Demand Under 'Construction of Complex' Invalid for Composite Contracts Prior to 2010: CESTAT Sets Aside Service Tax Demand [Read Order]

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the appellant was not liable to pay service tax for the period before 1 July 2010, and consequently set aside the demand confirmed under “Construction of Complex Service” along with interest and penalty.

The Bench concluded that the Appellate Authority had travelled beyond the scope of the show cause notice by reclassifying the activity under “Works Contract Service,” which was never proposed in the Show Cause Notice (SCN).

The dispute arose from a show cause notice delivered to appellant, Dugar Housing, a developer engaged in the construction of residential complexes, alleging short-payment of service tax on the construction of the residential complex “Dugar Estate” for the period from 1 November 2005 to 31 March 2008. The Department alleged that the developer had failed to include certain receipts in the taxable value. The Original Authority confirmed the demand, and the Commissioner (Appeals) upheld the confirmation, holding that the activity became taxable as a works contract service with effect from 1 June 2007.

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Aggrieved, the appellant approached the Tribunal. It was contended that developers were brought within the tax net only through the Explanation inserted in Section 65(105)(zzzh) by the Finance Act, 2010, with effect from 1 July 2010. Relying on the Tribunal’s decision in Krishna Homes v. CCE, 2014, and subsequent rulings, including Pragati Edifice Pvt. Ltd. and Chaitanya Builders & Leasing Pvt. Ltd., the appellant asserted that construction undertaken by developers under composite contracts before the said date could not be treated as taxable. It was further argued that the Commissioner (Appeals) had exceeded jurisdiction by confirming the demand under Works Contract Service, despite the show cause notice proposing tax only under “Construction of Complex Service.”

The appellant also challenged the invocation of the extended period, submitting that the issue involved interpretational disputes and, therefore, no suppression could be alleged.

The Tribunal Bench comprising Ajayan T.V. (Judicial Member) and M. Ajit Kumar (Technical Member) observed that it was undisputed that the appellant was engaged in a composite contract involving both provision of service and transfer of property in goods. Referring to the findings of the Commissioner (Appeals), the Bench noted that although the authority accepted that the activity would fall under works contract service post-1 June 2007, it nevertheless upheld the demand confirmed under construction of complex service without any proposal in the show cause notice to tax the activity under the works contract category.

CESTAT relied heavily on the binding ratio in Krishna Homes, wherein it was held that builders or developers who construct residential complexes for customers under agreements for sale are not liable to service tax under the construction of complex service before 1 July 2010, as the taxable entry did not cover such composite activities until the explanation was inserted. The Bench noted that coordinate benches had consistently followed this legal position in later decisions, including those cited by the appellant.

The Tribunal further held that the issue regarding the taxability of composite works contracts during the relevant period was the subject of widespread litigation, indicating that the matter was interpretational. In such circumstances, the ingredients required to invoke the extended period of limitation, such as fraud, suppression or wilful misstatement, were absent. Therefore, the longer limitation period could not be applied.

In view of these findings, CESTAT held that the demand confirmed under construction of complex service for the period in dispute was unsustainable both on merits and on limitation. The penalty imposed under Section 77 of the Finance Act, 1994, was also set aside.

Allowing the appeal, the Tribunal concluded that the developer was not liable to service tax for the period in question and directed that consequential relief be granted.

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