central Excise and Service Tax – Hyderabad-iv
The matter was heard in great details even though the issue involved was only consideration of waiver of predeposit and stay against recovery. The learned counsel covered important factual and legal elements and in our opinion, the details covered by the learned counsel and after consideration of the records by us, is sufficient to arrive at the final decision at this stage itself. Accordingly, we dispense with the requirement of predeposit and take up the appeal itself for final decision.
2. Appellant is a builder/developer of commercial and residential complexes and has projects in many parts of the country. The present case before us relates to a project Project Celestia in Hyderabad. The appellants registered themselves under state VAT law as well as under Finance Act, 1994 for payment of VAT and Service Tax on works contract service from April 2009 onwards. Appellants entered into development agreements with vendors/land owners to develop properties on property sharing basis ratio engaging independent architects and reputed construction contractors for actual design and construction work, and enters into agreements joints with land owner and prospective buyers and conveys the properties eventually constructed to the buyers. Appellant paid VAT as well as service tax under composition scheme availing CENVAT credit on input services. Taking a view that the appellant is rendering residential complex construction service and the classification of service as works contract service adopted by them for payment of service tax is not correct, proceedings were initiated for recovery of service tax for the period from 2009-10 to 2011-12 which has culminated in confirmation of demand of service tax of Rs.14,09,78,092/- with interest and penalties under Sections 77 and 78 of the Finance Act. It was also held that appellant is not eligible for the benefit of Notification No.1/2006-ST as they have taken CENVAT credit on input services.
3. The learned senior counsel on behalf of the appellants submitted that the learned Commissioner observed in the impugned order that there was no dispute that appellants did not contest that the scope of the activities undertaken by the appellants would go out of the scope of the definition given under the construction of residential complex service. He submits that this is totally a wrong observation and it was all along the claim of the appellant that they were construction residential complex and it was also their claim that they were selling the apartments to the buyers. He observed that the appellants emphasized that works contract service is more specific than construction of residential complex is general. The learned counsel also submits that the observation of the Commissioner in para 17.5 that it is on record that appellant entered into individual contracts in 2 stages with the buyers of flats. The first one is for undivided share of the land and second is for construction of the flat. He observes that since the appellants were selling individual flats and not the complete residential complex, the services provided by them could not have been classified as works contract since there cannot be several works contracts in respect of one complex. He has observed that the works contract service would be applicable only when the entire complex is constructed for one service recipient. On this ground he has held that the service cannot be classified as works contract service and has denied the composition scheme.
4. We find that the submissions by the learned counsel, residential complex is defined in Section 65(91a) of the Finance Act, 1994 as follows:-
(91a)? residential complex means any complex comprising of
(i) a building or buildings, having more than twelve residential units;
(ii) a common area; and
(iii)any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system, located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person. The definition of construction of residential complex is defined as follows, according to Section 65(30a) of Finance Act, 1994:- construction of complex means-
(a) construction of a new residential complex or a part thereof; or
(b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal journey and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or
(c) repair, alternation, renovation or restoration of, or similar services in relation to, residential complex;
5. After the amendment of the definitions w.e.f. 01/07/2010, the liability arises even when the flats are sold to individual buyers and the definition of construction of residential complex continues to be applicable to cases where a single complex has more than 12 apartments. Therefore the Commissioner s observation is totally incorrect and contrary to the provisions of law as submitted by the learned counsel. We are unable to agree or we are unable to find any justification for taking a stand that just because agreements are entered into with individual, the service goes out of the definition of works contract.
6. The definition of works contract in Section 65(105)(zzzza) clearly covers construction of new residential complex or a part thereof. Therefore in the case of construction of a new residential complex, if the contract involves transfer of property in the execution of such contract leviable to tax sale of goods, can be classifiable as works contract. In this case, the appellants have registered for payment of tax in respect of portion involving transfer of property under the AP VAT Act and the appellant is engaged in the construction residential complex. Therefore, we find that the activity is clearly covered by works contract service. Further, we also find that the Hon ble Supreme Court in the case of Larsen and Toubro Ltd. and another Vs. State of Karnataka and another [2013] 65 VST 1 (SC)] also took the view that activities of construction of residential complex and transfer of individual flats after construction has to be treated as works contract for the purpose of levy of VAT. Para 93 and para 100 of the Hon ble Supreme Court decision are applicable and are reproduced below:-
93. The question is: Whether taxing sale of goods in an agreement for sale of flat which is to be constructed by the developer/promoter is permissible under the Constitution? When the agreement between the promoter/developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is obvious that such transaction involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed. We, therefore, think that there is no reason why such activity of construction is not covered by the term works contract . After all, the term works contract is nothing but a contract in which one of the parties is obliged to undertake or to execute works. Such activity of construction has all the characteristics or elements of works contract. The ultimate transaction between the parties may be sale of flat but it cannot be said that the characteristics of works contract are not involved in that transaction. When the transaction involves the activity of construction, the factors such as, the flat purchaser has no control over the type and standard of the material to be used in the construction of building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or lay-out of the building, in our view, are not of much significance and in any case these factors do not detract the contract being works contract insofar as construction part is concerned.
100. We have no doubt that the State legislatures lack legislative power to levy tax on the transfer of immovable property under Entry 54 of List II of the Seventh Schedule. However, the States do have competence to levy sales tax on the sale of goods in an agreement of sale of flat which also has a component of a deemed sale of goods. Aspects theory though does not allow the State legislature to entrench upon the Union List and tax services by including the cost of such service in the value of goods but that does not detract the State to tax the sale of goods element involved in the execution of works contract in a composite contract like contract for construction of building and sale of a flat therein. In para 88 of Bharat Sanchar, the Court stated: the aspects theory 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 under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax . Having said that, the Court also stated that the States were not competent to include the cost of service in the value of the goods sold (i.e. the sim card) nor the Parliament could include the value of the sim card in the cost of services. But the statement in para 92(C) of the Report is clear that it is upto the States to tax the sale of goods element in a composite contract of sale and service. Bharat Sanchar5 thus supports the view that taxation of different aspects of the same transaction as separate taxable events is permissible.
7. The learned AR fairly agreed that the decision of the Hon ble Supreme Court may cover the case of the appellants. However, he pointed out that the appellants were not eligible for composition scheme under works contract in view of the fact that the appellants had availed CENVAT credit on inputs and subsequently the appellants had already paid tax at the normal rate in the year 2009. However, on going through para 10 of the impugned order, it was seen that this payment was collected and paid towards preferential allocation and development service and not on the residential complex service. As regards CENVAT credit, the appellant cannot take credit on inputs and capital goods only and not on input services. As rightly pointed out by the learned counsel for availing composition scheme in accordance with .. rules.
8. The above observation would show that the payment of service tax by the appellants by opting for composition scheme on the services rendered by them during the relevant period is in accordance with law and therefore the impugned order has no merit. Accordingly, the impugned order is set aside and appeal is allowed with consequential relief if any to the appellants.