No reversal of Cenvat credit if output service was taxed before receipt of completion certificate: CESTAT

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Fact: M/s. Alembic Ltd.(“the applicant”) was engaged in development of real estate projects. It had availed Cenvat credit of service tax paid on various input services used to construct residential complex. It was registered with Service Tax authorities as service provider and had paid service tax under the category of works contract service for the residential units sold to various customers from time-to-time. On the date of obtaining such Completion Certificate, approximately 35 per cent property remained unsold by the assessee and for which no bookings were made. As such whenever such properties would be sold in future, no service tax would be payable thereon.

Issues involved: The appeal filed before CESTAT involves the following questions:-

1.Whether receipt of consideration for residential units sold as immovable property after receipt of completion certificate amounts to providing exempted service and Rule 6 of the Cenvat Credit Rules (“CCR”), 2004 is applicable in such case and as such, whether the Appellants are liable to pay 8%/10% amount of exempted value under Rule 6 of the CCR, 2004?

2. Whether Credit can be allowed to the Appellants under Rule 3 of the CCR, 2004 in such circumstances?

3. Whether the Appellants can be said to have “maintained proper separate accounts” as required under Rule 6 of the CCR, 2004?

4. Whether the Appellants are required to reverse Cenvat Credit availed during the period when output service was taxable before receipt of Completion Certificate, since such services were availed to construct entire property, and portion of such property did not attract Service Tax after receipt of Completion Certificate?

5. Whether the Appellants are required to reverse Cenvat Credit availed during the period when output service was taxable before receipt of Completion Certificate, since such services were availed to construct entire property, and portion of such property did not attract Service Tax after receipt of Completion Certificate?

Applicant’s Interpretation of law: The applicant contended that they had given due intimation to the Competent Authority that it shall be availing only proportionate Cenvat Credit of service tax paid on input services received by it after date of obtaining Completion Certificate on basis of square feet area, which suffered the levy of service tax as compared to the area which was converted into immovable property and on which no service tax would be paid.

Held: The Hon’ble CESTAT of Ahmedabad Bench vide its final order nos. A/12229-12232 of 2018 dated October 23, 2018 stated as follows:

1. The Appellants are not liable to pay 8%/10% amount of value of service became exempted after receipt of completion certificate under Rule 6 of the CCR, 2004.

2. The Cenvat Credit on input services received after obtaining Completion Certificate cannot be wholly allowed to the Appellant, and since they had availed only proportionate credit by maintaining separate accounts, the same is therefore sufficient compliance of the legal obligation cast upon them.

3. The Appellants can be said to have “maintained proper separate accounts” as required under Rule 6 of the CCR, 2004, having availed credit only to the extent input services in taxable activity, on the scientific basis after obtaining Completion Certificate.

4. The Appellants are not required to reverse Cenvat Credit availed during the period when output service was wholly taxable before receipt of Completion Certificate, in accordance with law.

5. Connected to (4) above, the Appellants are eligible to seek refund of the amount paid under protest towards Credit availed from 2010 till receipt of completion certificate, based on CERA audit objection wherein such credit was sought to be reversed based on considering square foot area where Service Tax was paid and balance area where Service Tax will not be paid after Completion Certificate, in accordance with law.

Citation: [2019] 101 taxmann.com 461 (Ahmedabad – CESTAT)