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2025 (5) TMI 476 - AT - Central ExciseLevy of service tax on construction of residential complex services for the period from April 2014 to June 2017 - time limitation - penalties - HELD THAT - Reliance placed upon the judgement of Hon ble Delhi High Court in the case of Suresh Kumar Bansal 2016 (6) TMI 192 - DELHI HIGH COURT . The Hon ble High Court held that there was no statutory mechanism to ascertain the value of service component and that service tax could not be levied on value of undivided share of land. Neither Service Tax (Valuation) Rules 2006 nor Finance Act 1994 have any provisions for determining value of service covered under Section 65(105)(zzzh). The aforesaid decision of Hon ble Delhi High Court even though had been passed in the context of service tax provisions as applicable prior to 01.07.2012 is equally applicable to the period after 01.07.2012 - Appellants were not liable for payment of service tax on construction of residential complex service during April 2014 to June 2017 and the appeal is liable to be allowed on merits. Time limitation - HELD THAT - For demanding service tax for the period April 2014 to June 2017 SCN had been issued on 07.11.2019 by invoking extended period of limitation. The Commissioner (Appeals) has upheld the invocation of extended period by holding that the decision in the case of Suresh Kumar Bansal 2016 (6) TMI 192 - DELHI HIGH COURT was for the period prior to 01.07.2012 and that the Appellants have been holding service tax registration for a long period and accordingly they were under legal obligation to file ST-3 return and pay the service tax. Penalties - HELD THAT - As the demands itself are being set aside penalties under Section 78(1) as well as Section 77(2) are also liable to be set aside. Conclusion - i) The appellant s contract for construction and sale of residential complexes is a composite contract involving sale of immovable property and goods and no statutory mechanism existed to determine the service component. Therefore the demand of service tax on the entire amount is unsustainable. ii) Invocation of extended period of limitation is upheld. iii) As the demands itself are being set aside penalties under Section 78(1) as well as Section 77(2) are also liable to be set aside. Appeal allowed.
The core legal questions considered in this judgment are as follows:
1. Whether service tax is leviable on construction of residential complex services under the relevant provisions of the Finance Act, 1994, particularly under Section 65(105)(zzzh) and related sections, for the period from April 2014 to June 2017. 2. Whether the levy of service tax on the composite contract involving sale of developed property (including undivided share of land and goods) without a statutory mechanism to segregate the service component is valid. 3. Whether the extended period of limitation for issuing the show cause notice (SCN) invoking suppression of facts is maintainable in the present case. 4. Whether penalties under Sections 77 and 78 of the Finance Act are justified in view of the above issues. Issue-wise Detailed Analysis Issue 1 & 2: Levy of Service Tax on Construction of Residential Complex Services and Validity of Composite Contract Taxation The legal framework involves the Finance Act, 1994, particularly Section 65(105)(zzzh) defining taxable service as "services in relation to construction of complex," and the explanation inserted by the Finance Act, 2010, that treats construction of a complex intended for sale as a service provided by the builder to the buyer. Post 1st July 2012, the negative list regime under the Finance Act was introduced, with Section 66E(b) and related provisions imposing service tax on declared services including construction of complexes. Precedents central to this issue include the decision of the Hon'ble Delhi High Court in the case referenced as Suresh Kumar Bansal, which held that:
The Tribunal also considered the decision of the Hon'ble Telangana High Court in Vasudha Bommireddy, which reaffirmed the above principles and emphasized that Rule 2A of the Service Tax (Determination of Value) Rules, 2006, which provides a mechanism for works contracts, does not apply to composite contracts involving sale of land and built-up area. The absence of any statutory rule or provision to segregate the service component in such composite contracts invalidates the levy of service tax on the entire consideration. The Court rejected the Department's contention that the construction service falls under works contract services under Section 66E(h), reasoning that if that were so, the separate category under Section 66E(b) for construction of complexes would be redundant. Applying these principles to the facts, the Tribunal found that the appellant's contract for construction and sale of residential complexes was a composite contract involving sale of immovable property and goods, and no statutory mechanism existed to determine the service component. Therefore, the demand of service tax on the entire amount was unsustainable. Issue 3: Invocation of Extended Period of Limitation The SCN was issued invoking the extended period of limitation on the ground of suppression of facts. The Commissioner (Appeals) upheld this invocation, reasoning that the appellant had held service tax registration for a long time and was under legal obligation to file returns and pay tax. The Tribunal examined this issue in light of the legal principle that extended limitation cannot be invoked where the matter involves interpretation of law with scope for difference of opinion. It relied on the Tribunal's earlier decision in Shervani Industries Syndicate Ltd., which held that where there is a bona fide difference in interpretation, extended limitation is not applicable. Since the appellant's case involved interpretation of the levy of service tax on composite contracts and the absence of statutory machinery provisions, and since two High Courts had taken the view that the levy itself fails for lack of mechanism to ascertain service value, the Tribunal held that the appellant could not be faulted for suppression of facts. Hence, the extended period of limitation was not invocable. Issue 4: Penalties under Sections 77 and 78 Given that the demand of service tax was set aside on merits and limitation grounds, the Tribunal held that penalties imposed under Section 78 (equal penalty to the amount of tax demanded) and Section 77 (for non-filing of returns) also stood vitiated. The penalties were accordingly set aside. Significant Holdings The Tribunal upheld the principle that: "Service tax cannot be levied on the value of undivided share of land acquired by a buyer of a dwelling unit or on the value of goods which are incorporated in the project by a developer. Levying a tax on the constituent goods or the land would clearly intrude into the legislative field reserved for the States under List II of the Seventh Schedule to the Constitution of India." It further emphasized: "...there is no machinery provision for ascertaining the service element involved in the composite contract. In order to sustain the levy of service tax on services, it is essential that the machinery provisions provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax." And: "The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract." On limitation, the Tribunal held: "Extended period of limitation is not invocable when there is scope of difference in interpretation... When the two High Courts have taken the view that there was no mechanism to ascertain the value of services and therefore the levy itself fails, the Appellants cannot be charged with the allegation of suppression of facts." Accordingly, the Tribunal allowed the appeals, set aside the demand of service tax along with penalties, and held that the appellants were not liable for service tax on construction of residential complex services for the period April 2014 to June 2017.
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