CASE STUDY
Prepared By: CA Neetu Sukhwani &
Kavita Thanvi
Introduction:
The assessee, M/s Ashapurna Buildcon Ltd. were issued with show cause notice wherein it was alleged that they have not paid service tax on the charges collected from the respective buyers of bungalow/villa/plot as society charges and also have not paid service tax under proper category in respect of charges collected from the respective buyers on account of Internal Electrification & substation charges and internal water system development charges. It was alleged that these charges are liable for service tax under the category of “Preferential Location or External or Internal Development of Complex” on full value. It was submitted that society charges collected by them would be transferred to the respective ‘Welfare Housing Society’ of the respective project and such charges are like “deposits” and are not leviable to service tax. As regards non-payment of service tax on internal electrification and water system development charges, it was submitted that service tax has been correctly paid under the category of “Construction of Residential Complex Services” as such facilities are integral to any construction and cannot be classified under “Preferential Services”. The adjudicating authority confirmed demand of Service Tax amounting to Rs. 2,96,777/- along with interest out of total demand of Rs. 8,30,989/- against the assessee and drop the remaining demand of Rs. 5,34,212/- pertaining to the society charges and also imposed penalty of Rs. 10,000/- upon the assessee under Section 77 of the Finance Act, 1994 and penalty of Rs. 2,96,777/- on the assessee under Section 78 of the Finance Act, 1994.
M/S ASHAPURNA BUILDCON LTD. [OIO NO. 165/ST/JPR-II/2013, DT. 26.11.2013]
Relevant Legal Provisions:
Rule 5(2) of Service Tax (Determination of value Rules, 2006):-
“(2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:-
(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
(iii) the recipient of service is liable to make payment to the third party;
(iv) the recipient of service authorizes the service provider to make payment on his behalf;
(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.
Explanation1.–For the purposes of sub- rule (2), “pure agent” means a person who–
(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;
(c) does not use such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services.”
Section 65(105)(zzzzu) of the Finance Act, 1994:-
Taxable service means any service provided or to be provided to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorised by such builder, for providing preferential location or development of such complex but does not include services covered under sub-clauses (zzg), (zzq), (zzzh) and in relation to parking place.
Explanation.- For the purpose of this sub clause, “preferential location” means any location having extra advantage which attracts extra payment over and above the basic sale price.
Further, sub- clause (zzg) is in relation to Management, maintenance or repair services; sub clause (zzq) is for services in relation to commercial or industrial construction and sub clause (zzzh) is for services in relation to construction of complex.
Notification no. 36/2010-ST dated 28.6.2010:-
“G.S.R. (E).- In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services specified in clause (A) of section 76 of the Finance Act, 2010 (14 of 2010) other than services referred to in clause (zzc) and (zzzz) of sub-section (105) of section 65 of the Finance Act from so much of the service tax leviable thereon under section 66 of the Finance Act as is in excess of the service tax calculated on a value which is equivalent to the amount of advance payment received before the said appointed date.”
Section 65(25aa) of the Finance Act, 1994:-
Club or association” means any person or body of persons providing services, facilities or advantages, primarily to its members, for a subscription or any other amount, but does not include—
(i) anybody established or constituted by or under any law for the time being in force; or
(ii) any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry; or
(iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature; or
(iv) any person or body of persons associated with press or media;]
Issue Involved:
The issue involved in this case before the adjudicating authority was that-
Whether the consideration received by the assessee on account of society charges chargeable to service tax under “Club or association service”?
Brief Facts:
M/s Ashapurna Buildcon Ltd. Mahaveer Palace, Opposite Circuit House, Jodhpur are holding Service tax registration No. AAFCA1426LSD005 issued under Section 69 of the Chapter V of the Finance Act 1994 read with Rule 4 of the Service Tax Rules, 1994. During the course of audit, while scrutinizing the agreement and ledger of the service provider, it was noticed that the builder had collected/charged certain amount from respective buyers of bungalow/villa/plot as society charges. The audit vide Letter dt. 12.6.2012 asked the assessee to explain the reason for such collection and also requested the assessee to deposit the due service tax.
The assessee vide letter dated 14.06.2012 informed that the said charges are received by them from their buyers as deposit, the amount received by them for society charges are kept as deposit till the formation of society. On the formation of the society these will be handed over to the society. Thus, they are only keeping the amount as deposit holder and handing over the amount as soon as society is formed and as such amount received is not used for any purpose of providing any taxable service due to the above reasons. The amount will be used by the society for maintenance and betterment of society.
On perusal of the reply, it was noticed that the sum charged is nothing but is membership fee for Welfare Housing Society (WHS), which is taxable service and is chargeable to service tax under the category of Club or Association Service of the Finance Act, 1994. Plea taken by the assessee that they are keeping the amount as deposit on behalf of the WHS does not exempts the taxability on such amount. However the audit made to understand the builder that service tax is leviable on service provided or to be provided, but assessee did not agree with the contention of audit and kept on saying that service ax is not leviable on them.
Further, it was noticed by the audit that the builder had obtained registration since the year 2010 for its Ashapurna enclave projects after the construction of Residential Complex came into Service Tax net w.e.f. 01.07.2010. It will not be out of place to mention here that prior to the period the construction service came into service tax net, the builder was engaged in the construction of Complex Services also. Accordingly, the assessee were requested the jurisdictional Superintendent. Central excise (S.-Tax) Range-II, Jodhpur vide letter dated 19.10.2010 to deposit the said amount of Service Tax Rs. 534212/- (S. Tax Rs. 518640/-+ Ed. Cess Rs. 10372/- + S&H Ed. Cess Rs. 5200/-) along with interest for the period from 2008-09 to 2011-12. The assessee vide letter dated 19.10.2012 stated that they have not paid service tax on the membership fee collected for society charges as the same are not required to be paid.
The assessee's contentions does not appear correct and tenable as per Section 65 (105) (zzze) of the Chapter V of the Finance Act, 1994. Taxable Services means any service provided or to be provided to its members, by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount;
In terms of the provisions of Section 67 of Chapter V of Finance Act, 1994 read with the Service Tax Rules, 1994 the amount being received from various buyers such as advance including interest and other charges if any is taxable value of the service. Further Circular F. No. B 1/6/2005-TRU dated: 27.7.2005 was also observed. The department has clarified the scope of expression “any other amount”. The scope of the “any other amount” is the amount paid by the member apart from membership fee or recurring subscription fee, such as amount paid for provision of services to the guests of a member, amount paid for get-together and functions, charged over and above the subscription amount. Any additional fee should be treated in the same way as subscription. Life membership fees must be treated in the same way as subscription. (This is apparently because every amount received for services to be provided is now taxable.)
From the above facts the assessee appears to have willfully suppressed the facts thereby contravened the provisions of Section 67 and 68 of the Act read with rule 6 of the Service Tax Rules, 1994 with an intent to evade payment of Service tax amounting to Rs. 534212/- (S. Tax Rs. 518640/-+ Ed. Cess Rs. 10372/- + S&H Ed. Cess Rs. 5200/-) during the period 2008-09 to 2011-12 under the category of service “Club and Associates Service.” The said amount of service tax is recoverable from the assessee by invoking the clause of extended period of limitation in terms of proviso to Section 73(1) of the Finance Act, 1994 as the assessee willfully suppressed the facts with intent to evade payment of service tax. The interest at the applicable rate is also recoverable from them under the provisions of the Section 75 of the Finance Act, 1994. Assessee also appears liable for penalty under Section 76 of the Finance Act, 1994 for failure to pay service tax at appointed time. The assessee also appears liable to penal action under Section 78 of the Finance Act, 1994 for willfully suppressing facts/Value of taxable services and for contravening the provisions of the Act and Rules mentioned in the forgoing paras with intent to evade payment of service tax.
During the course of audit of the assessee on perusal of annexure of agreement for purchase of bungalow, it was noticed that the assessee had separately charged/collected from the respective buyers on account of Internal Electrification & substation charges and internal water system development charges, which does not form a part of taxable value for charging tax on construction and falls under the category “Provision of Preferential Location or External or Internal Development of Complex” of the Finance Act, 1994 since 01.07.2010 onwards, and the assessee was required to pay the service tax at the prevailing rate on the entire value recovered from the buyer for providing preferential location or development service but the assessee had paid the service tax on the abated value by making part of taxable value for paying service tax on construction hence the assessee has short paid the service tax by not paying the service tax on the entire value recovered/collected from the buyer of a bungalow on account of such internal development.
It is also noticed that the assessee has taken full exemption of paying service tax in respect of bungalows which were completed before 01.07.2010 for which payment received after 01.07.2010 and in respect of bungalows for which lull advance was received before 01.07.2010 irrespective of completion of such bungalow. But the assessee was required to pay the service tax on the amount received by such buyers of bungalow as the preferential location or development service was provided on later date i.e. much after 01.07.2010, but the assessee has not paid the service tax on the amount so collected under this head before 01.07.2010. On being asked for the assessee replied that such collection is done by them as per regulations of Jodhpur Development Authority (JDA), each builder has to develop such internal developments and the assessee also replied that the service tax has been paid by them on abated value by considering it as part of construction cost, hence they have correctly paid the service tax on such amount. Further, the assessee did not agree with the views of Audit and wants to contest the issue. Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, such charges are being brought under the new service. Charges for providing parking space have been specifically excluded from the scope of this service. Development charges to the extent they are paid to State Government or local bodies would be excluded from the taxable value. Further, any service provided by Resident Welfare Associations or Cooperative group Housing Societies consisting of residents/owners as their members would not be taxable under this service.
Accordingly, the assessee were requested by the jurisdictional Superintendent, Central Excise (S. Tax) Range-II, Jodhpur vide letter dated 19.10.2010 to deposit the said amount of Rs.296777/- (S. Tax Rs. 288125/- + Ed. Cess Rs 5763/- + S&H Ed. Cess Rs.2890/-) alongwith interest on the service tax during the period from 01.07.2010 up to 2011-12. The assessee vide letter dated 19.10.2012 stated that they have not paid service tax on the “provision of preferential location or external or internal development of complex” as the same are not required to be paid and hence the audit paras raised are not tenable.
The assessee had short paid service tax amounting to Rs. 296777/- (S. Tax Rs. 288125/- + Ed. Cess Rs 5763/- + S&H Ed. Cess Rs.2890/-) for the period from 01.07.2010 up to 2011-12 on providing service under category of “provision of preferential location or external or internal development of complex services” contravening the provisions of Rule 6 & 7 of the Rules read with Section 68 & 70 of Chapter V of the Act, which appears to recoverable from them in terms of the proviso to Section 73(1) ibid alongwith interest thereon in terms of the provisions of Section 75 ibid. It was also alleged that the assessee have willfully suppressed the facts from the department with intent to evade payment of Service Tax in contravention of the provisions of Section 67, 68 & 70 of the Act read with Rule 6 & 7 of the Service Rules. The assessee also appears to have rendered themselves liable to penal action in terms of the provisions of Section 76, 77& 78 of Chapter V of the Act for contravention of provisions of Rule 6 & 7 of the Rules read with Section 68, 70 & 75 of Chapter V of the Act. Therefore M/s Ashapurna Buildcon Mahaveer Palace, Opposite Circuit House, Jodhpur were issued with Show cause notice.
Assessee’s Contention: The assessee made following submissions before the adjudicating authority:-
The assessee submitted thatit is alleged that the sum charged from the buyers for society charges is nothing but a membership fee for Welfare Housing Society (WHS), which is taxable service and is chargeable to service tax under the category of ‘Club or Association Service’ and their plea that they are keeping the amount as deposit on behalf of WHS does not exempt the taxability of such amount. In this respect, they submit that the said amount is not liable to service tax as the amount is collected as pure agent which will be transferred to the Welfare Housing Society of the respective project. They have not paid service tax on such amount as they are collecting such charges as pure agent which will be handed over to the society on its formation. They further submit that such amount is being kept as deposit in their books of accounts and it will be handed over to the society when it will be formed. This fact is affirmed by the society charges ledger accounts maintained by them wherein it is found that these charges have closing balances which is carried forward to the Balance sheet in liability side. This shows that these charges are treated as amount due to other persons (i.e. society). In other words, this amount is not appropriated as income in their books of accounts. Thus, no service tax is payable in this case as this amount is due to society when it will be formed and the “society” has a separate and distinct identity than M/s Ashapurna Buildcon Limited.
In continuation to above, they submit that, no service tax will be levied in view of rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. The rule 5(1) of these rules says that every expenditure incurred by the service provider in course of providing the taxable service will be chargeable to service tax. However, rule 5(2) provides for the cases where the expenditure incurred will not be chargeable to service tax. Thus, where the services in respect of the amount received are actually provided by some other person and the person receiving the same is simply acting as a mediator to hand over the amount on actual basis to the real service provider; the service tax will not be levied under the provisions of rule 5(2) of above rules.
Therefore, in light of the above mentioned provisions, they submit that:
· The said amount is collected by them as a pure agent on behalf of the society and that they and society are two different persons with distinct legal identity.
· No service is provided by them against the amount so received and the same will be provided by the society when it is formed.
· The amount is not written off in their books and the same is shown as amount due to other person.
· The transfer of amount so collected is on actual basis.
Therefore, from the above submissions, it is very much clear that they have not paid service tax on the membership fee collected for society charges as the same is not required to be paid and hence the impugned show cause notice is not tenable and is liable to be quashed.
Aligning with the above, they submit that even if it is accepted for the sake of argument that the society charges are liable to service tax, then also in view of the decision given in the case of Rohan Builders vs Commissioner of Service Tax, Bangalore [2013-TIOL-300-CESTAT-BANG], it has been held while granting part stay that when the appellant has taken deposit for maintenance work from customers which will be ultimately transferred to the association of flat owners, service tax can be levied only on the interest on such deposit utilized for the purposes of repair and maintenance services provided by the appellant and not on the whole deposit amount. Similarly, in their case, firstly, they are not providing any service to the customers i.e. buyers of flats and the amount collected as society charges will be handed over to the society on its formation. Secondly, when they are not providing any service, question of paying service tax does not arise. Therefore, the benefit of this decision should be extended to them and the impugned show cause notice demanding service tax on the same is not tenable and is liable to be quashed.
They also submit that the show cause notice is also placing reliance on the Circular F. No. B1/6/2005-TRU dated 27.07.2005. The analysis of Para no. 10.4 of this TRU letter makes it clear that the service tax will be levied under section 65(25a) under the head of Club and Association only if the company/society provides “SERVICES” to its “MEMBERS”. On the other hand, no service is being provided by them (M/s Ashapurna Buildcon Limited) in return of the “society charges”. It is further specified in this TRU letter that the services should be provided by the company/society to “its members”. On the other hand, the other party from whom the society charges are recovered are the “Buyers” of the flats/plots sold by them. Thus, there is relationship of seller and buyer and the buyers cannot be deemed as “members” of M/s Ashapurna Buildcon Limited. Thus, no such services are being provided by them to the “members” against the amount so collected. Therefore, service tax cannot be levied on them against these charges as no service is involved. Further, analysis of Para 10.5 of this circular also clarifies that to come under purview of this circular, the following conditions should be satisfied:-
· The services should be provided to the members.
· The services should be in relation to provision of service, facilities and advantages.
· The scope of any other amount will be any amount paid by members, apart from membership/recurring subscription fee such as amounts paid for provision of services to the guests of member, amount paid for get-togethers and functions charged over and above the subscription amount.
However, in the instant case, none of the above conditions are satisfied. The charges have been collected from the buyers who cannot be treated as “members” for the purpose of levy of service tax. Also, there is no service element or in other words there is no provision of service for which the service tax is payable. Also, the term “any other amount” consists of the amount payable in addition to membership fees for the purpose of “provision of service” by the “club or association”; which is not the case here. Therefore, the reliance placed on the above circular is wholly and totally erroneous and is liable to be set aside.
Further, in support of the allegation that they have willfully suppressed facts thereby contravening the provisions of Section 67 & 68 of the Act read with Rule 6 of the Service Tax Rules, 1994 with intent to evade payment of duty under the category of ‘Club and Associates Service’. In this regard, they submit that the above cited circular is not applicable in the present case as per discussion done in the forgoing paras. However, even if it is accepted that the said circular is applicable in the instant case, they have the liberty to disagree and challenge the same. This has been held in the case of BIRLA JUTE AND INDUSTRIES LTD. versus ASSISTANT COLLECTOR OF C. EX. [1992 (57) E.L.T. 674 (Cal.)] which was further approved by Hon’ble Supreme Court on 2005 (179)ELT 272(Supreme Court). In this case it was held that Board Circulars are not binding on the assessees and they may opt not to follow these Circulars. As such, the circulars are not binding on them. Therefore, though the circular is not applicable on them and even if they accept the contention of the show cause notice for the sake of argument also, then too this circular is not binding on them. Therefore, the impugned show cause notice should be set aside and no demand should be confirmed on them.
It has also been alleged that they have separately charged from the buyers on account of Internal Electrification & sub-station charges and internal water system development charges which do not form part of taxable value for charging tax on construction and falls under the category of ‘Provision of Preferential Location or External or Internal Development of Complex’ but they have paid service tax on the abated value by making it part of taxable value for paying service tax on construction and so have short paid the service tax by not paying the service tax on the entire value recovered/collected from the buyer on account of such internal development. In this respect, they submit that they have correctly paid service tax on such charges by classifying it under construction services as electrification and water system development are integral part of any building. They submit that the charges collected by them are not for making the residing more enjoyable rather, these are basic facilities that every builder is required to provide in the complex and hence are integral to the construction of complex. Further they submit that on analyzing the definition of “Taxable service” given under section 65(105)(zzzzu) of the Finance Act, 1994, it is clear that services under section 65(105)(zzzh) are excluded from the scope of taxable service under the service provided in respect of preferential location or external or internal development of complexes. They also submit that the services of internal electrification and internal water system development provided by them, squarely falls under the exclusion clause and hence the service tax paid by them is rightly covered under the service of “Construction of complex service” because no builder can provide a complex without including basic facilities of electricity and water. Furthermore, whether the said charges have been collected separately or collectively by the service provider does not alter the fact that such charges are part of the service of construction of complex provided by the service provider. Therefore, such charges are correctly covered under the service of “Construction of Complex Service” and there is no short payment of service tax in this respect. Therefore, the impugned show cause notice is liable to be set aside.
They further submit that it has been alleged that they have taken full exemption of paying service tax in respect of bungalows which were completed before 01.07.2010 for which payment received after 01.07.2010 and in respect of bungalows for which full advance was received before 01.07.2010 irrespective of completion of such bungalow. Whereas, they were required to pay the service tax on the amount received by such buyers of bungalow, as the preferential location or development service was provided on later date i.e. much after 01.07.2010, but they have not paid the service tax on the amount so collected under this head before 01.07.2010. In this respect, they submit that the advance so received was considered as the receipts from Construction of Commercial complex services which were not liable to service tax prior to 1.7.2010. It is worth mentioning that these were the advance receipts from Construction of residential service. On these services, the service tax was levied w.e.f. 1.7.2010 by inserting the explanation to its definition which reads as follows:-
“Explanation.—For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised 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 a person authorized by the builder before the 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, the service tax was levied on them w.e.f. 1.7.2010 and they were duly registered after this date and there is no dispute about this fact. Further, along with levy of service tax in such cases, notification no. 36/2010-ST dated 28.6.2010 was issued to exempt the service tax on the advance payments received before 1.7.2010. In the light of said notification, it is ample clear that no service tax would be levied on the advance payments received for construction of residential complex service in respect of the cases brought under service tax net w.e.f. 1.7.2010. Therefore, they have rightfully availed the benefit of this notification and no service tax was payable on the advance payments received in respect of this service prior to 1.7.2010. Thus, the impugned show cause notice is not viable and is liable to be set aside.
They submit that the impugned show cause notice has placed reliance on the circular letter DOF no. 334/1/2010-TRU dated 26.02.2010. While placing reliance on this circular, it has been held that as per this circular the internal and external development charges which are collected for developing and maintaining parks, laying of sewerage and water pipelines, proper access roads, common lighting, etc. will be included in the preferential location charges. This circular is wholly and totally erroneous and is going beyond the definition of taxable service of “preferential location”. The definition of taxable service specifically excludes the services covered under sub-clause (zzg), (zzq) and (zzzh). Thus, if the services are coverable under the head of construction services, these cannot be covered under the scope of preferential location. As stated in the forgoing paras, the alleged services are integral part of the construction of complex services provided by them and no buyer will accept their services without provision of these services. Thus, these are construction services only on which no service tax was payable prior to 1.7.2010. Therefore, the impugned show cause notice demanding the service tax on the advance received against these services prior to 1.7.2010 is not sustainable. Even if it is accepted for the sake of argument also that the above circular is correctly issued, then too, it is not binding on them and they have liberty to challenge the same. Thus, the impugned show cause notice is not justified and is liable to be set aside.
They submit that the impugned show cause notice is proposing to levy interest under Section 75 of the Finance Act, 1994. In this respect, they submit that on the basis of the above mentioned submissions, the proposed demand itself is not sustainable and therefore, the impugned show cause notice proposing interest is also not tenable and is liable to be quashed.
They further submit that the penalty proposed under section 76 & 77 cannot be imposed on them as they were under the bona fide belief that they are not liable to pay any service tax and hence have not deposited the same. The same belief was supported by the case laws cited above. Even the highest court of India – Hon’ble Supreme Court has held in the case of COMMISSIONER OF CENTRAL EXCISE, TRICHY Versus GRASIM INDUSTRIES LTD. [2005 (183) E.L.T. 123 (S.C.)] that where the act of assessee is based on the interpretation taken by the Tribunal, penalty cannot be imposed as the act is based on bona fide belief. The analysis of said decision makes it clear that since they have acted under bona fide, no penalty can be imposed on them. Therefore, the benefit of above decision of Hon’ble Supreme Court should be extended to them and the whole proceedings should be dropped.
In continuation it is submitted that the issue involved herein is that of interpretation of legal provisions and where interpretation of legal provisions is involved penalty cannot be imposed on the assessee. This contention has been upheld in the case of Uniflex Cables Ltd v/s Commissioner of Central Excise, Surat-II [2011-TIOL-85-SC-CX]. Hon’ble Supreme Court has held that penalty is not imposable in the issues involving the interpretation of legal provisions.
They also submit that in view of proviso inserted in Section 78, w.e.f. 10.05.2008, it is specifically stated that “Provided further that if the penalty is payable under this section, the provisions of section 76 shall not apply.” Therefore, in view of the specific provision in the Act w.e.f., 10.05.2008, simultaneous imposition of penalties under section 76 & 78 is not warranted. It has been held by Hon’ble Punjab & Haryana High Court in the case of Commissioner of Central Excise, Chandigarh-I Vs M/s Cool Tech Corporation, Chandigarh [2011-TIOL-23-HC-P&H-ST] that the penalty under section 76 & 78 are mutually exclusive and cannot be imposed simultaneously. Similar decision has been given in following cases:-
· M/s Anand Agencies v/s CCE (Service Tax), Coimbatore [2010-TIOL-364-CESTAT-MAD]
· M/s Safe Test Enterprises v/s CCE, Salem [2010-TIOL-355-CESTAT-MAD]
· M/s AR AS PV PV Motors Erode (P) Ltd v/s CCE, Salem [2010-TIOL-1241-CESTAT-MAD]
In the light of above decisions, it is ample clear that the penalties cannot be imposed simultaneously under the provisions of section 76 and 78 of the Finance Act, 1994. Thus, extending the ratio of above decisions, the impugned show cause notice should be quashed and proceedings initiated against them should be dropped.
They reiterate that the impugned show cause notice has proposed to impose the penalty under section 76, 77 and 78 of the Finance Act, 1994. In this regard, it is worthwhile to mention here that penalty under section 78 is imposable only if there is any suppression of facts or willful misstatement. On the other hand, there is no suppression of facts in the instant case as all the facts were well within the knowledge of department as detailed audit has been regularly conducted by the departmental auditors and they have duly replied all the objections raised vide audit paras. Moreover, they have provided each and every agreement as being demanded by the audit team. Further, they have cooperated in every possible manner by providing the audit team with all the possible details. Not only this, they granted them access to their tally software and financial statements including Balance Sheet during the detailed audit of 15 to 20 days being conducted by them. Even after such cooperation, the allegation of suppression has been leveled against them. Thus, the allegation of suppression is not viable. When there is no suppression of facts or willful misstatement, penalty under section 78 cannot be imposed. It has been held in various cases that when the facts are already in the knowledge of the department, it cannot be said that there is any suppression for which penalty under section 78 is imposable. Thus, the impugned show cause notice proposing the penalty under section 78 (which is applicable only in case of willful suppression of facts) is not sustainable.
It is further submitted that a part of show cause notice is barred by the clause of limitation as it has been issued after expiry of normal period allowed to issue the show cause notice. It is submitted that the extended period is invokable only if there is some fraud, collusion, willful misstatement or suppression of facts, none of which is present here. They submit that for invoking the extended period, the fraud, collusion or willful misstatement should be there. It was held in the case of Rainbow Industries v/s. CCE [1994 (74) ELT 3 (SC)] that for invoking the extended period, two ingredients are essential – (i) Willful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This has also been held in the case of Chemphar Drug & Limits reported in (2002-TIOL-266-SC-CX). Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Where the assessees have been acting in the boundaries of law, the extended period cannot be invoked. Similar decision is given in the following cases:-
· PADMINI PRODUCTS vs. CCE[1989 (43) ELT 195 (Supreme Court)]
· LARSEN & TOUBRO LTD. Versus COMMISSIONER OF C. EX., PUNE-II [2007 (211) ELT 513(S.C.)]
In the above cases, it was held that mere inaction would not be a valid ground for invoking the extended period of limitation. There should be deliberate withholding of information with an intent to evade payment of duty without which extended period is not invokable. In the instant case also, they have been regular in paying the service tax and filing the returns prescribed under service tax law. Further, all the information as and when required, was also duly provided. Thus, it has not been proved that there was any suppression of facts or intention to evade payment of service tax. Without proving the same, the extended period is not invokable and the impugned show cause notice is not viable and is liable to be quashed.
Further, while giving the written submissions, they submit thatit has been alleged in the show cause notice that they have not paid service tax on the charges collected from the respective buyers of bungalow/villa/plot as society charges under the category of “Club or Association Service” and also have not paid service tax under proper category in respect of charges collected from the respective buyers on account of Internal Electrification & substation charges and internal water system development charges. It is alleged that these charges are liable for service tax under the category of “Preferential Location or External or Internal Development of Complex” on full value while they have paid service tax under Construction services after availing the abatement. They submit that the allegations leveled in the impugned show cause notice are erroneous and the same is liable to be quashed.
They submit that the demand of service tax has been raised against them under the category of “Club or Association Service” for the charges collected from the buyers on the contention that the activity is similar to rendering service to the members of the society. In this respect, they reiterate that no service is provided by them to the buyers of the bungalows in lieu of charges collected and the charges are only “deposit” that will be transferred to the respective Welfare Housing Society of the project. However, even if it is accepted for the sake of argument only that the service tax demand under the category of club services has been rightly raised, they submit that the same is still not tenable as the High Court of Gujarat in the case of Sports Club of Gujarat Ltd. Vs UOI [2013-TIOL-528-HC-AHM-ST] has held that levy of service tax on the services provided by club to its members is ultra virus. In light of the above cited decision, it is submitted that when the levy of service tax on the services provided by club to its members is itself under doubt, the confirmation of service tax demand under this category is not tenable and should be quashed.
They further submit that they also wish to place reliance on some of the recent judicial pronouncements wherein it has been held that when assessee has collected charges merely in the capacity of executor, service tax is not leviable on such an activity prima facie. Some of such decisions are produced as follows:-
· GREEN VALLEY DEVELOPERS Vs COMMISSIONER OF SERVICE TAX, MUMBAI [2013-TIOL-1198-CESTAT-MUMBAI]:-
· OMEGA ASSOCIATES Vs COMMISSIONER OF SERVICE TAX, MUMBAI [2013-TIOL-1149-CESTAT-MUM]:-
· RAHEJA UNIVERSAL PVT. LTD. VS COMMISSIONER OF SERVICE TAX, MUMBAI-I [2013-TIOL-1357-CESTAT-MUM]:-
Similarly, they have also collected charges from the buyers in the capacity of pure agent. Accordingly, they have also not rendered any service and no service tax is leviable and the impugned show cause notice should be set aside.
Theysubmit that it has been contended by them in their reply that the society charges collected are kept as deposit that is ultimately transferred to the Welfare Housing Society formed for the respective projects later on. They submit that the said charges are being collected as pure agent which will be handed over to the society on its formation. They further submit that such amount is being kept as deposit in their books of accounts and it will be handed over to the society when it will be formed. This fact is affirmed by the society charges ledger accounts maintained by them wherein it is found that these charges have closing balances which is carried forward to the Balance sheet in liability side. They further submit that if any amount is appropriated as an income, it is closed down by taking the balance to Profit and Loss Account. On the other hand, if the balance of any account is carried forward, it is either an asset or a liability. Since the account of society fund is carried forward with credit balance, it is clear that this amount is not appropriated as income in their books of accounts. When there are no receipts from a taxable income, no service tax can be levied on the same, therefore the contention of impugned show cause notice is not tenable and is liable to be set aside.
Reasoning adopted by the adjudicating authority: -
The learned Additional Commissioner observed that the issue to be decided is whether the consideration received by the assessee on account of society charges during the period covered under the impugned show cause notice is chargeable to service tax under the category of ‘Club or Association’ as defined under clause (25a) of section 65 of the Finance Act, 1994 or not and whether the consideration received by the assessee on account of internal electrification and sub-station charges and internal water system development charges during the period covered under the show cause notice is chargeable to service tax under the category of “Provision of Preferential Location or External or Internal Development of Complex” as defined under dub clause (zzzu) of clause (105) of section 65 of the Finance Act, 1994 or not.
The Additional Commissioner held that it is apparent that the assessee is engaged in the construction of bungalow/villa/plot and collected/charged certain amount from respective buyers of these bungalow/villa/plot as society charges and the amount so received are kept as deposit till the formation of society and on the formation of the society the same will he handed over to the society but the assessee had not paid service tax thereon. From the definition of “club or association and the activity undertaken by the assessee it is found that the consideration received by any club or association for providing services to its members is liable for service tax. Further, they also find that the circular letter DOF No.334/1/2010-TRU dated 26.02.2010 stipulated that any service provided by Resident Welfare Associations or Cooperative Group Housing Societies consisting of residents/owners as their members would not be taxable under this service. They observed that the services provided by the Resident Welfare Associations or Cooperative Group Housing Societies consisting of residents/owners as their members is not liable for service tax and the service tax is not recoverable on the consideration received on that account and in the instant case, it was found that the assessee is collecting certain amount from respective buyers of their bungalow/villa/plot as society charges and the amount so received are kept as deposit in their books of accounts as well as in their Balance Sheets of the period covered under the impugned s how cause notice in the liability side which shows that these charges are treated as amount due to other persons (i.e. society) as such this amount is not appropriated as income in their books of accounts till the formation of society and the same will be handed over to the society on the formation of the society. Since the service tax is not recoverable on the consideration received by any Society consisting of residents/owners as their members as per the provisions of circular letter DOF No.334/1/2010-TRU dated 26.02.2010, thus, they are of the view that the service tax is not recoverable on the amount collected from the respective buyers of the bungalow/villa/plot of the assessee as society charges in terms of the provisions of circular letter DOF No.334/1/2010-TRU dated 26.02.2010.
They also find that the show cause notice has also demanded the service tax on the differential consideration of Rs. 28,81,250/- realized on account of internal electrification & substation charges and internal water system development charges during the period covered under the impugned show cause notice. From the definition of “preferential location or external or internal development of complex” and the provisions or the circular letter DOF No.334/1/2010-TRU dated 26.02.2010 as well as the activity undertaken by the assessee, they find that the consideration received by the builder from the buyer of the property for providing services in terms of category enumerated in the said circular is liable for service tax and in the instant case, they find that the assessee is collecting the certain amount from respective buyers of their bungalow/villa/plot on account of internal electrification & substation charges and internal water system development charges during the period covered under the impugned show cause notice and paid service tax by clubbing the same with the consideration received on account of bungalow/villa/plot and paid service tax after availing abatement but the assessee was required to pay service tax on the whole amount collected on account of internal electrification & substation charges and internal water system development charges which is clearly covered by the impugned circular letter DOF No.334/1/2010-TRU dated 26.02.2010 read with the definition of "preferential location or development of complex” defined in sub clause (zzzzu) of clause (105) of Section 65 of the Finance Act, 1994 and, thus, they are of the view that the service tax is recoverable on the differential amount collected from the respective buyers of the bungalow/villa/plot of the assessee on account of internal electrification & substation charges and internal water system development charges in terms of the provisions of circular letter DOF No. 334/1/2010- TRU dated 26.02.2010 read with the definition of “preferential location or external or internal development of complex” defined in sub clause (zzzzu) of clause (105) of Section 65 of the Finance Act, 1994.
Furthermore, it was also held that the demand vide impugned notice has been raised by invoking extended period of limitation as provided under proviso to Section 73(1) of the Finance Act, 1994. They find that the aforesaid demand have been raised during the audit of the records of the assessee by the department and the assessee had not provided any information at any point of time on their own and the department got the details only during the audit of the records of the assessee during the visit so the contention of the assessee is not tenable. Further, they find that there has been a deliberate act on the part of the assessee to suppress the information in as much as they neither provided details in any form during the said period nor paid service tax. Suppression means failure to disclose full information with the intent to evade payment of duty as held by Hon'ble Supreme Court in the case of Continental Foundation Jt. Venture Vs. CCE, Chandigarh-I [2007(216)ELT 177 S.C.]. Similar view has been taken by Hon’ble CESTAT in the case of Chemfab Alkalis Ltd. V/s. CCE Pondichery [2010(251) ELT 264 Tri-Chennai]. From the principle laid down by the Apex court as well as CESTAT in the above judgments it follows that in case where non-payment of duty/tax is intentional i.e. intent to evade payment of tax by adopting any means as indicated in proviso to Section 73 of Finance Act, 1994 (or 11 A of Central Excise Act, 1944) i.e. suppression, fraud, collusion, willful misstatement or contravention of any of the provision of the law with intent to evade is present, therefore, extended period is invokable. They find that it has been established from the foregoing discussion that the assessee had evaded the payment of service tax willfully by suppressing the material facts from the department; therefore, the clause of extended period of limitation has been rightly invoiced. They also find that the show cause notice has also proposed the penal provisions under Section 76, 77 and 78 of the Finance Act, 1994. The assessee had contested the penal provisions by averting that the department has not been able to establish any mens rea in the instant case. They do not find force in the averments of the assessee and observe that since the assessee had not provided any information at any point of time on their own and the department got the details only during the audit of the records of the assessee, hence, they are liable for penal action under section 77 and 78 of the Finance Act, 1994 but they do not impose any penalty under section 76 of the Finance Act, 1994 as the penal provisions under section 76 of the Finance Act, 1994 cannot he invoked along with the penal provisions under section 78 of the Finance Act, 1994 since 10-05-2008. Accordingly, they confirm the demand of Service Tax amounting to Rs. 2,96,777/- (inclusive of cesses) along with interest out of total demand of Rs. 8,30,989/- (inclusive of cesses) against the assessee and drop the remaining demand of Rs. 5,34,212/- (inclusive of cesses). Further, they imposed penalty of Rs. 10,000/- upon the assessee under Section 77 of the Finance Act, 1994 and penalty of Rs. 2,96,777/- on the assessee under Section 78 of the Finance Act, 1994.
Decision:Demand partly confirmed.
Conclusion:The analogy that is drawn from this case is that as according to DOF Circular no. 334/1/2010-TRU dated 26.02.2010, any service provided by Resident Welfare Associations or Cooperative Group Housing Societies to residents/owners as their members is not leviable to service tax, the development charges/society charges collected by the assessee that would be transferred to the Welfare Housing Society of the respective project would not be leviable to service tax under “Club or Association Service”. However, the charges of internal electrification and water system development were held to be liable to service tax under the category of “Preferential Location Services” and consequently the demand was confirmed in respect of the same. Charges for internal electrification and water system development are prone to litigation as regards their classification as they being the integral part of the construction of complex service would be more appropriately classifiable under the Construction service rather than Preferential service.
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