Service tax cannot be levied on residential construction under individual agreements for purchasers’ personal use.

M/s Abhilash Synergetic Constructions & Exports Pvt. Ltd. constructed residential flats pursuant to development agreements with landowners and separate agreements with individual prospective purchasers.

The Department issued a show-cause notice dated 20 June 2013 demanding Service Tax of ₹2,20,23,119 for the period 1 October 2007 to 31 March 2013, with interest and penalties. The adjudicating authority classified the activity under “Works Contract Service”, confirmed ₹80,27,853, and dropped the balance demand of ₹1,39,95,266. The assessee challenged the confirmed demand, while the Revenue appealed against the dropped portion.

1. Whether composite construction contracts involving transfer of goods and construction services were taxable under “Works Contract Service”, and whether a project comprising twelve or fewer residential units could constitute a taxable “Residential Complex” under Section 65(91a) of the Finance Act, 1994

2. Whether construction of residential flats for prospective purchasers was taxable for the period before 1 July 2010, prior to the insertion of the deeming Explanation to Section 65(105)(zzzh)

3. Whether construction and completion undertaken under separate agreements with individual purchasers, for their personal residential use, fell within the personal-use exclusion in Section 65(91a)

4. Whether the flats allotted to landowners under development agreements attracted a separate Service Tax demand, or whether such demand resulted in double taxation where the value of land or development rights was already included in the value taxed on the developer’s share

5. Whether the assessee was entitled to statutory abatement and cum-tax valuation, and whether the extended period of limitation and penalties were invocable

The Tribunal applied Sections 65(91a), 65(105)(zzzh), 67(2) and 73(1) of the Finance Act, 1994.

Under Section 65(91a), a “Residential Complex” required, among other features, a building or buildings comprising more than twelve residential units, common areas and prescribed common facilities; the provision also excluded construction undertaken for personal residential use, with “personal use” extending to residence by another person on rent or without consideration.

The Tribunal relied on Commissioner of Central Excise & Customs, Kerala v. Larsen & Toubro Ltd., 2015 (39) S.T.R. 913 (S.C.), which held that indivisible composite contracts could not be taxed under construction-service categories before 1 June 2007 and, thereafter, could be taxed only under the specific category of Works Contract Service, subject to statutory requirements.

It further applied the principle that the Explanation to Section 65(105)(zzzh), inserted with effect from 1 July 2010, created a prospective deeming fiction and could not retrospectively tax earlier transactions.

The Tribunal also relied on Vasantha Green Projects v. Commissioner of Central Tax, 2019 (20) G.S.T.L. 568 (Tri.–Hyd.) concerning avoidance of double taxation in respect of landowners’ shares.

Uniworth Textiles Ltd. v. Commissioner of Central Excise, 2013 (288) E.L.T. 161 (S.C.), holding that mere non-payment of tax does not establish suppression or justify the extended limitation period absent deliberate intent to evade tax.

Under Section 67(2), where the gross consideration is inclusive of Service Tax, the taxable value must be determined on a cum-tax basis.

The Tribunal accepted that the agreements were composite contracts involving goods and construction services, but held that classification as Works Contract Service did not by itself establish taxability: the construction still had to satisfy the statutory definition of “Residential Complex”.

Projects or independently identifiable buildings containing twelve or fewer residential units could not be taxed merely by recharacterising them as works contracts.

The Tribunal further held that the 1 July 2010 Explanation could not retrospectively validate the pre-1 July 2010 demand; consequently, construction for prospective purchasers before that date was not taxable under the deeming provision.

For the later period, the separate agreements for completion and finishing of individual flats were treated as contracts for residences intended for the purchasers’ personal use, attracting the exclusion in Section 65(91a); the Department had produced no evidence that the units were acquired for commercial exploitation.

Regarding landowners’ flats, a separate demand could not be sustained where the value attributable to land or development rights had already been embedded in the developer’s taxable share, since that would amount to double taxation; the Department had not established that such value had escaped taxation.

Any residual taxable amount was required to receive applicable abatement and cum-tax treatment.

Finally, because the dispute involved complex classification and interpretation issues, and the adjudicating order identified no positive act of fraud, collusion, wilful misstatement or deliberate suppression, the extended limitation period and penalties were held unsustainable.

The Tribunal set aside the demand relating to construction before 1 July 2010; held that projects containing twelve or fewer residential units, not otherwise satisfying Section 65(91a), were outside the taxable residential-complex category; excluded construction performed under separate agreements for purchasers’ personal residential use; rejected the separate landowners’ demand where it would result in double taxation; directed that any surviving taxable consideration receive applicable abatement and cum-tax treatment; confined any surviving liability to the normal limitation period; and set aside all penalties.