Service Tax Not Payable On ‘Construction Of Residential Complexes’: CESTAT [Read Order]

In a significant case, the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) of New Delhi bench held that service tax is not payable on ‘Construction Of Residential Complexes’. It was observed that since the appellant had rendered the service of construction of residential complexes as ‘works contracts’, the demand of service tax under section 65(105)(zzzh) of the Act towards ‘construction of residential complexes’ cannot be sustained.

Raj Construction Company , the appellant challenged the Order in Appeal passed by the Commissioner (Appeals) whereby he upheld the Order in Original passed by the Assistant Commissioner and rejected the appellant’s appeal. The appellant had provided services of construction of residential complexes but had not registered with the Service Tax department or paid any service tax.

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Acting on intelligence, the Assistant Commissioner sent letters and reminders to the appellant, who, in reply, sent letter dated 2.2.2011 giving details of the work done by it during the period 2006-07 to 2009-10 along with its annual reports. It also submitted work order wise details of the payments received from 1.4.2006 to 31.3.2011. 

The Assistant Commissioner  concluded that the appellant had rendered taxable service of ‘construction of residential complexes’ chargeable to service tax under section 65(105) (zzzh) of the Finance Act, 1994  and issued a Show Cause Notice demanding service tax of Rs. 46,08,851 invoking extended period of limitation under the proviso to section 73(1) of the Act along with interest under section 75 of the Act. The SCN also proposed to impose penalties on the appellant under sections 76, 77 and 78 of the Act.

The appellant opposed the SCN but the proposals therein were confirmed in the OIO passed by the Assistant Commissioner which was upheld by the impugned order passed by the Commissioner (Appeals). The Commissioner (Appeals) specifically recorded that all the services rendered by the appellant were under ‘works contracts’ as they included the use of materials also but he declined to give abatement towards the use of materials as the appellant had not opted for composition as per Rule 3(3) of the Works Contract (Composition scheme for payment of Service Tax) Rules, 2007. 

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It was observed that since the appellant had not opted for the composition as provided in the Rules, the entire amount received for the works contracts should be treated as consideration and service tax should be collected on the total value of works contracts including the value of goods is not correct. This is because the power of taxation of the Union does not, after the twenty sixth amendment to the Constitution, extend to tax the value of the goods used in works contracts. The Act and the Rules cannot be interpreted so as to tax the value of the goods used in works contracts.

Section 66 of the Act was the charging section for levy and collection of service tax on taxable services rendered during the relevant period. The term ‘taxable service’ is defined in section 65(105) of the Finance Act and its various clauses covered various types of taxable services. Initially, the levy of service tax was levied only on some services which were enlarged over years by adding more clauses in section 65(105) of the Act thereby making more and more services taxable. During the period, whenever taxable services were rendered along with the use of the goods, i.e., as a part of works contracts, abatement towards the value of the goods used was provided through notifications. 

Later, with effect from 1.6.2007, tax was levied on any service provided in relation to execution of ‘works contract service’ by inserting clause (zzzza) in section 65 (105) of the Act. It reads as follows:

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Section 65 (105) "taxable service" means any service provided or to be provided,-

(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

While allowing the appeal, the two member bench of Justice Dilip Gupta, President and P. V. Subba Rao, Member ( Technical ) held that “Since the appellant had rendered the service of construction of residential complexes as ‘works contracts’, the demand of service tax under section 65(105)(zzzh) of the Act towards

‘construction of residential complexes’ cannot be sustained.”

The Tribunal set aside the demand, interest and penalties on the appellant along with  the impugned order.

To Read the full text of the Order CLICK HERE

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