In a recent ruling, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) of Mumbai held that CENVAT credit on input services are not reversible for unsold flats after receiving completion certificate.
The appellant/assessee, M/s Chheda Developments, is a real estate developer involved in the redevelopment of a Co-operative Housing Society named Jai Devki ‘A’, located in Borivali (West), Mumbai. During the financial years 2014-15 to 2016-17, the assessee constructed 134 flats and, in the course of the construction, availed of CENVAT Credit for Service Tax paid on various input services. These services were essential for the construction of the flats, and the appellant believed they were entitled to claim CENVAT Credit under the then-prevailing Service Tax regime.
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On March 31, 2017, the assessee received completion certificate for the flats. According to the law, once a completion certificate is received, any unsold flats at that point are considered immovable property. The sale of immovable property, under Section 65B(44) of the Finance Act, 1994, is not classified as a service and, therefore, does not attract Service Tax.
At the time of receiving the completion certificate, the assessee still had 19 unsold flats. The revenue department argued that since these flats had attained the status of immovable property, the appellant was no longer entitled to the CENVAT Credit on the input services used in the construction of these flats. The department, through an audit observation, issued a show-cause notice on December 9, 2019 to the assessee proposing a proportional recovery of ₹16,39,155/- from the CENVAT Credit previously availed, based on the unsold flats on the date of the completion certificate. The notice also sought recovery of interest and the imposition of penalties.
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The assessee contested this demand. It was argued that the entitlement to CENVAT Credit should be examined at the time of receipt of the input services and not after the subsequent conversion of the constructed property into immovable property. The assessee further contended that the reversal of CENVAT Credit in this case was impermissible by law, as the credit had been legitimately availed when the entire project was taxable under Service Tax. In support of their case, the appellant referred to multiple judgments by the CESTAT, as well as decisions from the Gujarat High Court, which held that CENVAT Credit could not be reversed based on a later change in the status of the property.
However, the first level of adjudication did not favor the appellant. The Deputy Commissioner upheld the reversal demand, leading the assessee to file an appeal before the Commissioner (Appeals), who also concurred with the Deputy Commissioner’s findings.
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Dissatisfied with these rulings, the appellant brought the matter before the CESTAT, West Zonal Bench in Mumbai.
During the hearing before the Tribunal, the appellant’s legal counsel, Ms. Padmavati Patil, argued extensively that the issue had been settled by the Tribunal in similar cases. She cited the case of Alembic Ltd, in which the Gujarat High Court ruled that the eligibility for CENVAT Credit must be determined at the time of receipt of input services, not when the property later becomes immovable. Other cases, such as Shreno Ltd., TPL Developers, Kabra Associates, Prajapati Developers, were also cited to show that CESTAT had consistently ruled in favor of developers in similar circumstances.
On the other hand, the department’s authorized representative, Mr. Ajay Kumar Shrivastava, defended the order passed by the Commissioner (Appeals). He pointed out that the Finance Act, 1994, specifically excluded the transfer of title in immovable property from the definition of services. He argued that the activity in question—sale of immovable property—was an exempted service as per Rule 2(e) of the CENVAT Credit Rules, 2004. Therefore, the reversal of CENVAT Credit in respect of the unsold flats was legitimate under Rule 6(1) of the CENVAT Credit Rules, 2004, which mandates proportional reversal of credit when both taxable and exempted services are provided.
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After carefully considering the arguments from both sides and examining the relevant case laws, the bench of Dr. Suvendu Kumar Pati, delivered its final order on September 11, 2024. The Tribunal acknowledged that judicial precedent had consistently supported the appellant’s position. It was observed that the eligibility for CENVAT Credit should be determined at the time the input services are received, and subsequent changes—such as the conversion of flats into immovable property—do not retrospectively affect that eligibility. The Tribunal also observed that the provision excluding the sale of immovable property from Service Tax, as contained in Section 65B(44) of the Finance Act, 1994, was not applicable for reversing CENVAT Credit that had already been legitimately availed.
In result, the CESTAT allowed the appeal and set aside the order passed by the Commissioner of GST & Central Excise (Appeals), with consequential relief to the assessee.
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