2025 (7) TMI 1077 - AT - Service Tax

Levy of service tax - Business Auxiliary Service - funds shared for appellant/SPA by the Developer and RDA both of whom agreed for the Special Purpose Vehicle (SPV) to be constituted at a later stage in terms of the agreement for carrying out O M functions but on behalf of the developer can be called as consideration for rendering a taxable service - Time limitation - Penalty - HELD THAT - For any activity to be called as taxable service there should be an element of contractual relationship between the service provider and service recipient with the specified activity / service to be rendered. The present case admittedly has arisen out of agreement dated11.11.2005 between RDA the owner of a land and GIPL the developer of a project/Mall Complex on the said land. Since there is no contractual relationship neither express nor even implied between RDA and SPV the very basis of the impugned activity to be called as service under section 66B(49) of the Finance Act is not existing. Further any activity to be a taxable service it should be an activity for a consideration the quid pro quo amount between promiser and promisee which should emerge from contractual relationship (expressed or implied). There is no evidence on record to show that the invoice was ever issued by the Appellant to RDA though the invoices were issued to the commercial users of the Mall and the service tax on the amount received from them already stands discharged by the developer. Nor there is any evidence that the amount in question was ever received by the appellant. On the contrary appellant has placed on the record the chartered accountant certificate to certify that the annual amount of 66, 63, 329/- for the financial year from 2011-12 to 2015-16 (Rs. 3316645) though was receivable from RDA but was never paid and finally got written of in financial year 2021-22. The SCN is held to have wrongly recorded that the amount was received by the appellants from RDA. The SCN is liable to be rejected on this ground alone. The adjudicating authority is held to have wrongly ignored the relevant submissions. Though after introduction of concept of negative list w.e.f. 01.07.2012 in the Finance Act the concept of classification of service has got redundant but for the purpose of arriving at the assessable value or as to whether any exemption is available to the activity the true nature of the activity has to be looked into. Since the department has wrongly mentioned the nature of impugned activities of operations and Management which are purely in nature of repairs and maintenance as BSS the SCN itself is not sustainable. Confirmation of the proposal of such SCN is liable to be set aside. Time limitation - penalty - HELD THAT - The show cause notice dated 11.04.2017 covers period 2011-12 to 2015-16. Entire period is beyond the normal period of limitation. Appellants was admittedly disclosing all facts in financials records. The service tax with reference to the commercial uses of specific area for maintenance thereof was regularly been paid. No amount of consideration was received from RDA despite the agreement to contribute and the amount agreed between RDA and developer was duly show as receivables in appellant s record. There seems no act of alleged suppression on part of appellant were repeatedly been followed. The appellant rather was under bonafide belief (as submitted) that since no service is being render to RDA nor any money is received from RDA there is no service tax liability of appellants vis- -vis RDA. The department has failed to produce any evidence proving that appellant had intentionally evaded payment of service tax. The above discussion has already held that appellant was not liable to pay service tax on the amount mentioned in para 6 of the agreement dated 11.11.2025 - The extended period under Section 73(1) was not invocable nor penalty was imposable. The SCN gets barred by time and the order under challenge is liable to be set aside. The order under challenge is hereby set aside - Appeal allowed.

Summary

ISSUES:

Whether the funds shared by the Developer and the statutory authority with the Special Purpose Vehicle (SPV) constituted consideration for rendering taxable Business Auxiliary Services under the Finance Act, 1994.Whether the absence of a direct contractual relationship (privity of contract) between the SPV and the statutory authority negates the existence of a taxable service.Whether the nature of services rendered by the SPV falls under Business Auxiliary Services or Management, Maintenance or Repair Services for the purpose of service tax classification.Whether the amount alleged to be received by the SPV from the statutory authority was actually received and hence liable to service tax.Whether the extended period of limitation under Section 73(1) of the Finance Act was invocable in the absence of suppression or evasion by the SPV.Whether the Point of Taxation Rules, 2011 were correctly applied in determining the date of payment with respect to the alleged service tax liability.

RULINGS / HOLDINGS:

Funds shared by the Developer and the statutory authority with the SPV cannot be called "consideration for rendering a taxable service of nature of Business Auxiliary Service" as there is no contractual relationship between the SPV and the statutory authority."For any activity to be called as taxable service there should be an element of contractual relationship between the service provider and service recipient," which is absent between the SPV and the statutory authority; hence, no taxable service exists.The activities undertaken by the SPV are in the nature of "Management, Maintenance or Repair Services" and not Business Auxiliary Services; thus, the show cause notice proposing demand under Business Auxiliary Services is unsustainable.The SPV did not receive the alleged amount from the statutory authority during the disputed period, and the amount was shown as receivable and ultimately written off; therefore, no service tax liability arises on non-received amounts.The extended period under Section 73(1) was not invocable as there was no evidence of suppression or intent to evade tax by the SPV; thus, the show cause notice is barred by limitation.The Point of Taxation Rules, 2011 were wrongly invoked since no payment was received, no invoice was issued to the statutory authority, and the conditions for applying Rule 2A were not satisfied.

RATIONALE:

The court applied the definition of "service" under Section 65B(44) of the Finance Act, 1994, which requires an "activity carried out by a person for another for consideration," emphasizing the necessity of a contractual relationship and quid pro quo consideration for taxability.The interpretation of "consideration" was guided by Section 2(d) of the Indian Contract Act, 1872, requiring the consideration to be given "at the desire of the promisor," reinforcing the absence of taxable service without a contractual nexus.The court noted the absence of privity of contract between the SPV and the statutory authority, as the agreement was only between the statutory authority and the Developer, with the SPV acting as an agent of the Developer post-project completion.The court distinguished between Business Auxiliary Services and Management, Maintenance or Repair Services, holding that the nature of the SPV's activities aligns with the latter, which was not the classification used in the show cause notice, rendering the notice defective.The court relied on documentary evidence including the auditor's certificate confirming non-receipt of the amounts from the statutory authority, thereby negating the basis for service tax liability and the invocation of extended limitation.The court referred to the Point of Taxation Rules, 2011, particularly Rule 2A, and held that since no payment was received or credited to the SPV's bank account and no invoice was issued, the rules could not be applied to justify the tax demand.The decision aligns with the principle that "existence of consideration cannot be presumed in every money flow" and that "factual matrix of the existence of a monetary flow combined with convergence of two entities" does not automatically create a taxable event.The court also noted the applicability of a departmental circular clarifying that service tax is not leviable on amounts received by SPVs in PPP/BOOT models as mere contributions or grants for maintenance activities.No dissent or doctrinal shift was indicated; the ruling reaffirmed established principles of service tax liability requiring contractual consideration and correct classification of services.