by Narendra Singhvi
The real estate industry has witnessed high litigation rate, considering the number of indirect taxes payable by the sector prior to GST. Prior to GST, a real estate developer was required to pay various taxes including Service Tax, VAT, Central Excise, Entry Tax, LBT, Octroi, etc. and the credits of such taxes were not freely available. With the introduction of GST, the real estate developers have been allowed to avail Input Tax Credit (ITC), aimed at reducing the cascading effect of taxes.
This article highlights the impact of recent decision of Gujarat High Court in Principal Commissioner v. Alembic Limited, 2019-TIOL-1495-HC-AHM-ST, which has affirmed the decision of CESTAT in Alembic Limited v. Commissioner, 2019-TIOL-358-CESTAT-AHM.
In the Service Tax regime, a developer paying Service Tax under Construction of Complex Services, while availing abatement under Notification No. 26/2012-ST, dated 20-6-2012, was allowed to avail Cenvat credit of Service Tax and Cesses paid on input services. The liability under Construction of Complex Services arose, only when a unit was agreed to be sold against receipt of some payment prior to receipt of the completion certificate. In other words, units sold after receipt of the completion certificate were treated as amounting to sale of immovable property and not charged to Service Tax.
The sale of units by any developer, however, depends on a number of factors and is largely market-driven. There arise situations, where number of units are unsold even at the time of receipt of completion certificate. In such a case, no Service Tax was paid on sale of such units taking place after receipt of completion certificate. This is irrespective of receipt of input services by the developer, which are largely received at the time of pre-development and development phases of the projects. The credit of tax paid on such services, thus, is also availed at the time of receipt of such services.
In such cases, disputes were raised by the department alleging that Cenvat credit was not admissible on portion of the input services used in development of the project, to the extent of unsold units till receipt of the completion certificate, in as much as there was no liability to pay Service Tax on sale of such units after completion certificate.
This dispute received attention of all real estate developers and their jurisdictional departmental authorities. Divergent practices were being followed regarding availment of Cenvat credit by developers, with a view to avoid disputes with the department. Some developers were not availing any Cenvat credit on input services received after issuance of completion certificate, though Service Tax was being paid on installments received thereafter as pertaining to units sold earlier.
In this background, the dispute was considered by Tribunal in Alembic Limited (supra). Relying on decision of Supreme Court in Collector v. Dai Ichi Karkaria Limited, 1999 (112) ELT 353 (SC), it was held that the entitlement to Cenvat credit is to be determined at the time of receipt of input services and merely because the output services became exempt later on, the credit on input services received earlier is not deniable, in the absence of specific provision. The Tribunal also considered Rule 11 of the Cenvat Credit Rules, 2004, which specifically provides for reversal of credit on inputs in case of finished goods/ output services becoming exempt later. For illustration, Rule 11(4) provides for reversal of credit in respect of inputs received for providing output services, when the service provider opts for exemption from payment of Service Tax on such output services. Highlighting the absence of such specific provisions in the context of Cenvat credit on input services, it held that eligibility/entitlement to credit has to be examined only at the time of receipt of input service and once it is found to be availed at a time when output service is wholly taxable, and the said credit is availed legitimately, the same cannot be denied and/or recovered unless specific machinery provisions are made in this regard.
Aggrieved by the said decision of the Tribunal, the Department preferred an appeal before Gujarat High Court, which was dismissed in Alembic Limited (supra). The observations of the Tribunal discussed hereinabove have received approval of High Court.
The judgement has come as a sigh of relief for the real estate developers, although, with the introduction of GST, the window to avail Cenvat credit under earlier regime has been closed. However, this decision sets to rest disputes raised by department, where developers had already availed Cenvat credit prior to receipt of completion certificate and some units were unsold till then. Under the GST regime, though specific provisions have been enacted for calculation of ITC required to be reversed (particularly at time of rationalization of rates for real estate sector in March, 2019), the doubts over interpretation of statutory provisions therein still loom large.
[The author is a Joint Partner, Tax Practice, Lakshmikumaran and Sridharan, New Delhi]