CESTAT: Developer of Residential Flats Entitled Service Tax Refund on Cancellation of Booking

CESTAT: Developer of Residential Flats Entitled Service Tax Refund on Cancellation of Booking

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi bench by its single judge Justice Anil Choudhary (Judicial Member) held that the developer of residential flats was entitled to service tax refund on cancellation of booking, under Section 142(3) of Central Goods and Services Tax (CGST).

The appellant- M/s Ratnawat Infra Construction Company LLP, developer is in the business of constructing residential complexes, among others, and is registered with the service tax department. The appellant had entered into an "Agreement of Sale" of flats during the service tax regime prior to June 30, 2017, and had received advance payment from the proposed buyers for flats in their project, namely "Pinnacle."

The project was delayed, and seven apartment bookings were canceled on December 30, 2019, prior to receiving an occupancy certificate for the year 2021. The flats booked earlier, on 15th November, 2016, were canceled under a "cancellation agreement" between the parties.

The appellant issued a credit note to the buyer on cancellation of the flat and also adjusted the amount of the credit note in the ledger account of the buyer. Pursuant to the adjustment, the amount of the deposit, along with the service tax received from the buyer of the flat, was refunded with respect to all seven flats.

The appellant argued that some of the invoices that were raised after 30th June, 2017, during the GST regime have been reversed, and they have taken input tax credits for the tax paid during the GST regime, for which no objection has been raised by revenue. So far, pursuant to the raising of invoice prior to June 30, 2017, the appellant has demonstrated that service tax was shown as a tax liability in the return for the period April through June 2017 and that such tax was properly paid, as reflected in the return.

Further, Rule 6(3) of the Service Tax Rules states that if a service provider has issued an invoice and/or received any payment against any service that is not provided, whatever the reason may be, then the service provider can take credit for any excess service tax paid by him.

However, due to modification in the regime from service tax to GST, in the event of cancellation of the proposed service in September 2019, the appellant could not take credit for service tax. Accordingly, in view of the transitional provisions under Section 142 of their CGST Act, the appellant applied for a refund of the service tax paid on the cancellation (booked prior to 30th June, 2017).

The refund claim, which was filed on 30th September, 2020, was refused due to limitation and unjust enrichment.

The appellant took the matter to the Commissioner (Appeals), who ordered that because the refund was filed on 30th September, 2020, but the demand letter or invoice issued by the appellant to the buyer was dated 25th June, 2017, the refund was time-barred. He agreed with the adjudicating authority, holding that the unjust enrichment bar raised by the appellant had also not been satisfied.

The bar of unjust enrichment was raised since they had raised the invoice on the buyer of the flat, and the legal presumption under Section 12B of the Central Excise Act is that the tax charged in the invoice is deemed to have been passed on to the buyer.

The appellant claimed that he had refunded the amount received from the buyer of the flat pursuant to the cancellation, along with the amount of service tax. The amount of service tax remained as a deposit with the department, and accordingly, there was no time limit, as such an amount became refundable pursuant to the cancellation of the booking.

The appellant referred on the CBIC Circular dated 10th February, 2012, which clarified that the developer/builder is entitled to service tax credit on cancellation of bookings, wherein the builder has refunded the amount of the booking, including service tax, to the buyer of the flat.

The Tribunal, found that there was no dispute on facts with regard to booking and cancellation and the refund made by the appellant to the buyer including the amount of service tax.

The CESTAT observed, "I hold that the appellant is entitled to refund, in view of the Cenvat credit no longer available, in spite of being entitled to the same under Rule (6)(3) of Service Tax Rules, the appellant is entitled to refund of such amount u/s 142(3) of CGST Act. I further find that as admittedly the appellant have refunded the booking amount including service tax, the appellant have satisfied the bar of unjust enrichment."

The tribunal held that the appellant was entitled to a refund of the amount of Rs. 12,74,883. The Adjudicating Authority was ordered to grant the refund of the amount along with interest as per rules within 45 days.