The Ahmedabad bench of Customs Excise & Service Tax Appellate Tribunal ( CESTAT ), in the matter of Adani Estate, ruled that sale of building prior to completion of construction constitutes works contract.
The appellant, engaged in real estate development and duly registered with the Service Tax Department, faced objections during an audit for the period 2015–16 to 2017–18 related to its project “The North Park,” a residential bungalow scheme. The project entailed three distinct transactions: land sale, framework construction, and finishing works.
The appellant categorized the construction-related activities under “works contract services” and excluded land sale from service tax. However, the department alleged incorrect classification and valuation, raising demands under the category of “Construction of Residential Complex.”
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During proceedings, the appellant, represented by Chartered Accountant Rahul Patel, argued that the Supreme Court’s rulings in Larsen & Toubro Ltd. v. State of Karnataka and K. Raheja Development Corporation v. State of Karnataka settled that such contracts qualify as works contracts.
Mr. Patel emphasized the constitutional and statutory basis under Article 366(29A) and Section 65B(44) of the Finance Act, 1994, asserting that service tax applies only to the service portion of a works contract and excludes land.
The tribunal examined whether the appellant’s valuation method, splitting the land value from the works contract, adhered to the law. It observed that the department’s objections lacked substantiation, as the appellant had clearly identified land value in agreements and subjected construction activities to VAT.
Furthermore, the tribunal noted inconsistencies in the adjudicating authority’s interpretation, finding the classification under clause (b) of Section 66E contradictory.
Relying on the Supreme Court’s decision in the case of Larsen & Toubro v. State of Karnataka, CESTAT concluded that the sale of a building before construction completion indeed constitutes a works contract. The tribunal dismissed the department’s objections and upheld the appellant’s classification and valuation practices.
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