CESTAT Upheld That No Service Tax Is Applicable On Refundable Advances And Sale Of Self-Owned Flats Is Sale Of Immovable Property And Thus Not Liable To Service Tax

BRIEF FACTS OF THE CASE

• The Respondent, M/s Skylink Construction Pvt. Ltd., was registered under service tax for providing construction services, including construction of commercial/industrial buildings, civil structures, and residential complex services, and was regularly filing ST-3 returns. The Department conducted an investigation and issued a show cause notice dated 22.04.2016 raising a total demand of INR 5,29,39,121 along with interest and penalty.
• The Adjudicating Authority, vide Order dated 28.03.2018, confirmed service tax demand only to the extent of INR 66,38,753/- under construction of complex services for the period, and real estate agent services, while dropping substantial portions of the proposed demand.
• The Adjudicating Authority dropped the proposed demand of INR 3,61,55,494/- on “advances received for providing construction of complex services”, and the proposed demand of INR 68,33,417/- on real estate agent services in respect of 300 flats pertaining to the Meerut Development Authority.
• The learned Adjudicating Authority treated large “advances” as refundable security deposits for merely locating properties, noting that many were refunded and did not represent consideration for taxable construction services, and therefore dropped the corresponding demand. For 300 Meerut Development Authority flats, based on the purchase agreement and allotment-cum-instalment letter, the Commissioner found that Skylink had purchased and owned the flats and that subsequent transfers were sales of its own immovable property, not taxable as real estate agent services.
• The Revenue filed the appeal before the CESTAT, New Delhi disputing the service tax on construction carried out in collaboration with landowners for 2013-14 up to 12.05.2015, service tax on advances shown in the balance sheet as “advance against booking of flats”, service tax on real estate agent services relating to Meerut Development Authority Flats, and service tax on real estate agent services relating to flats other than Meerut Development Authority Flats.
• The Revenue’s Appeal was limited during arguments mainly to two issues:
  • Whether advance reflected in the balance sheet as “advance against booking of property” were taxable under construction of residential complex service and
  • Whether the completion certificate produced by the Respondent was valid for the purpose of service tax computation.

KEY OBSERVATIONS OF THE HON’BLE TRIBUNAL

• The Tribunal upheld the Commissioner’s finding that the amounts described as advances were in substance refundable security deposits received for helping customers find suitable property, not taxable consideration for construction services. It relied on the agreement, customer-wise refund chart, balance sheets, and bank statements to conclude that the amounts were often refunded when the underlying arrangement did not materialize, indicating that no taxable service had been rendered. The Revenue’s argument that the amounts were shown under current liabilities rather than borrowings was held to be irrelevant because accounting classification does not alter the true character of the receipt.
• The Tribunal also sustained the benefit of cum-tax valuation. It referred to Section 67(2) of the Finance Act, 1994 and held that where tax was not separately recovered, the gross amount had to be treated as inclusive of tax. Since the Revenue did not show that service tax had been separately collected, the challenge on this count failed.
• On the Meerut Development Authority flats, the Tribunal accepted that the assessee had already purchased the flats and become their owner before selling them onward. That transaction was treated as sale of the assessee’s own immovable property, not as a taxable service under ‘real estate agent service’. The Tribunal also rejected the Department’s objection to the completion certificate, holding that once the original certificate was later produced, verified, and returned, the assessee could not be denied relief on a procedural ground.

AURTUS COMMENTS

• Under the service tax regime, advances received towards taxable services were, as a general rule, subject to tax at the time of receipt. However, this principle does not extend to amounts that are merely refundable deposits or security advances, especially where the surrounding documents and conduct of the parties clearly establish that no taxable service was rendered against such receipt. In such cases, the real nature of the transaction must be examined, and not merely the nomenclature used in the books of account.
• The Tribunal has rightly reiterated a foundational principle of indirect tax law, namely, that taxability must be determined on the basis of the real character of the transaction and not merely by the manner in which it is reflected in the books of account. In relation to the advances, the Tribunal accepted the assessee’s contention that amounts received as refundable advances or security deposits cannot be subjected to service tax merely because they are shown under the head “current liabilities.” What ultimately matters is whether the receipt is, in substance, consideration for a taxable service. Where the agreement terms, refund trail, customer-wise details, and bank records clearly demonstrate that the amount was refundable and that no taxable service had in fact been rendered against such receipt, the mere accounting description cannot be the basis of levy. The Revenue’s objection was confined largely to the treatment of the amounts in the balance sheet as “current liabilities.” That by itself cannot be a determinative factor for levy of service tax. Where the amount is shown to be refundable and no service is actually rendered against it, service tax cannot be imposed merely based on its book entry or balance sheet disclosure.
• The principle also has clear relevance under GST, where the taxability of advances continues to depend on the true character of the receipt and the nature of the underlying supply. Even though the present order is not very detailed on this aspect, the ratio remains useful in so far as it reiterates that a refundable deposit does not become taxable merely because it is reflected in the books as an advance. The same reasoning can be applied in GST disputes as well, subject of course to the specific facts and the applicable statutory scheme.
• The Tribunal held that once the assessee had already acquired title over the flats, the subsequent sale was only a transaction of sale of immovable property and not a service transaction. This finding is fully consistent with the scheme of the Finance Act, 1994, under which sale of immovable property was never intended to be brought within the service tax net. The position continues to remain equally relevant under GST, where sale of immovable property is outside the scope of supply and construction-related taxability is confined only to the service element rendered prior to completion. In other words, a back-to-back sale of property, absent any independent service element, cannot be artificially recharacterised as a taxable supply either under the earlier service tax regime or under GST. The Revenue’s attempt to classify the transaction as real estate agent service was therefore rightly rejected, since a person cannot be treated as providing a service merely because he resells property that already belongs to him.
• The Revenue appears to have taken a hypertechnical view before the CESTAT while contending the denial of the benefit of the completion certificate. However, under GST, reference is made to both the occupancy certificate and the completion certificate, and the taxability of construction services is intended to cease once either is received. The issue cannot be examined in a purely formal manner because the practice relating to issuance and nomenclature of occupancy/completion certificates varies from State to State, and the relevant document must therefore be seen in the context of the applicable local law and procedure. RERA also assumes significance in this framework, since it likewise operates with completion/occupancy certification as an important marker of project completion.

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