:- Interpretation of “personal use” excluded from construction of residential complex service

PJ/CASE LAW/2014-15/2411

Case:- GOLDEN VENTURES V/S COMMISSIONER OF SERVICE TAX, CHENNAI

Citation:- 2013-TIOL-1698-CESTAT-MAD

Brief Facts:- The appellant filed delayed appeal with a delay of 18 days. The appellant is a partnership concern which was in construction business only for execution of one project only. After completion of the project they had wound up their activities by the time the adjudication order was received and hence there was some delay in processing of the papers for filing of appeal. The appellant requests that the delay in filing the appeal may be condoned. Condonation of delay has been ordered. There is a miscellaneous application filed by the Revenue to change the name of Respondent as “Commissioner of Service Tax, Chennai” instead of “Commissioner of Central Excise, Chennai-I" because presently the applicant-appellant is registered with Commissioner of Service Tax Chennai.After hearing both sides this petition is also allowed.

Thereafter, the stay petition was taken up for hearing. The applicant is engaged in promotion and construction of residential complexes for sale of residential flats to prospective customers. They were procuring land from land owners and constructing residential flats. They were obtaining the necessary permission from different authorities concerned like MMDA, appointing Architects, Structural Engineers etc. They were also advertising and canvassing prospective buyers to purchase flats and after identifying prospective buyers they were entering into two separate agreements with such prospective buyers as follows:-

1) Agreement of sale of the undivided share (UDS) of the land for each individual buyer of flats in the residential complex.

2) For construction of flat for each buyer of UDS.

Both these agreements with each of the prospective buyers were being executed simultaneously. Finally, after construction of flat, sale deeds for UDS were registered with state government authorities and possession of constructed flats was handed over. Each of the sale deeds executed did not include value of constructed flat. For such construction activity carried out by them for the period April 2006 to March 2009, they did not pay any service tax. Revenue was of the view that the activities done by them was taxable services under Section 65 (105) (zzzh) read with Section 65 (91a) of Finance Act, 1994. So Revenue issued a show cause notice dated 24-03-2010, demanding service tax not paid. On adjudication demand for service tax of Rs.18141933/- stands confirmed against the applicant along with interest and penalties. Aggrieved by the order, the applicant has filed appeal before this Tribunal along with stay application for waiver of pro-deposit of dues arising from the impugned order. Such petition is being considered in this proceeding.

Appellant’s Contention:- The appellant contended that when the construction activity was done the land was still in their name and therefore at that stage there was no relationship of service provider and service recipient between them and the prospective buyers and the construction activity was done for their own benefit and hence the demand for service tax is not maintainable. The applicant relies on the following circulars issued by the CBEC in support of his argument.

1. Circular F. No. 137/12/2006-CX.4 dated 29.01.2009

2. Circular F. No.108/02/2009 dated 29.01.2009.

He also relies on the decision of the Hon. Gauhati High Court in Magus Construction Pvt. Ltd Vs. UOI - 2008 (11) STR (Gau) = (2008-TIOL-321-HC-GUW-ST) and the decision of the Tribunal in the case of CCE Vs. UB Constructions - 2009 (15) STR 234 (del-Tri). They further submit that UDS was registered only after construction was completed. After completion of the construction activity, the registration is done with the state government authorities only in respect of undivided shares (UDS) of land and the value of the flat already constructed, and appurtenant to UDS on the day of registration, was not taken into account for payment of stamp duty for registration. Possession of the constructed flat was handed over to the prospective buyers. He submits that this is the usual practice in Tamil Nadu. He has another argument that the flats constructed were for the personal use of the individual buyers for their residence and hence the residential building was covered by the exclusion clause in definition at section 65(91a) and for that reason also the demand is not sustainable. He further points out that the entire details of the agreements executed, the consideration received etc were known to the department in July 2008 in statement given by J Ramkuar Balsingh, Partner of the applicant firm but the Show Cause Notice was issued only on 28-03-2010 demonstrating that the department itself was not sure of the legal position and in such a situation invoking extended period for making the demand is not sustainable. He submits that the entire demand is beyond the normal period of limitation of one year. He also pleaded that there was no suppression of facts on their part and hence the demand confirmed invoking extended period is not maintainable. He further submits that they are facing financial difficulties for making pre-deposit on account of the general slump in the construction industry. They prayed that the appeal may be taken up for hearing without any pre- deposit for the reasons stated by them.

Respondent’s Contention:- The respondent contended that the very fact that the applicant had executed agreement with each of the prospective buyers for providing construction service shows that there was a relationship of service provider and service recipient between the applicant and the prospective buyers. They further argue that the applicant did not enter into any sale deed for selling constructed flat. He argues that the clarifications issued by the CBEC are applicable only when flats are constructed and constructed flats are sold to the identified buyers. In this case, the applicant themselves are admitting that they were only handing over the possession of the constructed flats to the buyers and therefore, there was a service being provided to the buyers of UDS. He points out that under the novel method adopted, the applicant was neither paying the stamp duties to state government nor paying service tax on the value of construction services. While the evasion of stamp duty is not a matter before the Tribunal he argues that the essence of the agreement should be appreciated taking the total facts into consideration in which case it can be seen that there is an agreement to construct flat and there is no agreement to sell constructed flats.

With regard to the argument of the applicant that these flats were for individual use of each of the buyers in the residential units and hence not covered by the definition at section 65 (91a), they submit that the definition under Section 65 (91a) excludes only those cases where the entire residential complex is for the personal use of the person getting the building constructed for his own residence or for renting it out. He submits that the exclusion clause will not apply to cases where the individual residential units are for sale to others. The exclusion cannot be interpreted to mean that if each residential unit is meant for stay of the prospective buyers or for rending it out, buildings comprising of such flats will not be covered by the definition. If such interpretation is given to the definition under Section 65 (91a) no building will come under the tax net at all. He argues that any definition which makes an entry otiose should not be adopted while interpreting a definition.
He further points out that the contention raised by the applicants have already been examined by the Tribunal in the case of LCS City Makers Vs. CST - 2013 (30) S.T.R. 33 (Tri.-Chennai) = (2012-TIOL-618-CESTAT-MAD), in almost all respects except that in that case UDS was registered before starting the construction work. He submits that since there is contract with each prospective buyer for providing service the fact that UDS was registered after the construction was completed should not make any difference to tax liability.
He pointed out that the entire matter was unearthed during investigation by department and by voluntary disclosure. The issue of time bar can arise for services rendered from July 2008 that is the date of disclosure. In respect of matters not disclosed earlier the statute does not prescribe that SCN has to be issued 5 years from date of knowledge but the time limit is prescribed in the statute is 5 years from the date on which return should have been filed. He also relies on the decision of the Apex Court in the case of COMMISSIONER OF C. EX., VISAKHAPATNAM Vs MEHTA AND COMPANY - 2011 (264) E.L.T. 481 (S.C.) = (2011-TIOL-17-SC-CX). So he submitted that the demands are not time barred. He prayed that the applicant should be put to reasonable terms for hearing them, especially because service tax assessees like the present applicant have hardly any assets and if a liability is confirmed at a later point of time department will not be able to recover any dues.

Reasoning of Judgment:- The Hon’ble Tribunal held that there is a relationship of service provider and service recipient between the applicant and the prospective buyers of the individual residential units as it is evidenced by the contract between the two parties. The contract is not for sale of flats but for providing construction service. Further they also examined the exclusion clause of Section 65(91a), which is as under:-
^"(91a) ^"residential complex^" means any complex comprising of‑
(i)            a building or buildings, having more than twelve residential units;
(ii)           a common area; and
(iii)        any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system, located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.

Explanation. - For the removal of doubts, it is hereby declared that for the purposes of this clause, -
(a)           "personal use" includes permitting the complex for use as residence by another person on rent or without consideration;
(b)          ^"residential unit^" means a single house or a single apartment intended for use as a place of residence;

The highlighted portion of the definition can apply only when a complex is got constructed by one person for his own residence. In this case the residential complex was not for the residence of the applicant but the individual residence units were constructed for residential use of the persons for whom such units were constructed. The fact that individual residential units were for residential use of the purchaser of UDS cannot take the complex outside the definition. Any interpretation to the contrary will make the entry otiose. The Circulars of CBEC and the decision in the case Magus Construction are in the context of builders who construct flats and then sell the flats. In this case there is sale of only UDS and no sale of constructed flats. Further there are agreements by applicant for providing service. So we are prima facie of the view that the facts of these cases are quite different and the rationale in the said instructions and decision will not apply to the facts of the case. The argument of the applicant regarding time bar does not appear to be supported by provisions in statute because the demand does not cover any period beyond one year from the date of disclosure. In respect of demands prior to the date of disclosure the time limit of one year may not apply for issue of SCN. Considering the different arguments raised, the financial hardship pleaded by applicant and the balance of convenience to safeguard interest of Revenue also they direct the applicant to make a pre-deposit of Rs. 30 Lakhs within 8 weeks and report compliance on 13.09.2013. Subject to such deposit, pre-deposit of balance dues are waived for admission of appeal and its collection is stayed during the pendency of the appeal.

Decision:- Pre depositordered.

Comment:-The essence of this case is that the exclusion clause in the defination of Construction of Residential Complex Service will be applicable if a person directly engages another person for construction of residential complex for his own residence. The mere fact of individual residential unit being used for residential purpose will not be covered by the said exclusion clause. The reason being that an interpretation that renders the provision meaningless should not be adopted.

Prepared by: Kavita Thanvi

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PJ/CASE LAW/2014-15/2411

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