Construction Involving Common Areas Still a Composite Works Contract, Not Residential Complex Service: CESTAT [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) held that construction services involving common areas such as parking spaces do not change the nature of a composite contract into a taxable "Residential Complex Service" under service tax law.

Orchid Homes, the appellant, is a construction firm engaged in building residential complexes. The dispute related to two of their projects, Orchid Chengachery and Orchid Balaganapathy Enclave, both comprising more than twelve residential units. The department conducted an audit and found that the appellant had not paid service tax for the period between June 16, 2005, and September 30, 2008. A show cause notice was issued demanding service tax of Rs. 18,22,530 along with interest and penalties.

The original authority confirmed the demand under Section 73(1) of the Finance Act, 1994, and imposed an equal penalty under Section 78. On appeal, the Commissioner (Appeals) partially upheld the demand but set aside the penalty. Aggrieved by this decision, the appellant approached the CESTAT.

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The appellant’s counsel argued that their contracts were composite in nature, meaning they involved both construction services and the sale of goods and could not be classified solely as "Residential Complex Service." They pointed out that the show cause notice itself allowed a 67% abatement, acknowledging the composite nature of the contract.

They relied on the Supreme Court's ruling in Larsen & Toubro Ltd., arguing that such composite contracts were not liable for service tax under "Residential Complex Service" before June 1, 2007, and could only be taxed under "Works Contract Service" thereafter. They also argued that since the case involved legal interpretation, the extended period of limitation could not be invoked.

The revenue counsel argued that the presence of common areas like parking spaces and shared utilities brought the construction activity within the definition of "Residential Complex Service." They also argued that the appellant had never claimed that their service was a works contract during earlier proceedings and should not be allowed to raise a new argument at this stage.

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The two-member bench comprising P. Dinesha (Judicial Member) and M. Anjani Kumar (Technical Member) observed that the contracts were indeed composite and could not be separated into distinct service and goods components. It further observed that merely having common areas did not alter the composite nature of the contract.

The tribunal held that a service that aligns in description with "Residential Complex Service" does not automatically fall under that category if the consideration is indivisible and the contract is composite.

The tribunal also observed that legal grounds, including those based on Supreme Court rulings, can be raised at any stage of proceedings. Dismissing such grounds for procedural reasons would amount to denying justice. The tribunal held that the demand could not be sustained either on merits or on limitation grounds and allowed the appeal with consequential relief.

CESTAT Chennai ruled that construction services involving common areas remain composite works contracts and are not taxable as "Residential Complex Service."

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