2025 (5) TMI 1019 - AT - Service Tax

Reversal of CENVAT credit by a construction company engaged in residential complex development - flats sold post-issuance of completion certificates - consideration received towards construction / development of parking area - consideration received towards development costs - compensation received towards cancellation/termination of Joint Development Agreement and Power of Attorney under the declared service - income recognized as forfeiture income on account of cancellation of bookings - short payment of service tax under Interior Design Consultancy Service - Non-reversal of proportionate input service credit attributable to retention charges in respect of the services received from contractors / sub-contractors - time limitation. Reversal of Cenvat credit of Rs.63, 07, 843/-during the period from August 2012 to September 2015 - HELD THAT - The Explanation under the amended Rule 6 stating that the exempted services as defined in Rule 2(e) of Cenvat Credit Rules 2004 shall include an activity which is not a service as defined in section 65B (44) of the Finance Act 1994 is only clarificatory in nature in as much as the pre-amended Rule 6 also defined the categories of sales which cannot fall under the exempted category and the clearances made by the appellant after receipt of completion certificate which were not liable to service tax clearly fall under the exempted category. The claim of the appellant that only from 01.04.2016 the flats sold by them without payment of service tax is to be considered as exempted service is misplaced since all goods and services on which duties/service tax was not paid are considered as exempted and they are not eligible for the input credit. In the present case the dispute is that the partial occupancy certificate was issued on 4th May 2011 in respect of Polaris B block and on 23.11.2011 for Vega Block C and final Occupancy Certificate dated 04.10.2012 for all the blocks A, B and C and the flats sold after that have received consideration of Rs. 11, 15, 29, 085/- on which no service tax is paid. The claim of the appellant is that they are not liable to reverse cenvat credit in view of the above judgments is totally misplaced since the facts of that case is that proportionate credit was reversed or not taken and the only dispute was the demand of 8% credit on exempted goods which was allowed. However in the instant case neither the appellant had availed proportionate cenvat credit nor had maintained separate accounts therefore the decisions relied upon by the appellant are not applicable. Section 65B(44) of the Finance Act 1994 w.e.f. 01.07.2012 does not include an activity which constitutes merely a transfer of title in goods or immovable property by way of sale gift or in any other manner. Since the clearance of flats after the receipt of completion certificate are considered to be sale of immovable property they are not liable to pay service tax - appellants are required to reverse the cenvat credit of Rs.29, 67, 608/- the proportionate credit availed on those flats which are cleared after the receipt of the Completion Certificate. Consequently reversal of cenvat credit of Rs.63, 07, 843/- is set aside but reversal of proportionate credit is upheld. Hence it is remanded for limited purpose of re-quantification of proportionate cenvat credit. Non-payment of service tax of Rs.3, 19, 777/- on consideration received towards construction / development of parking area in The Promont Project during the period from March 2012 to September 2012 - HELD THAT - The demand of service tax on the consideration received for parking area service is accepted by the appellant and only penalty is being disputed. Hence on merit this amount is confirmed along with interest. Non-payment of service tax of Rs.5, 54, 63, 589/- on the consideration received towards development costs from M/s Promont Hilltop Private Ltd. - HELD THAT - The demand is being contested on the ground that the amounts received cannot be classified as works contract service since the Transferee was incorporated only on 24th September 2012 and the Appellant merely relinquishes all rights assets and liabilities pertinent to The Promont project for a consideration pursuant to the Development Agreement. There is no existence of service provider-recipient relationship and no provision of service pursuant to the Development Agreement - As per Section 3(26) of General Clauses Act 1897 immovable property shall include land benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth. Right to develop the project transferred vide the Development Agreement amounts to transfer of bundle of rights that arise out of and relate to the land - The transaction is merely a transfer of going concern exempted vide Sl. No. 37 of the Mega Exemption Notification No. 25/2012 dated 20th June 2012 and non-taxability of such transfer is clarified by the Education Guide dated 20th June 2012 published by CBEC. From the above Clauses of the Agreement it is clear that there is no sale of an ongoing concern as claimed by the appellant as there is nothing in the Agreement to deem it to be sale or transfer instead it establishes the fact that the Agreement is based on sharing of 22.5% of the gross proceeds which later was revised to 2.5% of gross proceeds. The actual consideration charged as development costs which includes construction marketing and sales of the project which is in the nature of works contract hence the Commissioner after deducting the cost of land has determined the value as Rs.112, 18, 36, 343/- and rightly provided 40% abatement. However the demand is upheld only for the normal period hence it is remanded for limited purpose for re-quantification. Non-payment of service tax of Rs. 24, 72, 000/- on compensation received towards cancellation/termination of Joint Development Agreement and Power of Attorney under the declared service category listed in Section 66E(e) of the Finance Act 1994 - HELD THAT - The Appellant had entered into Joint Development Agreements with prospective owners. However due to certain disputes legal proceedings were initiated between the parties inter se. Thereafter it was decided to settle the dispute amicably. Consequently Deed of Cancellation of Joint Development Agreement and Power of Attorney dated 6th January 1998 and Supplemental Agreement dated 22nd May 1998 and Deed of Cancellation dated 10th April 2013 the prospective owners agreed to pay the Appellant a sum of Rs. 2, 00, 00, 000/- towards compensation for relinquishing rights under the said Agreements and towards reimbursement of cost incurred towards execution of project as full and final settlement. By virtue of Section 66E(e) of Finance Act 1994 agreeing to cancel Joint Development Agreement (JDA) for consideration amounts to a taxable service - reliance is placed on Circular No. 178/10/2022-GST dated 3rd August 2022 which has been adopted for Service tax demands under Section 66E(e) vide Circular No. 214/1/2023-S.T. dated 28th February 2023. There are no reason to agree with the Commissioner in as much as the amounts received were only a compensation and not a consideration for any service rendered by the appellant hence the demand of 24, 72, 000/- stands set aside. Non-payment of service tax of Rs.2, 06, 186/- on income recognized as forfeiture income on account of cancellation of bookings - HELD THAT - There is no dispute that the Agreement for sale and Construction Agreement both dated 23rd October 2008 entered into between M/s. Tata Housing Development Company Limited and the prospective buyers that in the event of default by the prospective buyer in payment of instalments as per agreed Payment Schedule or in the event of cancellation / withdrawal of booking / application on his own volition the buyer forfeits 10% of the total consideration payable by the prospective buyer - amounts retained by the appellant in breach of the contract/in terms of the contract for cancellation of the purchase of the flats cannot be considered as service under 66E(e) and hence not liable to pay service tax. Consequently service tax demand of Rs.2, 06, 186/- is set aside. Short-payment of service tax of Rs.1, 27, 726/- from M/s. Suying Design Private Limited under Interior Design Consultancy Service - HELD THAT - The demand of short-payment of service tax on the on interior design consultancy service is accepted by the appellant and paid along with interest and only penalty is being disputed hence on merit these amounts are confirmed along with interest. Accordingly short-payment of Service tax of Rs.1, 27, 726/- from M/s. Suying Design Private Limited under Interior Design Consultancy Service is upheld along with interest. Non-reversal of proportionate input service credit attributable to retention charges in respect of the services received from contractors / sub-contractors (Amount Rs.5, 80, 728/-) - HELD THAT - The Commissioner has confirmed demand of Rs.5, 80, 728/- being service tax amount to be reversed on the amount of Rs.98, 45, 774/- retained by the appellant as shown in their Trial Balance as on 31.03.2014 however there is no evidence to show that these amounts were not paid to the contractors / sub-contractors on completion of the projects. Moreover there is no dispute that cenvat credit was availed only after payment of the service tax. The Tribunal in the case of CCE Vs. Thermax Engineering Construction Co. Ltd. 2017 (12) TMI 1191 - CESTAT MUMBAI has observed As regard appeal filed by the department against dropping of demand on retention money and on Export of Service we find that though the amount against supply of services by the sub-contractors was retained by the assessee but the amount of service tax was paid in full to the supplier/ vendor. The amount was retained by the assessee in terms of understanding between the assessee and their vendors and not due to non payment. The same was agreed to by both the parties. Since there is no dispute that the service tax amounts have been paid based on which the cenvat credit has been taken and considering the above decisions relied upon by the appellant the demand with regard to reversal of cenvat credit is set aside. Consequently reversal of proportionate input service tax of Rs.5, 80, 728/- is set aside. Time Limitation - HELD THAT - The Commissioner in the impugned order except for stating that certain disclosures were not made has not brought in any of the factors that prove misdeclaration or suppression with intent to evade payment of duty. Therefore going by the decision of the apex court that suppression cannot be presumed needs to be proved with certainty and factual incidents to prove intention to evade payment of duty we do not find any reason to confirm the demand beyond the normal period. Conclusion - i) Demand of reversal of Cenvat credit of Rs.63, 07, 843/- during the period from August 2012 to September 2015 is set aside but upheld the reversal of proportionate credit and remanded for limited purpose for re-quantification of proportionate credit. ii) Non-payment of service tax of Rs.3, 19, 777/- on consideration received towards construction / development of parking area in The Promont Project during the period from March 2012 to September 2012 is upheld along with interest since accepted and not contested by the appellant. iii) Non-payment of service tax of on the consideration received towards development costs from M/s. Promont Hilltop Private Limited by wrongly claiming it as Sale of Development Rights in respect of The Promont Project during the period from October 2012 to June 2015 is upheld; however remanded for limited purpose for re-quantification of service tax demand for normal period only. iv) Non-payment of service tax of Rs. 24, 72, 000/- on compensation received towards cancellation/termination of Joint Development Agreement and Power of Attorney under the declared service category listed in Section 66E(e) of the Finance Act 1994 is set aside. v) Non-payment of service tax of Rs.2, 06, 186/- on income recognized as forfeiture income on account of cancellation of bookings made by the customers under the declared service during the period from April 2014 to March 2015 is set aside. vi) Short payment of service tax of Rs. 1, 27, 726/-on the services received from M/s Suying Design Private Limited Singapore on account of retention of a part-value of interior design consultancy service is upheld along with interest since accepted and not contested by the appellant which is also appropriated in the impugned order. vii) Demand of Service Tax of Rs.5, 80, 728/- for non-reversal of proportionate input service credit attributable to retention charges in respect of the services received from contractors / sub-contractors is set aside. viii) All the penalties imposed under Section 77 and 78 are set aside. Appeal allowed in part.

Summary

The core legal questions considered by the Tribunal in this appeal concern the liability to pay service tax and related reversal of CENVAT credit by a construction company engaged in residential complex development. The issues examined include: (a) whether reversal of CENVAT credit is warranted for flats sold post-issuance of completion certificates; (b) applicability of service tax on consideration received for construction/development of parking areas; (c) classification and taxability of amounts received as development costs from a third party under a Development Agreement; (d) service tax liability on compensation received for cancellation/termination of Joint Development Agreements under declared services; (e) taxability of forfeiture income on cancellation of bookings under declared services; (f) short payment of service tax on interior design consultancy services received from a foreign entity; (g) requirement to reverse proportionate input service credit attributable to retention charges withheld from contractors; and (h) validity of penalties imposed and invocation of extended limitation period based on alleged suppression of facts.

Regarding reversal of CENVAT credit for flats sold after issuance of completion certificates, the Tribunal analyzed the relevant statutory provisions including Section 65B(44) and Section 66E of the Finance Act, 1994, and the CENVAT Credit Rules, 2004 as amended. The Court noted that sale of flats post-completion certificate is exempt from service tax as it constitutes transfer of immovable property, which is excluded from the definition of 'service'. The appellant had availed CENVAT credit on input services related to such exempted sales without reversing proportionate credit. The Court examined the insertion of Explanation 3 to Rule 6 of the CENVAT Credit Rules effective 1st April 2016, which retrospectively deemed such activities as exempted services for credit reversal purposes. However, the Tribunal held that prior to this amendment, such sales were 'non-services' and did not attract Rule 6's credit reversal provisions. Reliance was placed on a series of precedents including decisions of the Tribunal and High Courts that had settled this issue in favor of the appellant, recognizing the vested right of credit availed before the amendment. Nevertheless, since the appellant had not maintained separate accounts or availed only proportionate credit post-completion certificate, the Tribunal remanded the matter for re-quantification of proportionate credit reversal, reducing the demand from Rs.63,07,843/- to Rs.29,67,608/-.

On the issue of service tax on consideration received for construction/development of parking areas, the appellant accepted the demand of Rs.3,19,777/- and agreed to pay it. The Tribunal confirmed this amount along with interest but set aside penalty, as the appellant was unable to contest effectively due to loss of documents.

The demand of service tax on consideration received as development costs from a third party under the Development Agreement was contested by the appellant on the ground that the transaction was a transfer of development rights, essentially a sale of immovable property, hence not taxable as service. The Revenue contended that the amount represented remuneration for works contract services including construction, marketing, and development, inherently taxable. The Tribunal carefully examined the Development Agreement and Supplementary Agreement clauses, noting that the appellant and the third party jointly executed sale deeds to transferees and shared gross proceeds. The agreement involved development activities and revenue sharing rather than outright sale of a going concern. The Tribunal concluded that the amount received was consideration for works contract service and not merely a transfer of immovable property. The demand was upheld for the normal period but remanded for re-quantification of the service tax liability, recognizing the need to exclude land cost and apply appropriate abatements.

Regarding service tax on compensation received for cancellation/termination of Joint Development Agreements, the appellant argued that the amount was liquidated damages and not consideration for any service. The Revenue relied on Section 66E(e) declaring 'agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act' as a declared taxable service. The Tribunal referred to the Board's Circular No. 214/1/2023-S.T. and Circular No. 178/10/2022-GST, which clarify that liquidated damages paid for breach of contract are not consideration for a service and thus not taxable. The Deed of Cancellation evidenced compensation for relinquishment of rights and reimbursement of costs, not for any service rendered. The Tribunal set aside the demand of Rs.24,72,000/- on this ground.

Similarly, the demand on forfeiture income arising from cancellation of bookings was contested as liquidated damages for breach of contract. The Tribunal examined the terms of the Agreements for Sale and Construction Agreement, which stipulated forfeiture of 10% of consideration upon default or cancellation by the buyer. Following the Board's clarifications, the Tribunal held such forfeiture amounts as compensation for breach and not consideration for any service under Section 66E(e). Consequently, the demand of Rs.2,06,186/- was set aside.

The short payment of service tax on interior design consultancy services received from a foreign entity was accepted by the appellant and paid along with interest. Only penalty was disputed, but the Tribunal upheld the demand of Rs.1,27,726/- with interest.

On the non-reversal of proportionate input service credit attributable to retention charges withheld from contractors, the appellant contended that Rule 4(7) of the CENVAT Credit Rules during the relevant period linked credit eligibility to the date of invoice/bill and not payment, and that service tax had been paid in full to service providers. The Tribunal relied on precedents including CCE vs. Thermax Engineering Construction Co. Ltd. and Board Circular No. 122/03/2010, which support credit availability where service tax is paid to the supplier despite retention of part payments. The Tribunal set aside the demand of Rs.5,80,728/- for reversal of credit on this ground.

On the invocation of extended period of limitation and penalties, the Revenue alleged suppression of facts and wilful misstatement by the appellant in not disclosing taxable services and availing ineligible credit. The appellant argued that it had filed returns regularly, disclosed all relevant facts to the best of its understanding, and that the issue was a difference of opinion on credit eligibility. The Tribunal extensively analyzed the legal principles governing extended limitation under Section 73 of the Finance Act, 1994, emphasizing that extended period can be invoked only upon proof of fraud, collusion, wilful misstatement, suppression of facts with intent, or violation of law with intent to evade tax. Mere difference of opinion or self-assessment error does not constitute suppression. The Tribunal cited Supreme Court precedents and recent decisions of the Tribunal emphasizing that suppression requires deliberate concealment with intent to evade tax. It also noted that the appellant's failure to seek clarifications or disagreement with audit findings cannot be construed as intent to evade. The Tribunal underscored the statutory responsibility of tax officers to scrutinize returns and make best judgment assessments within limitation periods, and that failure to do so results in loss of revenue attributable to the department's policy risk, not the appellant's fault. Accordingly, all penalties under Sections 77 and 78 were set aside, and demands beyond the normal limitation period were disallowed.

In conclusion, the Tribunal held that reversal of proportionate CENVAT credit on flats sold post-completion certificate is warranted but must be re-quantified; service tax on parking area development and interior design consultancy short payment is confirmed; service tax on development costs received from the third party is upheld but remanded for re-quantification; demands on compensation for cancellation of Joint Development Agreements and forfeiture income on booking cancellations are set aside as liquidated damages not taxable as services; reversal of credit on retention charges is disallowed; and penalties and extended limitation demands are set aside due to absence of suppression or intent to evade tax.

Key legal principles established include the recognition that sale of flats post-completion certificate is exempted from service tax and credit reversal rules apply prospectively; liquidated damages and forfeiture amounts are not consideration for declared services under Section 66E(e); retention of payment to service providers does not mandate reversal of credit if service tax is paid; and extended limitation cannot be invoked without concrete proof of deliberate suppression or intent to evade tax.

Verbatim from the judgment encapsulating crucial reasoning includes:

"Section 65B(44) of the Finance Act, 1994 w.e.f. 01.07.2012 does not include an activity which constitutes merely a transfer of title in goods or immovable property, by way of sale, gift or in any other manner... Since, the clearance of flats after the receipt of completion certificate are considered to be sale of immovable property, they are not liable to pay service tax."

"Liquidated damages... are payments for not tolerating the breach of contract. They do not act as a remedy for the breach of contract. They do not restitute the aggrieved person... Such payments do not constitute consideration for a supply and are not taxable."

"Extended period of limitation cannot be invoked unless there is evidence of fraud or collusion or wilful misstatement or suppression of facts or violation of the provisions of Act or Rules with an intent... Intentional and wilful suppression of facts cannot be presumed because (a) the appellant was operating under self-assessment or (b) because the appellant did not agree with the audit and claimed that CENVAT credit was admissible."

"The appellant held a different view about the eligibility of CENVAT credit than the Revenue. Naturally, the appellant self-assessed duty and paid service tax as per its view. Such a self-assessment, cannot, by any stretch of imagination, be termed deliberate and wilful suppression of facts."