Custom, Excise & Service Tax Tribunal
Adani Estate Management Private ... vs Ahmedabad-I on 26 November, 2024
Customs, Excise & Service Tax Appellate Tribunal
West Zonal Bench At Ahmedabad
REGIONAL BENCH- COURT NO. 3
SERVICE TAX APPEAL NO. 10335 of 2022-DB
(Arising out of OIO-AHM-EXCUS-001-COM-020-21-22 Dated 22/03/2022 passed by Commissioner
of Central Excise, Customs and Service Tax-AHMEDABAD-I)
ADANI ESTATE MANAGEMENT PRIVATE LIMITED ........Appellant
EARLIER KNOWN AS SHANTIGRAM ESTATE MANAGEMENT PRIVATE LIMITED
ADANI HOUSE NEAR MITHAKHALI CIRCLE NAVRANGPURA
AHMEDABAD, GUJARAT
VERSUS
Commissioner of C.E.-AHMEDABAD-I ........Respondent
C. EX BHAVAN, NR PANJRAPOLE & POLYTECHNIC, AMBAVADI, AHMEDABAD,GUJARAT-380015 APPEARANCE:
Shri Rahul Patel, Chartered Accountant appeared for the Appellant Shri Rajesh Nathan, Assistant Commissioner(AR) appeared for the Respondent CORAM: HON'BLE MR. RAMESH NAIR, MEMBER (JUDICIAL) HON'BLE MR. RAJU, MEMBER (TECHNICAL) FINAL ORDER NO. 12840/2024 DATE OF HEARING:19.11.2024 DATE OF DECISION: 26.11.2024 RAMESH NAIR The present appeal is filed by M/s Adani Estate Management Private Limited (formerly known as Shantigram Estate Management Private Limited ) against the Order-in-Original No. AHM-EXCUS-001-COM-020-21-22 dtd. 22- 03-2022.
1.1 The brief facts of the case are that the appellant was engaged in development and construction of real estate projects and duly registered with the Service Tax department and discharging its obligations from time to time.
Records of the appellant were being subjected to Service Tax Audit by department from time to time. During the audit of the records for the period 2015-16 to 2017-18 ( upto June, 2017 ) by the departmental officers, certain objections were raised with respect to the project of "The North Park". The appellant has undertaken development and construction of "The North Park"
a scheme of residential bunglow. Arrangement with the buyers of the unit in the scheme comprised three distinct and discernible transactions (i) sale of land (ii) construction of framework and (iii) construction of balance work i.e.
2 ST/10335/2022-DB finishing works. Prices for each of the transactions were separately identified and agreed upon by the appellant with the buyer.
1.2 The appellant has classified construction of framework and construction of balance work as 'works contract services' under clause (h) of section 66E of the Act and determined the value at the rate of 40% as per rule 2A of the Service Tax (Determination of Value) Rules, 2006. Whereas sale of land was not subjected to service tax considering them as non-taxable activity. Value of two transactions namely (i) sale of land and (ii) construction of framework were separately determined and reduced in writing in agreement to sale entered into by the appellant with the buyer. Whereas the value of third transaction i.e. construction of balance works were not included in the agreement to sale.
1.3 Department raised objections as regards classification and valuation during the course of audit and consequently issued the show cause notice. It was alleged in the show cause notice that the appellant had adopted both the clauses of rule 2A for determination of value of works contract services insofar as first two transactions were concerned (i) sale of land (ii) construction of framework. It was also alleged that the activities carried out by the appellant was not covered under the ambit of works contract services and the proper category of services would be 'Construction of Residential Complex' as declared in clause (b) of section 66E of the Finance Act, 1994. Accordingly, the values of sale of land and construction of framework were clubbed and abatement of 70% was deducted in order to arrive at the value of taxable services. With respect to third transaction i.e. construction of balance works, revenue had accepted the classification as works contract services but re- determined the value of by resorting to the rate of 70% provided in rule 2A for finishing services instead of 40% claimed by the appellant as original works. Another issue was raised in the case relating to liability of service tax on the amount retained by the appellant upon cancellation of the booking by the buyer on which tax was paid earlier as part of works contract services.
2. Shri Rahul Patel, ld. Chartered accountant appearing on behalf of the appellant vehemently pressed the issues of classification, valuation and other grounds taken in the appeal memorandum and also presented the paper book and a separate compilation comprising synopsis, written submission and case laws in support.
3 ST/10335/2022-DB 2.1 He submits that the issue of classification of the construction of bungalows is no longer res integra following the Supreme Court's decision in Larsen & Toubro Ltd. v. State of Karnataka (2014) 34 STR 481, which affirmed the judgment in K. Raheja Development Corporation v. State of Karnataka (2005) 5 SCC 162. He emphasizes the relevance of the concept of "works contract" in the service tax regime, providing a historical overview of its taxation, commencing with the 46th Amendment to the Constitution of India, which introduced Article 366(29A). He further elaborates on the applicability of the Supreme Court's decision in Larsen & Toubro (supra). It is submitted that the concept of a "works contract" under Section 65B(44) of the Finance Act, 1994, is derived from Article 366(29A). Consequently, any activity qualifying as a "works contract" under Article 366(29A) would also be treated as a "works contract" for the purposes of service tax. Accordingly, the service portion involved in the execution of a works contract is deemed to be a "service" as defined under Section 65B(44) read with Section 66E(h) of the Finance Act, 1994. Since the Apex Court has unequivocally held that building contracts, i.e., the construction of residential or commercial units, constitute "works contracts" taxable under the respective VAT laws in terms of Article 366(29A), they must also be treated as "works contracts" for the purpose of service tax. Therefore, the decision of the Supreme Court squarely applies to the facts of the present case, particularly concerning transactions involving the construction framework and remaining works.
2.2 He refers to the provisions of Section 129 of the Finance Act, 2017, which retrospectively amended Rule 2A of the Service Tax (Determination of Value) Rules, 2006. This amendment introduced an additional option for determining the value of works contract services where the value of land is inseparably included. He explains that such a retrospective amendment was necessary to ensure parity in effective taxation between clause (b) and clause
(h) and reflects the government's acknowledgment of the classification of building contracts as works contracts, as affirmed by the decision of the Apex Court. He emphatically submits that the retrospective amendment in 2017, introduced when GST was on the verge of implementation, specifically addressing the deemed valuation of works contract services, unequivocally supports the classification of building contracts under works contract services.
2.3 He further explains that the classification adopted by the appellant with respect to construction of framework and construction of balance works under clause (h) of section 66E of the Act was thus correct and according to the legal 4 ST/10335/2022-DB framework and therefore the same cannot be challenged to be incorrect or unlawful. He further explains that the question of re-valuation for inclusion of land in the value of taxable services classifiable under clause (b) of section 66E has become infructuous when the services are classifiable under clause
(h) of section 66E. However, he explains that the value of land is clearly identified and indicated in the agreement to sale, which is relied upon by the revenue in the impugned Order and thus the measure of tax with respect to works contract service has become divisible insofar as value of land is concerned and consequently the land value is not includable in the value of works contract. He further explains that the concept of works contract, as it transpires from article 366(29A) as well as the definition given in section 65B(44) covers two elements as integral part of it i.e. goods and services. Land is neither goods nor services as per their respective meanings and accordingly the land which is a third element which does not find place within the meaning of works contract. Though the land can be additionally sold along with the works contract and be supplied indivisibly, land cannot be construed to be integral part of what is known as works contract. Thus, the land cannot be deemed as integral part of works contract.
2.4 He further elaborates, referring to the definition of "service" under Section 65B(44) and the declared services under Section 66E(h) of the Finance Act, 1994, that the subject matter of taxation is restricted to the "service portion involved in the execution of a works contract." Consequently, it cannot encompass land, which is neither goods nor services, within its ambit. He explains that service tax is a levy under Entry 97 of the Union List in the Seventh Schedule to the Constitution of India, and the scope of this levy is limited to subjects that do not fall within the jurisdiction of the State List. He further clarifies that "goods" fall under the jurisdiction of the State by virtue of Entry 54 of the State List, and "land" falls under the jurisdiction of the State by virtue of Entry 49 of the State List. Accordingly, service tax cannot be levied on goods or land, nor can it be construed to include them within its scope. To align with the constitutional framework, the provisions of Section 66E(h) have been specifically designed to limit their scope to the service portion involved in the execution of works contracts, which excludes land. Therefore, in the case of divisible contracts where the value of land is explicitly identified and agreed upon in the agreement with the buyer, such value cannot be included in the taxable value of services rendered by way of a works contract.
5 ST/10335/2022-DB 2.5 He further submits with respect to the issue of valuation of balance works, by pointing out that the revenue has failed to establish the specific nature, scope and extent of the activities those were undertaken by the appellant under balance works which may be regarded as other than original works, that could attract rate of 70%. He explains that the appellant undertook the construction of villas, excluding the activity related to the sale of land, as single arrangement. The construction of the framework and the execution of the balance works collectively culminated in the construction of a villa. Therefore, any artificial separation of these activities for the purpose of taxation is contrary to the law and the principles laid down by the Supreme Court. He refutes the allegation in the impugned order that the consideration received for the balance works was not related to the construction of the villa.
2.6 He further explains, with a clear reading of Rule 2A, that the construction activities undertaken by the appellant under the head of balance works should be classified under Rule 2A(ii)(A) rather than Rule 2A(ii)(B), as these works were in the nature of original works. He submits that the classification and valuation carried out by the appellant are, therefore, correct.
2.7 He submits, with respect to the demand of service tax on cancellation charges, that the provisions of clause (e) of Section 66E are inapplicable to the facts of the case. He clarifies that the demand pertains to the retention amount withheld by the appellant from the payments previously received from the buyer in connection with construction services. Upon cancellation of the booking, the appellant refunded the entire amount to the buyer, except for the retention amount retained as cancellation charges. He contends that this retention does not constitute a new activity falling within the scope of clause
(e). He further submits that the amounts from which the cancellation charges were retained had already been subjected to taxation at the relevant time as works contract services. Consequently, such amounts cannot be taxed again upon the cancellation of the booking.
2.8 He also relies upon the written submission furnished along with the synopsis, wherein additional grounds and arguments were presented in support of the pleadings. Validity of the show cause notice on the grounds of limitation as well as under Rule 4 of the Service Tax (Determination of Value) Rules, 2006 has been challenged forcefully. It is submitted that the appellant's records were subjected to periodic audits, and as evidence, he has furnished a copy of the final audit report for the period up to 2014-15, which raised no 6 ST/10335/2022-DB such objections. The demand involved in the impugned order pertains to the period 2015-16 to June 2017. It is also submitted that the issue of classification between clause (h) and clause (b) is highly contentious in nature and has been a subject of legal interpretation, with disputes escalating up to the Apex Court. Therefore, the invocation of an extended period of limitation while issuing the show cause notice is incorrect.
2.9 It is also submitted that the demand arises from the issue of valuation, which necessitates prior determination as per the procedures prescribed under Rule 4 of the Service Tax (Determination of Value) Rules, 2006. He highlights, by referring to the copy of the show cause notice and the impugned order, that the revenue failed to follow the procedure laid down in Rule 4. Consequently, they lacked the jurisdiction to issue a show cause notice under Section 73, rendering the show cause notice bad in law.
3. Shri Rajesh Nathan, Ld. Assistant Commissioner(AR) on behalf of the revenue, reiterates the findings of the impugned order.
4. We have carefully considered the oral submissions made by both the sides and perused the records, including the written synopsis, written submissions and paper book furnished by the appellant. We have also carefully perused the facts presented in the impugned order and show cause notice and averments made by the revenue therein. We find from the records, facts and averments made by both the sides that the construction activities, other than sale of land, undertaken by the appellant by way of construction of frameworks and constructions of balance works, were involving transfer of property in goods by the appellant and thus constituted indivisible arrangement insofar as goods and services by way of construction of building concerned. We find that the revenue has not disputed that the appellant has used own goods while carrying out the construction activities. We also find that another aspect of the construction of villa, which relates to construction of balance works, was classified as works contract services and accepted by the revenue in impugned order. We also find that the appellant has vehemently pressed that the construction of balance works in indispensable part for construction of villa and which submission has not been controverted by the revenue with plausible explanations or contemporary evidences. We also find that the revenue has not disputed that the activity of constructing framework was indivisible in nature with respect to goods and services and value of goods was not separately measured by the appellant. We also find 7 ST/10335/2022-DB that the revenue has not disputed another important aspect that the appellant has subjected the construction activities to VAT under respective statute. We also find that the case before us is involving taxability, classification and valuation and the burden of proof to frame the allegations and substantiation thereof lied on the revenue according to the principle of qui incumbit probatio qui decit non qui negat and thus we shall accordingly examine the issues in light of the facts remained uncontroverted by the revenue.
4.1 In view of above, we evaluate the issue on hand. Adjudicating authority has found by referring to the definition of 'works contract' given in section 65B(44) that there are four elements of a works contract out of which element named as (d) in para 51.2 i.e. "The contract should be for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property." is not fulfilled in the agreement executed by the appellant. Adjudicating Authority also contended that there is no mention of the appellant agreeing to construct villa on behalf of the buyer and thus the agreement was to sale of villa solely and not for the purpose of carrying construction and thus the transaction cannot be classified as works contract. We find that the adjudicating authority has deemed the transaction as that of sale of villa instead of construction whereas the adjudicating authority has classified the transaction under clause (b) which deemed "construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority". Needless to elaborate that the very applicability of clause (b) would also require services by way of construction of a complex or building and sale thereof before completion of construction, which apparently and unequivocally transpires from the plain language of clause (b). If the transaction, according to the adjudicating authority, is limited to that of sale of villa and not involving agreement to construct the same, the same cannot fall within the scope of clause (b) whereas the adjudicating authority has classified the transaction under clause (b). Thus, we find that the arguments and averments made by adjudicating authority in the impugned order to declassify the transactions under works contract and to classify them under the construction services are self-contradictory as well as preposterous.
8 ST/10335/2022-DB 4.2 We find that the definition of "works contract" provided under section 65B(54), is in pari materia with the concept articulated under article 366(29A). The notion of "works contract" under VAT laws and service tax laws represents two facets of the same coin. Therefore, it is impermissible to deviate from the guidelines laid down by Supreme Court in case of Larsen & Toubro v. State of Karnataka. Relevant para of the decision of Apex Court are as follows :
"114. In Article 366(29A)(b), the term 'works contract' covers all genre of works contract and it is not limited to one specie of the contract. In Raheja Development (supra), the definition of "works contract" in KST Act was under
consideration. That definition of "works contract" is inclusive and refers to building contracts and diverse construction activities for monetary consideration viz.; for cash, deferred payment or other valuable consideration as works contract. Having regard to the factual position, inter alia, Raheja Development (supra) entered into development agreements with the owners of the land and it also entered into agreements for sale with the flat purchasers, the consideration being payment in installments and also the clauses of the agreement the Court held that developer had undertaken to build for the flat purchaser and so long as there was no termination of the contract, the construction is for and on behalf of the purchaser and it remains a "works contract". The legal position summarized by us and the foregoing discussion would justify the view taken by the two-Judge Bench in Raheja Development (supra)."
4.3 In view of the above judgement of Apex court, it is abundantly clear that the sale of a building prior to completion of construction constitutes a works contract and the issue is no more res integra and thus contention made by adjudicating authority in impugned order to draw distinction between sale of villa prior to completion of construction and agreeing to construction activity is unacceptable and contrary to settled position of law. We also find force / merit in the argument placed by Shri Rahul Patel that amendment in rule 2A retrospectively by way of section 129 of Finance Act, 2017 shows the clear intention of the government to align the valuation machinery with the law settled by the Supreme Court. Thus, we do not find force / merit in the arguments and averments made by adjudicating authority in the impugned order and find that the classification adopted by the appellant under clause
(h) is correct and lawful.
9 ST/10335/2022-DB 4.4 Another issue which requires due consideration is valuation, wherein the value of land has been included in the value of construction services by the revenue. From the impugned order and the show cause notice, we observe that the value of land was included in the value of construction services, and the taxable value was determined in terms of Sl. No. 12 of Notification No. 26/2012-ST dated 20.06.2012, which pertains to the valuation of construction services classifiable under clause (b) of Section 66E of the Act. Since we have found that the classification of works contract under clause (h) is correct and accordingly the value was to be determined as per rule 2A of Service Tax (Determination of Value) Rules, 2006 which is correctly determined by the appellant, valuation determined by revenue in terms of Notification No. 26/2012-ST has become infructuous in nature and thus liable to be dismissed. Since there is no contention in the impugned order or allegation in the show cause notice to re-determine the value of works contract services under rule 2A to include the value of land, value determined by the appellant under rule 2A shall be accepted as final. However, we find that the appellant has raised various grounds and substantiated with the help of logical interpretation that the value of land cannot be included in the value of works contract under rule 2A. We find strong force in the arguments placed by Shri Rahul Patel that the subject matter of service tax is the service portion involved in execution of a works contract which transpires from the language of section 66E(h). We also find force in the clarity brought on record by him that the service tax cannot be extended to the value of land which is not a necessary an integral element of works contract like goods. Since the land is subject matter of State levy, same cannot be deemed as part of the service so defined in section 65B(44) of the Act. Thus, it is necessarily transpiring that the works contract is comprised of only two elements i.e. 'goods' and 'service' and does not include 'land' as integral part of it. However, this may not have any restriction to combine the works contract along with land under commercial arrangement and if that has been done the arrangement needs to be vivisected so as to separate the works contract from the land. It is a settled position of law that where the tax is imposed on the subject matter the measure for levying such a tax can only be the value of such subject matter. Supreme Court has in case of Commissioner, Central Excise & Customs versus M/s Larsen & Toubro Ltd. And Others referred to the principle elucidated in case of Gannon Dunkerley - (1993) 1 SCC 364 that the measure for levying sale tax / vat shall be the value of goods only and not the works contract. Relevant paras are as follows:
10 ST/10335/2022-DB "15. A reading of this judgment, on which counsel for the assessees heavily relied, would go to show that the separation of the value of goods contained in the execution of a works contract will have to be determined by working from the value of the entire works contract and deducting therefrom charges towards labour and services. Such deductions are stated by the Constitution Bench to be eight in number. What is important in particular is the deductions which are to be made under sub-paras (f), (g) and (h). Under each of these paras ,a bifurcation has to be made by the charging Section itself so that the cost of establishment of the contractor is bifurcated into what is relatable to supply of labour and services. Similarly, all other expenses have also to be bifurcated insofar as they are relatable to supply of labour and services, and the same goes for the profit that is earned by the contractor. These deductions are ordinarily to be made from the contractor's accounts. However, if it is found that contractors have not maintained proper accounts, or their accounts are found to be not worthy of credence, it is left to the legislature to prescribe a formula on the basis of a fixed percentage of the value of the entire works contract as relatable to the labour and service element of it. This judgment, therefore, clearly and unmistakably holds that unless the splitting of an indivisible works contract is done taking into account the eight heads of deduction, the charge to tax that would be made would otherwise contain, apart from other things, the entire cost of establishment, other expenses, and profit earned by the contractor and would transgress into forbidden territory namely into such portion of such cost, expenses and profit as would be attributable in the works contract to the transfer of property in goods in such contract. This being the case, we feel that the learned counsel for the assessees are on firm ground when they state that the service tax charging section itself must lay down with specificity that the levy of service tax can only be on works contracts, and the measure of tax can only be on that portion of works contracts which contain a service element which is to be derived from the gross amount charged for the works contract less the value of property in goods transferred in the execution of the works contract. This not having been done by the Finance Act, 1994, it is clear that any charge to tax under the five heads in Section 65(105) noticed above would only be of service contracts simpliciter and not composite indivisible works contracts."
4.5 Though the works contract is a different and distinct specie of contracts and distinct from a contract for service simplicitor, measure of tax is considered divisible so as to ensure that the tax is imposed only on that value which attributes to the powers available with respective tax authority. The Supreme Court has categorically held that the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be stuck down. This necessitates a complete segregation of the elements involved 11 ST/10335/2022-DB in the works contract to ensure compliance with constitutional mandates.
Relevant para of the judgement is as follows :
"16. At this stage, it is important to note the scheme of taxation under our Constitution. In the lists contained in the 7th Schedule to the Constitution, taxation entries are to be found only in lists I and II. This is for the reason that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There is no concurrent power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be struck down. In the present case, the dichotomyis between sales tax leviable by the States and service tax leviable by the Centre. When it comes to composite indivisible works contracts, such contracts can be taxed by Parliament as well as State legislatures. Parliament can only tax the service element contained in these contracts, and the States can only tax the transfer of property in goods element contained in these contracts. Thus, it becomes very important to segregate the two elements completely for if some element of transfer of property in goods remains when a service tax is levied, the said levy would be found to be constitutionally infirm. This position is well reflected in Bharat Sanchar Nigam Limited v. Union of India, (2006) 3 SCC 1, as follows:-
"No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. As was said in Larsen & Toubro v. Union of India[(1993) 1 SCC 364] : (SCC p. 395, para 47) :- "The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods."
For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service. As was held by us in Gujarat Ambuja Cements Ltd. v. Union of India [(2005)4 SCC 214] , SCC at p. 228, para 23:-
"This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading 12 ST/10335/2022-DB of the entry does not cover. If in substance, the statute is not referable to a field given to the State, the court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field." (at paras 88 and
89)"
4.6 Following the above principles of law and reading the language employed in section 65B(44) with respect to definition of 'service', section 65B(54) with respect to 'works contract', section 66E(h), we find that the land is required not to be clubbed with the works contract since the land is neither the subject matter of service tax nor it is integral part of a works contract. Thus any reference to the measure of taxable event shall be on the basis of measure of works contract by excluding the actual value of goods involved or be on the basis of measured as per fictional machinery provided in rule 2A(ii), however measure of levy cannot solely depend upon the measure of a bundle comprising works contract and land. We also find that the value of land is identified in the agreement and clearly discernible therefrom and therefore the measure shall be construed as divisible in nature. We also find that the appellant had vehemently argued before the adjudicating authority that the value of land agreed upon by the parties in the agreement had not been challenged or disputed by revenue in the show cause notice. Thus, it is not a case of revenue leading to overvaluation of land by the appellant. Accordingly, we hold that the value agreed upon with the buyer with respect to land and indicated in the agreement shall be the value of land required to be separated from the works contract. Accordingly, we find force in the argument that the land value is not includable in the value of works contract irrespective of and regardless of the option exercised by the appellant for valuation of works contract services under rule 2A. Similar view has been taken by this tribunal in case of Commissioner Of CGST & Central Excise - CGST & Central Excise Ahmedabad Versus Shree Siddhi Infrabuild Pvt Ltd relevant para of which are as follows :
"4. We have carefully considered the submission made by both the sides and perused the records. We find that as regard merit of the case the issue is whether in case of 'works contract service' the value of land is includable or otherwise. To decide this issue, it is necessary to go through valuation provision as regard the works contract service. Hence, provision of Rule 2 A (i) is reproduced below:-
"[2A. Determination of value of service portion in the execution of a works contract.:
13 ST/10335/2022-DB Subject to the provisions of section 67, the value of service portion in the execution of a works contract, referred to in clause (h) of section 66E of the Act, shall be determined in the following manner, namely:-
(i) Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods, 3C[or in goods and land or undivided share of land, as the case may be] transferred in the execution of the said works contract.
Explanation.- For the purposes of this clause,-
(a) gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;
(b) value of works contract service shall include, -
(i) labour charges for execution of the works;
(ii) amount paid to a sub-contractor for labour and services;
(iii) charges for planning, designing and architect's fees;11/8/24, 5:15 PM 2024 (11)
(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
(v) cost of consumables such as water, electricity, fuel used in the execution of the works contract;
(vi) cost of establishment of the contractor relatable to supply of labour and services;
(vii) other similar expenses relatable to supply of labour and services; and
(viii) profit earned by the service provider relatable to supply of labour and services;
(c) Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause.
(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-
14 ST/10335/2022-DB (A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract;
3G[Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent. of the total amount charged for the works contract.]"
From the above Rule 2A(i), it is clear that for the purpose of value of service in the execution of works contract the gross value shall not include the value of land or undivided share of land. In view of this provision the value of land is not includible and service tax demand on this ground is not sustainable on merit."
In view of above, the classification made by the revenue in impugned order is rejected and the demand of service tax of Rs. 1,20,74,334/- is accordingly deleted.
4.7 Regarding the issue of re-determination of the value by the Revenue concerning the construction of balance works by treating them as finishing services under Rule 2A(ii)(B) instead of Rule 2A(ii)(A), as adopted by the appellant, we find that the controversy is confined to the classification under clause (A) or (B) of Rule 2A(ii) and does not pertain to the classification under Section 66E(b) or Section 66E(h). The Revenue has already accepted that the activities in question are works contract services classifiable under Section 66E(h). We also find that the revenue has not exactly identified and proved with the help of contemporaneous evidences as to what was meant by the finishing services covered by such transaction. It was merely alleged that the appellant had received the money in addition to the value determined in the agreement for construction of framework and accordingly the same were finishing services in nature. Arguments and averments made by the revenue in show cause notice as well as impugned order are found to be presumptive in nature and not supported by corroborative evidences admissible in eye of law. We also find from the facts and records that the revenue has not challenged that the additional money received by the appellant were in relation to other than Villa. We also find from para 15 of the written submission dated 22.02.2022 submitted to the adjudicating authority that the appellant had categorically explained the reasons for bifurcation of the amounts for construction of villa into - value for construction of framework and value for construction of balance works and for which no contrary evidences or plausible arguments have been made by adjudicating authority in the impugned order. In view of the same and from the facts available on records, we find that the transaction of constructing balance of works are in 15 ST/10335/2022-DB relation to construction of villa and which is classified as works contract. Construction of framework and construction of balance works collectively resulted into construction of villa which is a residential dwelling for the buyer. Thus, we find that the treatment available to the construction of framework shall be the treatment for construction of balance work. Since we have already decided that the construction of framework is works contract and the appellant has classified them as original works under rule 2A(ii)(A), construction of balance works deserves classification under same machinery and not under the rule 2A(ii)(B).
4.8 In addition to foregoing, we also find that the construction of balance works merits classification under rule 2A(ii)(A) as per its plain language. Rule 2(A)(ii) reads as follows :
"(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-
(A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract;
Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent. of the total amount charged for the works contract.
(B) in case of works contract, not covered under sub-clause (A), including works contract entered into for,
(i) maintenance or repair or reconditioning or restoration or servicing of any goods; or
(ii) maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, service tax shall be payable on seventy per cent. of the total amount charged for the works contract"
Clause (A) determines the rate where works contracts are for original works which are defined in Explanation 1 as under :
"Explanation 1.- For the purposes of this rule,- (a) "original works" means-
(i) all new constructions;
(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
16 ST/10335/2022-DB
(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre- fabricated or otherwise;
(b) "total amount" means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-
(i) the amount charged for such goods or services, if any; and
(ii) the value added tax or sales tax, if any, levied thereon:
Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles."
"Original works," as defined above, encompasses all new constructions, additions to existing structures, and the erection, commissioning, and installation of plant and machinery. Therefore, all new constructions fall within the scope of "original works" for the purposes of Rule 2A. In the appellant's case, all activities--whether related to the framework or the balance works-- constitute new constructions, a fact that is not in dispute. As previously noted, the Revenue has failed to provide any evidence in the show cause notice to establish that the nature of the works undertaken by the appellant differs from those claimed. Consequently, it is necessary to accept these works as "original works" and classify them under Rule 2A(ii)(A). We also observe that clause (B) of Rule 2A(ii) expressly begins with the words, "in the case of works contract, not covered under sub-clause (A)," which implies that clause (B) applies exclusively to works that do not qualify under clause (A). Given that the construction of balance works, even if involving finishing services, qualifies as "original works," their valuation must be determined under clause (A) and not clause (B). Therefore, the contention of the Revenue in the show cause notice and the impugned order, which seeks to determine the value under Rule 2A(ii)(B), is incorrect. Accordingly, the demand for service tax amounting to Rs. 1,53,07,940/- based on the higher rate of valuation under clause (B) is unsustainable and is liable to be set aside.
4.9 Regarding the demand of service tax amounting to Rs. 3,29,637/- confirmed in relation to cancellation charges, we note that the Revenue contends the appellant claimed an abatement of 60% while determining the tax liability. However, from the facts of the case, it is evident that the cancellation charges represent the amounts retained by the appellant after refunding the balance to the buyer upon cancellation of the booking. The appellant asserts that these retained amounts were already subjected to 17 ST/10335/2022-DB service tax at the relevant time when initially received towards works contract services, and such tax was calculated at the rate of 40% as per Rule 2A. Despite this, the Revenue has treated the retained amounts as consideration for agreeing to an obligation, classifiable under clause (e) of Section 66E, and quantified the tax liability on the portion exceeding the value determined under works contract services at the rate of 40%. Since the Revenue itself, as evident from the facts stated in the show cause notice, has deducted the amounts on which service tax was paid under works contract services by the appellant, it follows logically that the amounts now subject to the impugned demand represent retentions from the payments originally received towards works contract services. Consequently, these amounts cannot simultaneously be treated as consideration for a new and distinct service provided by the appellant under clause (e) of Section 66E of the Act.
4.10 We also find that the cancellation charges, even if examined independently of their original classification as works contract services, do not attract service tax under clause (e) of Section 66E of the Finance Act, 1994. The issue of whether liquidated damages or compensation, even if quantified or stipulated in a written agreement, constitute consideration for the purposes of clause (e) has been conclusively settled by the judgment in South Eastern Coalfields Ltd. v. CCE - 2020 (12) TMI 912, which has attained finality. A similar view was taken by this Bench in Hariyana Ship Demolition Pvt. Ltd. v. CST - 2024 (11) TMI 404. Following these precedents, it must be held that cancellation charges, even if considered distinct from their prior taxation under works contract services, do not fall within the ambit of clause (e) of Section 66E of the Act. Accordingly, the demand for service tax on cancellation charges is unsustainable and is liable to be set aside.
4.11 We note from the grounds and submissions that the appellant has challenged the validity of the demand raised under the show cause notice on the ground that the procedure prescribed under Rule 4 of the Service Tax (Determination of Value) Rules, 2006, was not followed. From the impugned order, we observe that the adjudicating authority dismissed this ground as incongruous and untenable. The adjudicating authority contended, in para 55.6 of the impugned order, that the show cause notice did not challenge the value of services but addressed an alleged incorrect abatement. However, we find this reasoning to be both blatant and absurd. The central issue in the case pertains to the valuation of taxable services, as the appellant had determined the value under Rule 2A, which was subsequently challenged by the Revenue 18 ST/10335/2022-DB on the grounds of both classification and the rate of deduction applied. Thus, the contention of the adjudicating authority is entirely baseless and does not warrant further consideration.
4.12 Regarding the appellant's challenge, we find substantial merit in the argument that the show cause notice was issued without adhering to the procedure prescribed under Rule 4, which mandates that the central excise officer issue a notice to justify revisiting the value specified. The show cause notice, as evident from the records, fails to demonstrate compliance with this procedural requirement. However, given that the demands raised in the impugned order have already been found unsustainable on substantive grounds, we do not find it necessary to delve further into this procedural aspect.
4.13 Regarding the limitation for issuance of the show cause notice as challenged by the appellant, we note that the period covered by the notice is 2015-16 to June 2017, while the show cause notice was issued on 22-12- 2020. Additionally, we find that the ST-3 return for the period ending June 2017 was filed on 27-09-2017. Thus, the entire demand is raised under the extended period of limitation. The Revenue has invoked the extended period on the grounds of alleged suppression of facts by the appellant. In this context, we find merit in the arguments presented by Shri Rahul Patel. The appellant's records were subjected to a service tax audit, and the final audit report for the period up to 2014-15, which has been placed on record, shows that no issues of the present nature were raised during the audit. Furthermore, the appellant has clearly disclosed the amounts in Form ST-3 under the category of works contract services. These facts unequivocally demonstrate that the Revenue was aware of the appellant's business activities and the classification adopted. We also note that the issue involved in this case is highly contentious in nature and has previously been the subject of judicial scrutiny. Given these circumstances, it would be inappropriate to attribute serious allegations of suppression of facts or an intent to evade payment of tax to the appellant. In this regard, we rely on the decisions of the Hon'ble Supreme Court in Pahwa Chemicals P Ltd. v. CCE - 2005 (9) TMI 92 and Continental Foundation Joint Venture v. CCE - 2007 (8) TMI 11, which have consistently held that when all material facts are disclosed and the issue involves a bona fide interpretation of law, the extended period cannot be invoked. These decisions have been consistently followed by this Tribunal in a 19 ST/10335/2022-DB series of cases. Accordingly, we hold that the invocation of the extended period of limitation is unsustainable.
5. In view of above, the impugned order and the demands arising from the impugned order are legally as well as factually incorrect and unsustainable and hence set aside. The appeal is thus allowed with consequential relief as per law.
(Pronounced in the open court on 26.11.2024) (RAMESH NAIR) MEMBER (JUDICIAL) (RAJU) MEMBER (TECHNICAL) Bharvi