2024 (7) TMI 1636 - AT - Service Tax

Recovery of service tax with interest and penalty - existence of reasonable belief - demand of service tax on club membership charges was justified given that the appellant had deposited the tax prior to the issuance of the show cause notice or not - Construction of Residential Complex Service or Work Contract Service - entitlement to claim abatement and cum-tax benefit in the valuation of taxable services - treatment of service tax liability on receipt basis versus due basis. Existence of reasonable belief - HELD THAT - Though the appellant have specifically stated that the search was not proper in absence of any reasonable belief we do not find any merits in the said submission. It is for the officer issuing the search warrant to make such reasonable belief on the basis of material placed before him and issue the search warrant. The reasonable belief entertained by the officer duly empower to issue such search warrant could not be questioned by the party searched unless and until he is in position to show perversity in issuance of such search warrant. There are no perversity being alleged or established on the basis of cogent evidences. Club or Maintenance Services - HELD THAT - The appellants have discharged the entire amount for service tax duty (Rs.1, 35, 689/- along with interest of Rs. 20, 865/-) much prior to issuance of show cause notice. That being so even if it is on the basis of being pointed out during the search operation the benefit of Section 73 (3) could not have been denied to the appellant. This amount should have been appropriated towards the demand made and matter closed by the revenue authorities. As this amount was to be settled in terms of the said provision penalties imposed in respect of this demand needs to be set aside. Accordingly penalty amount of Rs. 67, 845/- imposed under Section 78 of the Finance Act is set aside. Construction of Complex Services - cum tax benefit - HELD THAT - The claim for appellant on cum tax benefit should have been allowed to them as has been discussed in the impugned order and it has been observed that the contracts entered by the party provided that the amount of tax due are to be paid separately over and above the contract value. The said stipulation in the contract has been accepted by the Director of the appellant. The demands in the present case have been made on the basis of the Receipts shown in the Book of Accounts which are made on the basis of the Guidance Note on accounting for real estate transaction GN (A) 33 (Revised 2012) Accounting Standard 7 pertaining to Construction Contracts. As per the said guidance note revenue is recognized on percentage completion method and no accounting entry is passed on in respect of installments becoming due from the customers unless the same is received by the appellant - if the receipts taken are not as per as invoice issued/ installments paid but on the basis of the book of accounts then the cum tax benefit needs to be extended to the appellant. The fact whether the amount of service tax was collected over and above the contract value as per the terms of agreement needs to be verified from the invoices issued by the appellant and relevant records maintained by the appellant in respect of the installment received. Thus this issue needs to be re-examined by the adjudicating authority on the basis of actual receipts project wise and not on the basis of fictional entries appearing in the books of accounts as per the above guidance note. The fact of payment of service tax on the receipt basis also needs to be verified it cannot be so that the service tax is demanded on due basis by taking the figures from the book of accounts and is in actual paid by the appellant on receipt basis - In such situation it would amount to double taxation on such transactions by following different method of computation which is against the Article 265 of Constitution. In case the amount in respect of all the projects has been paid of receipt basis then the benefit of such payments should be allowed while computing the tax demand. However in such cases also appellants would be liable to pay interest on the total payment of service tax from the due date determined as per Point of Taxation Rules 2011 till the date f payment of service tax. The value of services specifically in respect of consideration of complex services needs to be re-determined for the F.Y.2011-12 2012-13 2013-14 after taking into consideration the observations made above we set aside the impugned order. Remand the matter back to the Original Authority for re-computation of taxable values and service tax due if any by the appellant only in case of Construction of Residential Complex Services. Issues of penalty imposed will have to be re-decided in the remand proceedings. Penalties imposed upon Director Shri Nikhil Agarwal under Section 78A is set aside. Conclusion - The matter reamnded to the Original Authority for re-computation of taxable values and service tax demand in respect of Construction of Residential Complex Services taking into account the correct classification abatements cum-tax benefit and Point of Taxation Rules. Penalties were to be reconsidered accordingly. The penalties imposed on the director under Section 78A were set aside for lack of material establishing knowledge or involvement in evasion. Appeal allowed by way of remand.

Summary

The core legal issues considered by the Tribunal in these appeals pertain to the demand and recovery of service tax, interest, and penalties under the Finance Act, 1994, specifically concerning the classification and valuation of services rendered by the appellant in the construction of residential complexes and provision of club or association services. The principal questions addressed include:

1. Whether the demand of service tax on club membership charges was justified, given that the appellant had deposited the tax prior to the issuance of the show cause notice.

2. The correct classification of the services rendered by the appellant-whether the services fall under "Construction of Residential Complex Service" or "Work Contract Service"-and the consequent correct valuation and computation of taxable value and service tax liability.

3. Whether the appellant was entitled to claim abatement and cum-tax benefit in the valuation of taxable services.

4. The applicability and correctness of the demand based on the Point of Taxation Rules, 2011, including the treatment of service tax liability on receipt basis versus due basis.

5. The validity of imposition of penalties under Sections 76, 77, 78, and 78A of the Finance Act, 1994, including the liability of the director under Section 78A.

Issue-wise Detailed Analysis:

1. Demand of Service Tax on Club or Association Services

Legal Framework and Precedents: Service tax is leviable on club or association services under the Finance Act, 1994. The appellant was not registered for such services and had not paid service tax on club membership charges until pointed out during investigation. However, the appellant deposited the entire demanded amount for the financial year 2012-13, including interest, prior to the issuance of the show cause notice.

Court's Reasoning and Findings: The Tribunal noted that since the appellant had discharged the entire service tax liability on club membership charges before the show cause notice, the extended period for demand under the proviso to Section 73(1) could not be invoked. Consequently, penalties imposed on this demand were set aside.

Conclusion: The demand for service tax on club membership charges was confirmed but penalties related to this demand were quashed due to pre-deposit of tax and interest by the appellant.

2. Classification of Services: Construction of Residential Complex Service vs. Work Contract Service

Legal Framework: The Finance Act, 1994, defines "Construction of Complex" under Section 65(300), "Residential Complex" under Section 65(91a), and "Work Contract" under Section 65(54). The classification affects the taxable value and applicable abatements. Notifications 1/2006-ST and 26/2012-ST prescribe abatements and valuation rules for these services. Section 66F provides principles of interpretation for specified descriptions of services, emphasizing preference for the most specific description.

Court's Interpretation and Reasoning: The Tribunal examined the nature of the appellant's projects and agreements. It was found that the appellant undertook multiple residential projects and bifurcated cost components into land and construction. The appellant claimed that certain projects (Ganpati City and Wonder City Row Houses) should be classified as work contract services with 40% taxable value under Rule 2A of the Service Tax (Determination of Value) Rules, 2006, while others were classified as construction of residential complex services with abatements of 25% or 33% under Notification 1/2006-ST.

The Tribunal rejected the appellant's claim of classification as work contract service for Ganpati City and Wonder City Row Houses due to lack of supporting evidence such as contracts, ledger accounts, and tax payment records for work contract tax or VAT. The allotment letters and construction agreements indicated that construction agreements were executed prior to transfer of land ownership, suggesting a contrived bifurcation aimed at obtaining abatement benefits not otherwise available.

Applying Section 66F, the Tribunal held that "Construction of Residential Complex" is a more specific description than "Work Contract" and thus should prevail. The appellant's claim that the gross receipts included service tax was also disallowed, as the contracts explicitly stated that taxes were payable separately by the customer.

Application to Facts: The Tribunal upheld the Department's method of calculating taxable value based on the applicable abatements and rejected the appellant's attempt to club land and construction receipts or claim cum-tax benefit without proper evidence.

Conclusion: The services rendered by the appellant in the relevant projects were taxable as "Construction of Residential Complex Service" with abatements as per the notifications. The claim of classification as work contract service was rejected.

3. Valuation of Taxable Services and Cum-Tax Benefit

Legal Framework: Section 67(2) of the Finance Act, 1994, provides that where the gross amount charged includes service tax, the value of taxable service is the amount which, with the addition of tax payable, equals the gross amount charged. The Tribunal referred to precedent that invoices must specifically indicate inclusion of service tax to claim cum-tax benefit.

Court's Reasoning: The Tribunal found no evidence that the appellant's invoices included service tax in the gross amount charged. The appellant's director admitted that service tax was charged separately over and above the basic price. Therefore, cum-tax benefit was not applicable for the entire disputed period.

However, the Tribunal recognized that the appellant maintained accounts on the percentage completion method as per Accounting Standard 7 and Guidance Note GN (A) 33 (Revised 2012), which recognizes revenue based on stage completion rather than receipt basis. The Tribunal held that if demands were computed on due basis but tax was paid on receipt basis, cum-tax benefit should be extended, and the matter needed re-examination.

Conclusion: Cum-tax benefit was not allowed for the entire period but the issue was remanded for re-examination based on actual receipts and invoices.

4. Applicability of Point of Taxation Rules, 2011 and Basis of Tax Liability (Due Date vs. Receipt Basis)

Legal Framework: The Point of Taxation Rules, 2011, govern the timing of service tax liability, shifting the liability from receipt basis to due basis. Rule 3 provides methodology for determining the point of taxation for continuous or stage-wise services.

Court's Reasoning: The Tribunal noted that the appellant was discharging service tax on receipt basis, while the Department made demand on due basis derived from book entries. The Tribunal referred to a recent High Court decision holding that accounting standards (AS 7) and percentage completion method govern revenue recognition for financial reporting, but the Point of Taxation Rules govern tax liability timing.

The Tribunal emphasized that reliance on profit and loss accounts for tax assessment is flawed and that the Point of Taxation Rules should be applied. It was observed that if tax was paid on receipt basis but demand was made on due basis, double taxation would arise, violating Article 265 of the Constitution. The Tribunal directed re-examination of tax liability considering actual receipts and invoices.

Conclusion: The demand based on due basis accounting needs re-computation considering the appellant's payment on receipt basis, with interest payable for late payment as per the Point of Taxation Rules.

5. Imposition of Penalties under Sections 76, 77, 78, and 78A

Legal Framework: Sections 76, 77, and 78 of the Finance Act, 1994, provide for penalties for various contraventions related to service tax evasion or non-compliance. Section 78A imposes penalty on directors or officers who are knowingly involved in such contraventions.

Court's Reasoning: The Tribunal found that penalties imposed on the appellant in respect of club membership charges were not sustainable due to pre-deposit of tax and interest, and accordingly set aside those penalties.

Regarding the director's liability under Section 78A, the Tribunal observed that the impugned order did not record any specific reasons or material to establish that the director was knowingly involved in evasion. The Tribunal relied on precedent holding that penalty will not ordinarily be imposed unless there is deliberate defiance, contumacious or dishonest conduct. Mere negligence or compliance with agreements does not warrant penalty.

Conclusion: Penalties imposed on the director under Section 78A were set aside. The issue of penalties on the appellant company was remanded for reconsideration after re-computation of tax liability.

Significant Holdings:

"Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description." (Section 66F(2) of the Finance Act, 1994)

"In terms of the above provision if the invoice does not specifically say that the gross amount charged includes service tax, it cannot be treated as cum-service tax price." (Tribunal's reliance on precedent)

"The reasonable belief entertained by the officer duly empower to issue such search warrant could not be questioned by the party searched, unless and until he is in position to show perversity in issuance of such search warrant."

"The reporting of income in the P and L being irrelevant for the purposes of determination of service tax payable, the basis of the impugned assessment is erroneous." (Referring to application of Point of Taxation Rules over accounting standards)

"Penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation."

The Tribunal remanded the matter to the Original Authority for re-computation of taxable values and service tax demand in respect of Construction of Residential Complex Services, taking into account the correct classification, abatements, cum-tax benefit, and Point of Taxation Rules. Penalties were to be reconsidered accordingly. The penalties imposed on the director under Section 78A were set aside for lack of material establishing knowledge or involvement in evasion.