MUMBAI, MAY 03, 2013: THE appellant constructed flats for sale during the period May, 2006 to December, 2006. During the period of construction, they entered into agreement of sale of flats, which on completion of the construction was sold to the prospective buyers.

In the case of K Raheja Development Corporation vs. State of Karnataka [2005-TIOL-77-SC-CT] the apex Court had clarified that the activities undertaken by the builders constructing flats/building for and on behalf of prospective buyers for consideration in cash or deferred payment is covered by the Works Contract and not under sale.

Subsequent to this judgment, the Director General, Directorate of Service Tax issued a letter/Circular F.No.V/DGST/22/Audit/Misc./1/2004/ dated 16th February, 2006 stating that service tax liability would arise under ‘Works Contract Service' in respect of construction undertaken by the builder for prospective customers under the agreement for sale. However, vide circular/letter F.No. 332/35/2006-TRU dated 01/08/2006 the Central Board of Excise and Customs clarified that liability to pay service tax is on the person who undertook actual construction and not on the builder.

In view of the confusing legal position, the appellant collected sums from the prospective buyers of flats as ‘contingent liability” towards the service tax amount, if any, payable to the Central Excise department for the sale of the flats. It was also made clear to the prospective buyers at the time of collection of this contingent liability that the matter is pending decision before various judicial forums and the amount will be returned if the outcome of the decision pending before various high courts is in favour of the builders.

Subsequently, the Central Board and Excise vide a circular No. 108/02/2009-ST dated 29/01/2009 clarified as follows:-

“3. The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of 'agreement to sell'. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of 'self-service' and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of 'residential complex'. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.”

After issue of this Circular, the appellant returned the entire money collected as contingent liability to the buyers of the flats.

In the meanwhile a SCN dated 22/04/2009 was issued to the appellant demanding a sum of Rs. 44,96,441/- collected as ‘service tax' under the provisions of Section 73A(2) of the Finance Act, 1994. The said notice was adjudicated vide order dated 22/06/2010 and the demand was confirmed along with interest thereon apart from imposition of penalty of Rs. 5,000/-.

The appellant preferred an appeal but the same was dismissed.

And so, the appellant is before the CESTAT.

It is submitted that they did not collect any service tax from the flat buyers but collected a sum towards service tax as a contingent liability with a clear understanding that the same would be returned along with interest after the Courts decided the matter in their favour; accordingly, after issue of Circular dated 29/01/2009 by the CBEC, they have returned the money to the flat buyers along with interest accrued. They have also produced a certificate from the Chartered Accountant to that effect. Inasmuch as since the provisions of Section 73A(2) of the FA, 1994 is not attracted to the facts of the case, the appellant prays for grant of stay.

The Revenue representative reiterated the findings of the lower authorities.

The Bench noted that the matter is settled by the Board Circular dated 29/01/2009 and after dispensing with the requirement of pre-deposit took up the appeal itself for consideration and disposal.

The CESTAT observed -

“7. We have carefully considered the rival submissions. Section 73A(2) reads as follows:

“(2) Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government.”

8. This section envisages two things: (1) the amount is not required to be collected and (2) the amount collected as representing service tax. In the instant case it was the Directorate General of Service Tax which issued the circular dated 16/02/2006 saying that the amount is required to be collected and, therefore, the appellant cannot be blamed for believing that the amount is required to be collected. Nevertheless, the appellant took the precaution of collecting it as ‘contingent liability' and not as service tax per se and also made it clear that in case the outcome of the judicial proceedings emerges in their favour, the amount would be refunded along with interest and subsequently when the matter was clarified by the Board finally vide Circular dated 29/01/2009 that the amount is not required to be collected by the builders, they returned the money along with interest. In these circumstances, we are of the view that the provisions of Section 73A are not attracted at all to the facts of the present case.”

In fine, the appeal was allowed.

Revenue targets: The DG, Directorate of Service Tax while endorsing a copy of the subject letter dated 16/02/2006 to the then Member (Service Tax) had mentioned the following - “ If the Board has a contrary view, the same may please be communicated for compliance. Considering that only 43 days are left in the current fiscal, the urgency of this communication to the field formation can hardly be over emphasized especially when the revenue ramifications are enormous.”

Those were the days!

(See 2013-TIOL-681-CESTAT-MUM)