2025 (5) TMI 72 - AT - Service Tax

Demand to pay service tax - Construction of residential complex service - Taxability and classification of Preferential Location Charges (PLC) - Section 65(105)(zzzzu) of the Finance Act 1994 or whether these charges form part of the consideration for the construction of residential complex service - invocation of the extended period of limitation - HELD THAT - We observe that the PLC are inextricably linked to the construction of complex service provided to the customer as a preferential location/unit is asked for from the service provider among several other locations/units which are constructed by him while providing Construction of Complex Service. Thus PLC is an additional amount received by the service provider with respect to few among all locations/units constructed but it cannot be an amount for another service as seeking an option of paying extra cannot be called as receiving a service. The transaction is therefore on account of the property being sold to the buyer and there appears no separate existence of such charges. Section 66F(3) (a) of the Finance Act and Para 9.2.4 of the Education Guide as discussed above makes it clear that amount of PLC received is the part of value received for rendering construction of Residential Complex Service. PLC recovered from the customers will always be naturally bundled and shall form part and parcel of the transaction for sale of unit and such transaction takes place in ordinary course of business. Accordingly Service Tax shall be chargeable on the amount recovered towards the same at the abated rate which is applicable to the principal service of construction of a complex including unit intended for sale to a buyer. Further as abatement Notification No. 26/2012-ST specifically covers the services of construction of a part of any complex or building benefit of abatement to the extent of 75% from the value of taxable service is available to the appellant with respect to PLC also. In fact PLC is the part of gross value paid for Construction of Complex Service. Since Service Tax is leviable at abated value thus Service Tax paid on the aforesaid charges at abated value stands justified is held to have been rightly availed by them. Thus it is clear that the entire transaction has to be treated as that for construction of units sale of land in terms of Section 66F of the Act. The demand is therefore liable to be set aside. We further observe that the issue is no longer res-integra. Amount of PLC is already held to be the part and parcel of the various elements of the main service which is Residential Complex Service and therefore the entire consideration received also has already been held eligible for abatement under said notification no. 26/2012-S.T. Accordingly we hold that order under challenge has wrongly held PLC as the consideration received for activity different than Construction Service . The amount being part of the bundle as discussed above is wrongly denied the abatement benefit of Notification No. 26/2012. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration. Explanation (a) to section 67 provides that consideration includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance. The activities therefore that are contemplated under section 66E (e) when one party agrees to refrain from an act or to tolerate an act or a situation or to do an act are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this particular activity. Invocation of the extended period of limitation we observe that appellant was maintaining all the records and the demand was proposed basis the records of appellant only. Also no element of fraud or suppression has been established in the Impunged Order. Further it is submitted that the Appellant was under the bonafide belief that it was not liable to pay Service Tax in the alleged manner. The Appellant followed a reasonable and correct interpretation of law. Further demand was proposed pursuant to audit. Also returns were periodically filed before the Department by Appellant on the basis of self-assessment and it was the responsibility of the Department to scrutinize such assessment to verify its correctness. Thus suppression of facts with mala fide intent cannot be alleged. Hence we hold that extended period of limitation has wrongly been invoked while issuing the show cause notice. Reliance in this regard is placed on the decision in the case of G.D. Goenka Pvt. Ltd. Vs. Commissioner of Central Goods Service Tax Delhi South 2023 (8) TMI 995 - CESTAT NEW DELHI Therefore it is held that the demand for the extended period is wrongly confirmed. Finally it is also observed that the present SCN was issued for period July 2012-September 2015 i.e. for the negative list regime where classification based levy ceased to exist. Thus demand proposed by invoking/examining obsolete provisions and without analyzing relevant provisions i.e. Section 65B (44) of the Act or 66E (b) of the Act is not sustainable. Hence the demand even for the normal period is liable to be set aside. Hence the order under challenge confirming even the partial demand is set aside and the appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the Preferential Location Charges (PLC) collected by the appellant from buyers of flats constitute a separate taxable service under Section 65(105)(zzzzu) of the Finance Act, 1994, or whether these charges form part of the consideration for the construction of residential complex service, thereby attracting service tax at the abated rate under Notification No. 26/2012-ST.

(b) Whether the amounts retained or forfeited by the appellant from buyers on account of cancellation or breach of contract constitute taxable services under Section 66E(e) of the Finance Act, 1994.

(c) Whether the extended period of limitation for recovery of service tax demand was rightly invoked by the Department.

(d) Whether the demand based on obsolete provisions and without proper analysis of relevant sections of the Finance Act is sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Taxability and classification of Preferential Location Charges (PLC)

Relevant legal framework and precedents: The primary legal provisions examined were Section 65(105)(zzzzu) defining construction of complex service, Section 66F(3)(a) regarding bundled services, and Notification No. 26/2012-ST granting abatement on construction services. The Tribunal referred to authoritative precedents including decisions in Jaypee Infratech Ltd., Logix Infrastructure Pvt. Ltd., and others which held that PLC are part of the main construction service and eligible for abatement.

Court's interpretation and reasoning: The Tribunal analyzed whether PLC constitute a standalone service or are naturally bundled with construction of residential complex service. Applying Section 66F(3)(a), which mandates that when two services are naturally bundled, the bundle is treated as the service giving the transaction its essential character, the Tribunal held that construction of the complex is the dominant service. The PLC, being incidental and inseparable from the construction service, do not constitute a separate taxable service.

The Tribunal further relied on the Education Guide to Section 66F, which provides indicators for natural bundling such as consumer perception, business practice, and the integral nature of the service elements. It was found that PLC are a normal business practice in real estate, not independently offered, and exist solely as part of the construction service.

Key evidence and findings: The appellant's records and business practice showed PLC were charged as part of the flat sale price, and no separate service was rendered for PLC. The Department's contention that PLC are for preferential location service distinct from construction was rejected on the ground that no separate service activity occurs for PLC.

Application of law to facts: The Tribunal applied Section 66F(3)(a) and the Education Guide indicators to conclude that PLC are naturally bundled with construction service, and therefore the entire consideration including PLC is eligible for abatement under Notification No. 26/2012-ST. The service tax paid at abated rates on PLC was held justified.

Treatment of competing arguments: The Department argued that PLC represent a separate service attracting full service tax without abatement, relying on case law supporting separate taxability of preferential location services. The Tribunal distinguished these arguments by emphasizing the integral and incidental nature of PLC to the construction service, rejecting the notion of PLC as an independent service.

Conclusion: PLC form part of the construction of residential complex service and attract service tax at the abated rate. The demand for service tax on PLC at full rate without abatement was set aside.

Issue (b): Taxability of forfeited amounts on refund/cancellation under Section 66E(e)

Relevant legal framework and precedents: Section 66E(e) covers services where one person agrees to tolerate an act or situation for consideration. Section 65B(44) defines "service" as an activity carried out for another for consideration. The Tribunal relied on decisions including South Eastern Coalfields Ltd. (affirmed by the Supreme Court) and various CESTAT rulings clarifying that penal charges or liquidated damages for breach of contract are not consideration for any service and hence not taxable.

Court's interpretation and reasoning: The Tribunal examined whether forfeited amounts constitute consideration for a service of tolerating breach or cancellation. It found that forfeiture is a penalty or safeguard to protect commercial interests, not a payment for any activity or service provided by the appellant. There is no quid pro quo or service rendered in exchange for forfeited amounts.

The Tribunal emphasized that the intention of the parties was sale of flats, not provision of a service in exchange for forfeited sums. The penal clauses serve as deterrents, not taxable services. The flow of consideration necessary for service tax liability was absent.

Key evidence and findings: The appellant's cancellation policy and records showed forfeiture was applied only upon breach or cancellation, with no corresponding service activity. Circulars No. 178/10/2022-GST and No. 214/1/2023-ST were cited, clarifying that damages for breach are not taxable.

Application of law to facts: The Tribunal applied the definition of service and the requirement of consideration to hold forfeited amounts are not consideration for any taxable service. The Department's demand under Section 66E(e) was thus unsustainable.

Treatment of competing arguments: The Department contended forfeiture amounts represent consideration for tolerating breach and are therefore taxable. The Tribunal rejected this, relying on settled case law and clarifications that penalties or liquidated damages do not constitute taxable services.

Conclusion: Forfeited amounts on cancellation/refund are not taxable services under Section 66E(e). The demand for service tax on these amounts was set aside.

Issue (c): Invocation of extended period of limitation

Relevant legal framework and precedents: The extended period of limitation under service tax law applies in cases of fraud, suppression, or willful misstatement. The Tribunal relied on the decision in G.D. Goenka Pvt. Ltd. which held that bona fide belief and absence of fraud preclude invocation of extended limitation.

Court's interpretation and reasoning: The Tribunal found that the appellant maintained proper records, filed returns on self-assessment basis, and there was no evidence of fraud or suppression. The demand arose from audit and reasonable legal interpretation by the appellant. Therefore, invoking extended limitation was improper.

Application of law to facts: The absence of mala fide intent and proper record-keeping led to the conclusion that the extended period of limitation was wrongly invoked.

Conclusion: The demand confirmed under extended limitation period was set aside.

Issue (d): Sustainability of demand based on obsolete provisions

Relevant legal framework and precedents: The Tribunal noted that the demand related to the period July 2012 to September 2015, under the negative list regime where classification-based levy ceased. It relied on recent decisions including Bharat Swabhiman (Nyas) and Haiko Logistics India Pvt. Ltd., which held that demands based on obsolete or irrelevant provisions are unsustainable.

Court's interpretation and reasoning: The Tribunal observed that the Department invoked provisions without examining relevant sections such as Section 65B(44) or Section 66E(b). The demand was therefore not sustainable.

Conclusion: The demand for the normal period was also liable to be set aside.

3. SIGNIFICANT HOLDINGS

The Tribunal established the following core principles and final determinations:

"Preferential Location Charges (PLC) are naturally bundled with the construction of residential complex service and form part of the consideration for such service. Therefore, service tax on PLC is payable at the abated rate as per Notification No. 26/2012-ST."

"Amounts forfeited or retained on account of cancellation or breach of contract do not constitute consideration for any taxable service under Section 66E(e) of the Finance Act, 1994, and hence are not liable to service tax."

"Extended period of limitation for service tax recovery cannot be invoked in the absence of fraud, suppression, or mala fide intent, especially where the appellant maintained proper records and filed returns on self-assessment."

"Demands based on obsolete provisions or without proper analysis of relevant sections are not sustainable."

Consequently, the Tribunal set aside the entire demand confirmed against the appellant and allowed the appeal.