Service Tax - Construction of complex service -The Appellants argue that there is no relationship of service provider and service recipient between the Developer and the Land Owner. According to them it is a relationship in a joint venture for profit. Both the parties have joined together in the business of construction of complex and the land owner brings in the capital by way of his land. The Developer by way of his capital and services and they jointly construct the complex and use or sell the flats for profit. He argues that CBEC had clarified the position that no service arises in such context. This clarification dated 29-01-09 is examined later in this order.
On the contrary we find that the Joint Development agreement does not indicate any terms on the above lines. The parties were neither taking risks jointly or doing any common activity. There was no participation by the land Owners in organizing or carrying out the activity. The Joint Development Agreement as one in which the land owner transfers part of his rights in the land and gets the value of such rights transferred, in the form of constructed flats which consist of value of material used and services rendered by the Developer. After the Land Owner transfers a part of his rights through the agreement, his share of UDS is registered in his name and he is like any other prospective buyer for whom construction of complex is carried out under an agreement for construction of flats except that he has a guaranteed right to get his share of the number of flats constructed. We further examine the various issues raised in the light of this finding.
FULL TEXT OF THE JUDGMENT IS AS FOLLOWS:-
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
SOUTH ZONAL BENCH AT CHENNAI
(Arising out of Order-in-Original No.40/2010 dated 13.09.2010
passed by the Commissioner of Service Tax, Chennai)
Date of Decision: 03.05.2012
LCS CITY MAKERS PVT LTD
COMMISSIONER OF SERVICE TAX, CHENNAI
FINAL ORDER No. 507/2012
Per: Mathew John:
M/s.LCS Property Development (P) Ltd. (appellant herein) are engaged in construction of residential complexes. For this purpose, they used to enter into Joint Development Agreements with land owners, in terms of which they would undertake construction of residential flats/houses in the land owned by such land owners. As per the terms of the Joint Development Agreement, a portion of the constructed area, in the form of flats / houses, would be assigned in favor of the land owners and the remaining constructed area, in the form of flats/houses, would be sold by the appellant to various buyers. While selling the residential flats/houses belonging to the appellant, firstly the Undivided Share of the land (UDS) would be sold to the buyer and a construction agreement would also be entered into with the buyer, for construction of a flat/ house, in accordance with the agreed specifications. The constructed area in the form of flats/houses, allotted in favor of the land lord, would be dealt with by him according to his wish.
2. In this connection, the department conducted verification of the appellant’s liability for payment of service tax and a show cause notice dated 11.02.2008 was issued to the appellant, stating various grounds of short levy of service tax and proposing a service tax demand of Rs.83,98,962/- from the appellant, for the period 16.06.2005 to 31.03.2007 and also proposing imposition of penalties.
3. After due process of law, an Order-in-Original No.60/2008 dated 22.12.2008 has been passed by the Commissioner of Service Tax, confirming the above demand of service tax of Rs. 83,98,962/-, along with interest and imposing a penalty of Rs.84,00,000/- under Section 78 of the Act. An amount of Rs.58,45,507/- paid by the appellant was appropriated towards the above demand. Aggrieved by the said order-in-original, the appellant preferred an appeal before the Hon’ble Tribunal, which vide its Final Order No.1125/2009 dated 31.8.2009 remanded the matter for fresh adjudication observing as under:
“2. M/s.LCS City Makers Pvt. Limited are engaged in construction of residential premises. Shri G. Natarajan, Ld. Counsel appearing for the appellants states that the appellants had entered into Joint Development Agreement with land owners for undertaking construction of residential flats/houses. He states that the impugned order relates to three such Joint Development Agreements for three projects, namely TA Enclave, Himadri and Kamakotivilasam. The appellants are challenging the impugned order on various grounds. He also states that the appellants have also taken a new ground in respect of each of the three projects to the effect that the sale value of the land alone to the flat buyers should be considered as the value. Further, the appellants are also relying on the Board’s Circular No.108/02/2009-ST dated 29.1.2009 which was not before the adjudicating Commissioner who has passed the impugned order on 22.12.2008. In view of the new grounds taken and the later circular of the Board relied upon by the appellants, both sides agree that the matter can be remanded to the lower authority for fresh decision after taking into account the new ground taken by the appellants and the contents of the Board is Circular dated 29.1.2009.
3. Ld. JCDR Shri V.V. Hariharan appearing for the Revenue states that a similar matter has been remanded for fresh consideration by the Final Order No.805/2009 dated 14.5.09 in Appeal No.S/94/08.
4. Keeping in view the foregoing including the consent of both sides, we set aside the impugned order and remand the matter to the adjudicating Commissioner for fresh decision. All issues are kept open. The appellants shall be given a reasonable opportunity of being heard before passing a fresh order.”
4. In pursuance thereof, after due process of law, the Commissioner of Service Tax, Chennai has passed the impugned Order-in-Original No.40/2010 dt. 13.9.2010 wherein the demand of service tax amount of Rs. 83,98,962/- has been once again confirmed along with interest and a penalty of Rs.84,00,000/- has been imposed on the appellant under Section 78 of the Finance Act, 1994. Aggrieved by the impugned order, the appellant is now in appeal before the Tribunal.
5. The service tax demand is in respect of the following projects:-
(i) TA Enclave, Velacherry consisting of 81 units
(ii) Himardri, T.Nagar consisting of 20 units
(iii) Kamakotivilasam, Madipakkam consisting of 16 residential units
6. We have heard both sides. We find that the disputes can be grouped under three major headings. These are,-
(i) disputes in respect of constructed flats/ houses handed over to the land owners, in the nature of non-payment of tax;
(ii) disputes in respect of constructed flats/ houses sold by the developer to the individual buyers, in the nature of shot payment of tax on account of undervaluation;
(iii) disputes in respect of Kamakotivilasam Project in the nature of non-payment of tax, which dispute involves questions of facts and law.
7. Since these disputes are somewhat different in nature and hence are being treated separately. Further, many legal issues are argued under each of the above disputes. So we consider it proper to record arguments issue-wise and give findings.
8. The Appellants argue that there is no relationship of service provider and service recipient between the Developer and the Land Owner. According to them it is a relationship in a joint venture for profit. Both the parties have joined together in the business of construction of complex and the land owner brings in the capital by way of his land. The Developer by way of his capital and services and they jointly construct the complex and use or sell the flats for profit. He argues that CBEC had clarified the position that no service arises in such context. This clarification dated 29-01-09 is examined later in this order.
9. On the contrary we find that the Joint Development agreement does not indicate any terms on the above lines. The parties were neither taking risks jointly or doing any common activity. There was no participation by the land Owners in organizing or carrying out the activity. The Joint Development Agreement as one in which the land owner transfers part of his rights in the land and gets the value of such rights transferred, in the form of constructed flats which consist of value of material used and services rendered by the Developer. After the Land Owner transfers a part of his rights through the agreement, his share of UDS is registered in his name and he is like any other prospective buyer for whom construction of complex is carried out under an agreement for construction of flats except that he has a guaranteed right to get his share of the number of flats constructed. We further examine the various issues raised in the light of this finding.
PART-I-MATTERS RELATING TO CONSTRUCTED FLATS HANDED OVER TO LAND OWNERS
10. The argument that the Contracts are Work Contracts and liable to pay tax only from 01-06-2007 and not before.
10.1. The Appellant argues that the contracts were in the nature of works contract involving supply of material and service. Since such service became taxable only from 01-06-2007, there cannot be any tax on such work carried out prior to that date. The Counsel relies on the decision of the Tribunal in the case of Turbotech Precision Engg. P. Ltd. Vs. CCE – 2006 (3) S.T.R. 765 (Tri. – Bang.).
10.2. We have examined this argument. What we find is that the entry in section 65 (105) (zzzza) of Finance Act, 1994, called as “Works Contract Service” covers certain services which are covered by entries in section 65(105)(zzd), 65 (105) (zzq), 65 (105)(zzt), 65(105) (zzzh), etc of the said Act, before and after the introduction of the new entry for works contract. So this cannot be interpreted as an altogether new entry. It only provides a new method of determining the liability on such services at the option of the service provider. Accepting the argument of the appellants would render all taxes levied and collected on such services prior to 01-06-2007, as without authority of law. A reading of the entry in section 65 (105) (zzzza), Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and Rule 2A of Service Tax (Determination of Value) Rules, 2006, does not warrant such an interpretation.
10.3. We also note the Apex Court has held in BSNL Vs. UOI – 2006 (2) S.T.R. 161 (S.C.) held that the nature of a composite contract should be decided with reference to intention of the parties and also with reference to the dominant aspect of the contract. Further it was held that a contract of the nature of composite contract as defined in Article 366 (29A) of the Constitution of India can be spilt into sale and service. In this case the Land Owners parted with partial rights in their land to be paid for in the form of constructed flats. Construction of flat is in the nature of a composite contract specified in Article 366 (29A). So the value of the material supplied and the service provided can be separated and subjected to service tax. While levying service tax such splitting is done by providing abatements from the total value of contract.
10.4. The decision of the Karnataka High Court in Turbo-Tech (Supra) is with reference to the question whether the entry for “Consulting Engineer Service” during the period 1997 to 2001 could cover the activities of design, development in a contract for “Design, development and supply of turbo power pack and spares”. In the first place the levy extended to only professionally qualified engineer or an engineering firm and not to a corporate entity as the respondent in that case. Further in that situation there was a basic question whether the contract was for supply of goods or for providing service. In the case of construction of a complex, which is the impugned service in this case, the contract is for providing service considering the aspect theory laid down by the Apex Court in the case of BSNL Ltd (Supra) and also in Tamil Nadu Kalyana Mandapam Assn. Vs. UOI – 2006 (3) S.T.R. 260 (S.C.). This service is different from design and service involved in supply of material where the main aspect is supply of service.
10.5. Further the argument basically challenges the vires of certain taxing entries in Finance Act 1994, both for the period prior to 01-06-2007 and after that and Tribunal is not an appropriate forum for such challenge.
10.6. So we reject this argument of the appellant.
11. The argument that the flats handed over to the Land Owners were for their personal use, and hence the activity is not covered by the definition of the service.
11.1. The appellants argue that the definition of “residential complex” excludes the construction of such flats intended for personal use as recipient of service and Explanation under Section 65 (91a) specifically states that “personal use” includes permitting the complex for use as residence by another person on rent or without construction. It is submitted that the fact that the land owners were given more than one residential unit, should not be a reason to disregard their claim that the flats given to the land owners were for their personal use. It is also his submission that land owners had joint families and subsequent to construction of the flats, the land owners desired to split the joint family into small families and live in individual flats and, therefore, there cannot be a conclusion that all flats in excess of one flat handed over to the land owners were not for personal use.
11.2. We have considered this argument.
11.3. The definition of “residential complex” as defined at section 65 (91a) reads as under:
(91a) “residential complex” means any complex comprising of -
(i) a building or buildings, having more than twelve residential units;
(ii) a common area; and
(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system,
located within a premises and the layout of such premises is approved by an authority under any law for the time being in force,but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.