Whether explanation expanding scope of taxable service made applicable retrospectively?

Case:- M/s KRISHNA HOMES Vs COMMISSIONER OF CENTRAL EXCISE, BHOPAL

Citation:- 2014-TIOL-402-CESTAT-DEL

Brief facts:- M/s Krishna Homes is a Proprietary concern engaged in construction of residential complex as builder, promoter and developer. The firm constructs residential complex with more than 12 residential units. The appellant firm entered into agreements with prospective customers for construction of flats against which the customers were to make payments in installments for the fiats being built by them by the appellant and thereafter the possession the flats was to be given to the customers when the entire payment had been made. There were two agreements with each customer - first agreement was between the appellant as the seller and the prospective buyer/ customer as a purchaser for sale of flat, which was to be constructed up to column, beams, roof alongwith brick work. The second agreement was between the appellant and the prospective buyer/customer - for the purpose of carrying on the finishing work on the flat - plastering, water supply, sanitary and electric fittings, flooring etc. The appellant engaged contractors for construction and finishing and after completion of the construction and finishing, handed over the flats to the customers. The period of dispute is from December 2005 to October 2006. The department was of the view that the appellant as provider of the construction of residential complex service taxable under Section 65 (105) ( zzzh ) was liable to pay service tax on the amount charged by him from the buyers of the flats and accordingly the appellant was required to take service tax registration and pay the service tax. The service tax amounting to Rs. 8,96,303/- was paid by the appellant during the period from December 2005 to October 2006. However, in August 2006, the CBEC (Tax Research Unit) issued a Circular No. 332/35/2006 – TRU dated 01/8/06 wherein in respect of a question as to whether service tax is applicable on a builder, promoter or developer who builds a residential complex having more than 12 residential units by engaging a contractor for construction of such residential complex, it is the contractor who shall be liable to pay service tax on the gross amount charged by him for construction service provided to the builder, promoter or developer under construction of complex service falling under Section 65 (105) (zzzh ) and that if no other person is engaged for construction work and the builder, promoter or developer undertakes the construction work on his own without engaging the services of any person, then in such cases in absence of service provider and service recipient relationship, the question of providing taxable service by any other person does not arise. On the basis of the above Circular, the appellant submitted an application dated 06/11/06 for refund of the service tax of Rs. 8,96,303/- paid by them during the period from December 2005 to October 2006. The refund application was rejected by the Deputy Commissioner vide order-in-original dated 10/01/07. On appeal being filed to Commissioner (Appeals) against this order, the Commissioner (Appeals) dismissed the appeal vide order-in-appeal dated 27/07/2007. The Commissioner (Appeals) without going into the question of unjust enrichment, held that the appellant were not entitled for refund as they were the provider of construction of complex service to various buyers of the flats for whom the flats had been constructed by them under the agreements. The Commissioner (Appeals) observed that the appellant had entered into a work contract agreements with the customers and, therefore, their transactions with the customers are the transactions of service which is the service of construction of residential complex. Against order of the Commissioner (Appeals), the appeal No. ST/635 of 2007 had been filed.
In the other case, where Revenue is in appeal, the respondent - M/s Raj Homes Pvt. Ltd., Bhopal [hereinafter referred to as Raj Homes] had entered into the agreements with their customers for construction of residential units of certain specifications and certain designs. The prospective buyers were to make payment for the residential units being build by them in installments and on completion of the residential complex and making full payment for the residential units, the possession of the same was to be handed over to the customers. Here also M/s Raj Homes engaged contractors for construction of the residential complexes. The contractors were paying service tax on the amount being received by them from M/s Raj Homes. The department was of the view that M/s Raj Homes have provided construction of complex service taxable under Section 65 (105) ( zzzh ) to their customers - buyers of the flats and as such they were liable to pay service tax on the amount received by them as builders. On persuasion of the Department, M/s Raj Homes took the service tax registration and started paying service tax under protest. However, on the issue of the above-mentioned clarification of the Board vide Circular dated 01/08/06 they on 14/11/06 applied for refund of service tax of Rs. 40,50,000/-paid by them during the period from 16/6/05 to 31/7/06. The refund claim was rejected by the Jurisdictional Deputy Commissioner vide order-in-original dated 10/01/07. The Deputy Commissioner in his order rejected the claim observing that M/s Raj Homes have not submitted documents to prove that their contractors have discharged the service tax liability and that even if the contractors have discharged service tax liability then also, M/s Raj Homes would be liable to pay the service tax, as they by their own admission, have undertaken construction of residential complex on which service tax is to be paid by them as per the clarification issued by the TRU . On appeal being filed against this order, the Commissioner (Appeals) vide order-in-appeal dated 17/07/07 allowed the appeal holding that M/s Raj Homes are not liable to pay service tax and that there is no unjust enrichment involved as a number of the customers have given affidavits to the effect that M/s Raj Homes have not charged any amount towards service tax from them. Against this order of the Commissioner (Appeals), the appeal has been filed by the Revenue.
Appellant’s contention:-Shri Prabhat Kumar, Advocate, the learned Counsel representing the respondent M/s Raj Homes in appeal No. ST/556 of 2007 and the appellant M/s Krishna Homes in the appeal No. 635 of 2007, pleaded that M/s Raj Homes the respondent in appeal No. ST/556 of 2007 and M/s Krishna Homes, the appellant in the appeal No. ST/635 of 2007, are the builders who had entered into agreements with prospective buyers for building residential units for them on the land owned by them (the builders), that in terms of the agreements, during construction the payments for the residential units were to be made by the prospective buyers in installments and on completion of the residential complex and full payment having been made by the customers, the possession of the residential units was to be given to them, that for construction of the residential complexes, contractors had been engaged by the builders, that in terms of Circular No. 332/35/2006- TRU dated 01/08/06 of the Board, when a builder/developer builds a residential complex having more than 12 residential units by engaging a contractor, it is the contractor who shall be liable to pay service tax on the gross amount charged for the construction service provided by him to the builder/promoter/developer under Section 65 (105) (zzzh ), that in view of this, during the period of dispute, the builders - M/s Raj Homes and M/s Krishna Homes could not be held to have provided the construction of complex service and no service tax could be charged from them on the amount charged by them from their customers for whom the residential units had been constructed in terms of agreements with them, that it is only w.e.f . 01/7/10 that an explanation was added to Section (105) (zzzh ) providing that construction of a new building, which is intended for sale wholly or partly by a builder or any person authorized by the builder, before, during or after construction [except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorized by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being enforce] shall be deemed to be service provided by the builder to the buyer, that explanation to Section 65 (105) ( zzzh ) added w.e.f . 01/07/2010 expands the scope of this clause and as such is a prospective amendment' and it is only from 01/7/10 that such builders/developers would be liable to pay service tax on the amount received by them from the prospective customers with whom they entered into a contract for construction of residential units, that this explanation cannot be given a retrospective effect, that the Tribunal in the case of CCE , Chandigarh vs. U.B . Construction (P) Ltd. reported in2013 (32) S.T.R . 738 (Tri. - Del.) has held that the explanation to Section 65 (105) ( zzzh ) added w.e.f . 01/7/10 expands the scope of this clause and hence the same is not a clarificatory amendment and, as such, it cannot be given retrospective effect and accordingly during period prior to 01/7/10, when this explanation was not there, no service tax can be charged on the amount received by the builders/developers from the prospective buyers, that same view has been taken by the Tribunal in the case of R.F. Properties & Trading Ltd. vs. CCE , Jaipur reported in 2013 (31) S.T.R . 578 (Tri. - Del.,= (2013- TIOL-971-CESTAT-DEL) that in view of this, in both the cases, the appellant/respondent are eligible for refund on merits, that in both the cases the refund claims are not hit by limitation, as in the case of M/s Krishna Homes, the refund claim for the period from December 2005 to October 2006 had been filed on 06/11/06, and in the case of M/s Raj Homes, service tax had been paid under protest and, as such, limitation period prescribed under Section 11 B was not applicable, that unjust enrichment is not applicable as no amount had been charged from the customers towards service tax and that in view of this, while the Commissioner (Appeals)'s order in the case of M/s Krishna Homes is not correct, there is no infirmity in the Commissioner (Appeals)'s order in the case of M/s Raj Homes.
Respondent’s contention:- Shri Govind Dixit, the learned DR, appearing for the Department in the case of M/s Raj Homes and Shri Amresh Jain, the learned DR appearing for the Department in the case of M/s Krishna Homes, pleaded that even if the activity of the assessees during the period of dispute was not taxable under Section 65 (105) ( zzzh ), they would not get the refund, as their claims are hit by unjust enrichment in as much as they have not been able to discharge the burden of proof cast on them to prove that the incidence of the service tax whose refund has been claimed by them, has not been passed by them to their customers, and that in this regard, in accordance with the provisions of Section 83 of the Finance Act, 1994 read with Section 12B of the Central Excise Act, 1944, the burden of proof is on the assessees which they have failed to discharge. Both the DRs also pleaded that notwithstanding the Board's Circular No. 332/35/2006- TRU dated 01/8/06, the agreements of the assessees with their prospective customers for construction of residential units are work contracts in view of judgment of the Apex Court in the case of M/s Larsen & Toubro Limited and others vs. State of Karnataka & others reported in 2013-TIOL-46-SC-CT-LB and hence service tax would be attracted under Section 66 read with Section 65 (105) zzzh) of the Finance Act, 1994 on the amount charged by the assessees from their customers. In this regard, both the DRs drew the attention of the Bench to para 101 of the above-mentioned judgment of the Apex Court, wherein it has been held that when a contract comprises of both a works contract and transfer of immovable property, such contract does not denude it of its character as works contract, as the term works contract in Article 366 ( 29A ) (b) of the Constitution takes within its fold all forms of works contract and is not restricted to one specie of contract to provide for labour and service alone and that nothing in Article 366 ( 29A ) limits the terms "works contract". Both the DRs, therefore, pleaded that in view of the judgment of Larger Bench of the Apex Court in the case of M/s Larsen & Toubro Limited and others vs. State of Karnataka & others (supra) the assessees would not be eligible for refund, as the service tax had been correctly paid by them on the amount charged by them from their customers for building of the residential units for them.
Reasoning of judgment:- Coming first to the question as to whether the activity of M/s Krishna Homes and M/s Raj Homes was taxable during the period of dispute or not, by Finance Act, 2005, Clause ( zzzh ) was introduced into Section 65 (105) of Finance Act, 1994, so as to bring within the purview of the term 'taxable service', a service provided or to be provided to any person by any other person "in relation to construction of complex". The expression "construction of complex" was defined in sub-Section ( 30a ) of Section 65 and accordingly this expression covered - "(a) construction of a new residential complex or a part thereof or (b) completion of finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or (c) repair, alteration, renovation or restoration of, or similar services in relation to, residential complex". The expression residential complex was defined in Section 65 ( 91a ) of the Finance Act, 1994 as 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 any authority under 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". There is no dispute that the complex constructed by both the assessees in these appeals are covered by the definition of "residential complex" as given in Section 65 ( 91a ). There is also no dispute that both the assessees had engaged contractors for construction of the complexes. The dispute in these appeals is as to whether the assessees would be liable to pay service tax on the amounts charged by them from their customers with whom they had entered into agreements for construction of the residential units and whose possession was to be handed over on completion of the construction and full payment having been made by the customers. It is seen that on this point, the Tax Research Unit of the Central Board of Excise & Customs, which is a wing of the CBEC dealing with legislation work, had vide Circular No. 332/35/2006- TRU dated 01/8/06 clarified that in case where a builder, promoter, developer builds a residential complex having more than 12 residential units by engaging a contractor for construction of such residential complex, the contractor shall be liable to pay service tax on the gross amount charged for the construction service provided to the builder/promoter/developer under construction of complex service falling under Section 65 (105) (ZZZh) of the Finance Act, 1994 and that if no person is engaged by the builder, promoter, developer for construction work who undertakes construction work on his own without engaging the services of any other person than in such cases, in absence of the service provider and service recipient relationship, the question of providing taxable service to any person by any other person does not arise. W.e.f. 01/7/10, an explanation was added to Section (105) ( zzzh ) which was as under :
"Explanation - For the purposes of this sub-clause, the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorized by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer.]"
Thus, in terms of this explanation, when a builder/promoter /developer got a residential complex constructed for his customers with whom he had individually entered into agreements, in terms of which the prospective customers were required to make payments for the residential units to be constructed in installments and the possession of the residential units was to be given to the customers on completion of the complex and full payment having been made, the builder/ promoter/developer was to be treated as a deemed provider of construction of residential complex service to his customers. Thus, by this explanation the scope of the Clause ( zzzh ) of Section 65 (105) has been expanded and this amendment by adding an explanation has been held by this Tribunal in the case of CCE , Chandigarh vs. U.B. Construction (P) Ltd. (supra) as prospective amendment. In this regard, para 5 of this judgment is reproduced below :-
"5. In Maharashtra Chamber of Housing Industry v. Union of India - 2012 (25) S.T.R . 305 ( Bom . ),= (2012-TIOL-78-HC-MUM-ST) the validity of the 'Explanation' added to Sections 65(105)(zzq) and (zzzh) was challenged on several grounds. The Bombay high Court, also considered the issue whether the explanation was prospective or retrospective in operation and ruled that the explanation inserted by the Finance Act, 2010 brings within the fold of taxable service a construction service provided by the builder to a buyer where there is an intended sale between the parties whether before, during or after construction; that the 'Explanation' was specifically legislated upon to expand the concept of taxable service; that prior to the explanation, the view taken was that since a mere agreement to sell does not create any interest in the property and the title to the property continues to remain with the builder, no service was provided to the buyer; that the service, if any, would be in the nature of a service rendered by the builder to himself; that the explanation expands the scope of the taxable service, provided by builders to buyers pursuant to an intended sale of immovable property before, during or after the construction and therefore the provision is expansive of the existing intent and not clarificatory of the same; and is consequently prospective".
In view of the above, though in view of the Apex Court judgment in the case of M/s Larsen & Toubro Limited and others vs. State of Karnataka & others (supra) , the agreements entered into by a builder/promoter/developer with prospective buyers for construction of residential units in a residential complex against payments being made by the prospective buyers in installments during construction and in terms of which the possession of the residential unit, is to be handed over to the customers on completion of the residential complex and full payment having been made, are to be treated as works contracts, it has to be held that during the period of dispute, there was no intention of the Government to tax the activity in terms of such contracts a builder/developer with prospective customers for construction of residential units in a residential complex. Such works contracts involving transfer of immovable property were brought within the purview of taxable service by adding explanation to Section 65 (105) ( zzzh ) w.e.f . 01/7/10, and therefore, it has to be held that such contracts were not covered by Section 65 (105) ( zzzh ) during the period prior to 01/7/2010.
Coming to the question of limitation, while refund claim filed by M/s Krishna Homes for the period is within time as the service tax had been paid during the period from December 2005 to October 2006 and the refund claim had been filed on 06/11/06, in the case of M/s Raj Homes, though a refund claim for the period from 16/06/05 to 31/07/06 has been filed on 14/11/06, but since in terms of the findings of the Commissioner (Appeals) which have not been disputed, the service tax had been paid under protest, the limitation period would not apply.
The third point of dispute is as to whether these refund claims are hit by unjust enrichment. In terms of Section 12A of Central Excise Act, 1944, notwithstanding anything contained in this Act or any other law for the time being enforce, every person who is liable to pay duty of excise on any goods shall at the time of clearance of the goods, prominently indicate in all the documents relating to assessment, sales invoices and other like document, the amount of such duty which will form part of the price at which such goods are to be sold. Under Section 12B of the Central Excise Act, 1944 every person who has paid excise duty on any goods under this Act, shall, unless the contrary is proved, be deemed to have passed on full incidences of such duty to the buyers of such goods. By virtue of Section 83 of the Finance Act, 1994, Section 12A and 12B of the Central Excise Act, 1994 are applicable to service tax matters. Department's plea is that in view of the provisions of Section 12B as made applicable to service tax matters as Section 83 of the Finance Act, 1994, the burden is on the assessees to prove that the incidence of the service tax whose refund is claimed had not passed on by them to their customers. However, the finding of the Commissioner (Appeals) in the case of M/s Raj Homes is that he has seen sample invoices and in none of the invoices, any amount towards service tax has been charged. In view of this, this finding of the Commissioner (Appeals), it cannot be said that M/s Raj Homes had passed on the incidence of the service tax whose refund is claimed by them to their customers. Similarly, in the case of M/s Krishna Homes also, there is no evidence that they had charged any amount towards service tax from their customers. The presumption under Section 12B of the Central Excise Act, 1944 is a rebuttable presumption and when an assessee shows invoices issued by him is support of his claim that no amount representing service tax had been charged by him from his customers, the burden would shift to the department to produce evidence that the incidence of the tax, paid whose refund is sought had been passed on to the Customers. In this case no such evidence has been produced by the department. In view of this, it was held that the refund claims are not hit by unjust enrichment.
In view of the above discussion, while the appeal filed by the Revenue in the case against M/s Raj Homes is dismissed, the appeal filed by M/s Krishna Homes is allowed.

Decision:- Assessee’s appeal allowed.

Comment:-The gist of this case is that prior to the explanation inserted w.e.f. 01.07.2010, service tax under Construction of Residential Complex Service was leviable only when the builder or developer hired contractor for construction of residential complex that was to be sold to the ultimate buyer in installments and moreover, the service tax was required to be paid by the contractor. However, w.e.f. 01.07.2010, the scope of taxable service was expanded and even the builder or developer was made liable to pay service tax on the construction of the residential complex. It is concluded from this case that the explanation that expanded the scope of taxable service is to be applied prospectively. Accordingly, the refund of service tax paid by the builder/developer is admissible to them for the period prior to 01.07.2010 because at that relevant time, the service tax liability was on the contractor and not on the builder/developer.

Comments

PJ/Case Law/2014-15/2162

Post a Comment

Query