Mercury Estates vs Commissioner of Service Tax, Delhi

This appeal by M/s. Mercury Estates, under Section 35G of the Central Excises Act, 1944 (''Act'') is directed against the impugned order dated 31st March, 2015 [2015 (40) S.T.R. 507 (Tri. - Del.)] passed by the Customs, Excise & Service Tax Appellate Tribunal (''CESTAT'') in the stay application filed by the Appellant in its appeal being Appeal No. ST/51507/2015-CU (DB) which in turn is directed against the order-in-original dated 29th November, 2013 passed by the Adjudicating Authority (''AA''), viz., the Commissioner of Service Tax (''CST''). The brief facts as stated by the Appellant are that according to Sahara India Commercial Corporation Ltd. (SICCL) was keen to set up residential townships in or around Allahabad (in Uttar Pradesh) and Jodhpur (in Rajasthan). At each of the locations SICCL required around 100 to 150 acres of land. SICCL entered into Memoranda of Understanding (MOUs) with M/s. Sahara India (SI) which in turn entered into two separate MOUs dated 20th June, 2006 and 20th August, 2003 respectively for purchase of land in Allahabad and Jodhpur. The MOUs specified the extent of land to be purchased and the rate of land per acre at which SI would purchase land at each of the cities. The Appellant was entitled to difference, if any, of the amount actually paid for purchase of land to the original owners of land and the "agreed rate" between the Appellant and SI. In other words, the Appellant was entitled to the profit/loss on account of purchase and sale of the land.

A show cause notice (''SCN'') dated 22nd October, 2010 was issued to the Appellant by the Directorate General of Central Excise Intelligence. The SCN narrated the fact of the above MOUs having been entered into between SI and the Appellant and set out in a tabular form the details of the sums received by the Appellant and the consequent transactions of purchase of land as under:

The case of the Appellant has been that while it made a profit as regards the purchase of land at Jodhpur, the sum of Rs. 4 crores received by it for the purchase of land at Allahabad was not utilised to purchase land and that the said amount was returned by way of transfer of shares of 2 group companies of the Appellant in favour of SICCL.

The AA in the order dated 29th November 2013 held that the Appellant had provided taxable ''real estate'' services. The AA, however, agreed with the contention of the Appellant that "the cost/value of land cannot be included in the gross value for levy of Service Tax." Nevertheless, in proceeding to determine the Service Tax payable, the AA stated that in the absence of the Appellant providing the necessary details, the entire sum received by it would be considered as the taxable value for the purpose of computation of Service Tax. In other words the taxable value was taken as Rs. 9,62,98,304 and Service Tax liability, interest and penalty were determined on that basis for the period 1st January, 2004 to 31st March, 2008. It may be noted here that in the said adjudication order the AA recorded that for the purchase of land in Jodhpur the Appellant had received Rs. 6,78,54,100 and not Rs. 7,95,63,500 as shown in the SCN.

In the impugned order dated 31st March, 2015 the CESTAT noted that the AA had "considered the point that the value of the land is not includible in the assessable value" for the purpose of computing the Service Tax. It further noted that in the absence of data provided by the Appellant, the AA "prima facie felt constrained in granting the deduction of value of the land." The CESTAT observed that as per the definition of "real estate agent" under Section 65(88) of the Finance Act, 1994(FA) read with Section 65(89) thereof any advice, consultancy or technical assistance in relation to design, development construction acquisition of real estate was covered by the expression "Real Estate Agent Service" under Section 65(105)(v) of the FA. The CESTAT ordered that the Appellant should make a pre-deposit of 25% of the Service Tax demand along with proportionate interest for the purpose of Section 35F of the Act read with Section 83 of the FA, within four weeks.

On 2nd July 2015, while directing notice to issue in the present appeal, the Court stayed the further proceedings in the appeal before the CESTAT.

Mr. Sanjeev Sabharwal, learned Senior Counsel appearing for the Appellant, submitted that the Appellant did raise a contention that the MOUs did not reflect any taxable ''service'' having been provided by the Appellant to SI. He pointed out that the SCN itself sets out the fact that while the Appellant made a profit as regards the purchase of land in Jodhpur, the amount received for the purchase of land in Allahabad was returned by it in the form of allotment of shares in 2 group companies in favour of SICCL. He submitted that with the AA having agreed with the Appellant that the entire sum received by the Appellant for purchase of land could not form the basis for computation of the Service Tax, there was no logic in the AA proceeding to raise a demand of Service Tax in the sum of Rs. 98,22,427 calculated on the taxable value of Rs. 9,62,98,304. Interest and penalty were also calculated on that basis. The impugned order requiring the Appellant to deposit 25% of the said sum was unreasonable particularly considering that Section 35 F (ii) of the Act as amended with effect from 6th August, 2014 required a maximum pre-deposit of 7.5% of disputed tax.

Without prejudice to the above submissions, Mr. Sabharwal submitted that even assuming that the Appellant had provided any taxable service, the tax at 10% could be levied only on the commission/profit earned and not on the entire sum received by it for purchase of the lands. Mr. Sabharwal handed over a calculation sheet which showed that a profit of Rs. 1,62,40,700 was made in respect of the purchase of land at Jodhpur. Lastly, he pointed out that an application was filed by the Appellant before the CESTAT for bringing on record certain relevant facts but the said application was not taken up when the stay application was disposed of.

Mr. Satish Kumar, learned Senior Standing Counsel for the Respondent, sought to support the order of the AA but was unable to dispute that despite agreeing with the Appellant that the entire value of the land could not be included for the purposes of computation of Service Tax, the AA had proceeded to calculate the demand on the taxable value of Rs. 9,62,98,304.

The Court has considered the above submissions. The AA has in the order dated 29th November, 2013 come to the conclusion, on an analysis of the two MOUs entered into between the Appellant and SI, that the Appellant was working as an agent for SICCL and further that it had rendered two kinds of taxable services: one as a real estate agent/real estate consultant under Section 65 (89) of the FA and the other relating to levelling of soil including filling of gorges/nallah, removing of shrubs, grass and rubbish etc. classifiable under the head ''site formation and clearance excavation and earth moving and demolition services'', as defined under Section 65(97a) of the FA. Whether in fact the three MOUs reflect that the Appellant was acting as an agent of SICCL and that it had rendered taxable services to SICCL (although the MOUs have been entered into by it with SI) is arguable and will have to be examined by the CESTAT when the appeals before it are heard.

Secondly, the Court is of the view that the Appellant has made out a prima facie case on the aspect whether the entire amount received by it pursuant to the MoUs would be considered to be the ''gross'' or ''taxable value'' for the purposes of computation of Service Tax liability. Indeed it appears that the AA agreed with the Appellant that the entire sum received by the Appellant for purchase of land could not form the basis for computation of the Service Tax. Yet when the AA''s order dated 29th November, 2013 is examined carefully it shows that the AA has computed the Service Tax demand as Rs. 98,22,427 [Service Tax Rs. 96,29,830/- plus Education Cess of Rs. 1,92,597/-] calculated @ 10% on the taxable value of Rs. 9,62,98,304. This prima facie appears unsustainable since the total sum shown to have been received by the Appellant under the two MOUs, even as per the SCN, is around Rs. 10.79 crores [4+6.79]. It further appears that the interest and penalty have also been calculated on that basis.

It further prima facie appears that the AA overlooked the fact that even as per the SCN no land in Allahabad was purchased although the Appellant received Rs. 4 crores for that purpose. The Appellant''s explanation that it returned the said sum to SICCL in the form of shares of 2 of its group companies does not appear to have been considered. A further question that would arise is whether the entire profit generated from the purchase of land in Jodhpur can be taken to be value of the taxable services, if any, rendered by the Appellant. Those questions cannot obviously be examined at this stage but will have to await the final determination in the appeal before the CESTAT.

The Court is satisfied that the Appellant has made out a prima facie case and that the balance of convenience at this stage in making a conditional order of pre-deposit is in favour of the Appellant.

Although the Court is not expressing any opinion on the contention of the Appellant that no taxable service has been rendered by it, and that in any event the entire profit earned by it cannot constitute the value of such services, the Court, for the purposes of determining the reasonable amount of pre-deposit to be made by the Appellant, takes note of the fact that the Appellant has earned a profit of Rs. 1,62,40,700 in respect of the purchase of land at Jodhpur. If the Service Tax demand is computed at 10% of the said sum it would work out to Rs. 16,24,070. Keeping in view the above factors, and while not expressing any opinion on the merits of the contentions of the parties, the Court directs that the Appellant shall make a pre-deposit of 5% of the aforementioned sum of Rs. 1,62,40,700 i.e. Rs. 8,12,035 on or before 15th October 2015. The impugned order of the CESTAT dated 31st March 2015 is accordingly modified.

The interim order passed by the Court on 2nd July, 2015 will continue till 15th October, 2015. Subject to the Appellant complying with the above direction, the CESTAT will proceed to consider and dispose of the appeal and all pending applications before it on merits. The appeal and application are disposed of in the above terms. Order dasti to the parties.