Service Tax On EMDs For Office Space Construction Payable Only After Land Allotment: CESTAT Ahmedabad

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Ahmedabad has held that amounts collected from prospective members for a proposed construction project cannot be treated as advances towards construction services before the developer secures the land required for the project.

It ruled that refundable deposits collected before land allotment would not attract service tax as construction advances merely because the money had been received.

A bench of Judicial Member Dr. Ajaya Krishna Vishvesha and Technical Member Satendra Vikram Singh observed that SDB Diamond Bourse could not have been certain of constructing the project before securing the land. “Without getting the land allotted by the Government, it cannot be said that the appellant was confident of constructing the project,” it held.

The case concerned amounts collected by SDB Diamond Bourse from prospective members for office space and parking at a proposed diamond bourse in Surat. It collected ₹600 per square foot for office space, ₹50,000 for four-wheeler parking and ₹5,000 for two-wheeler parking. The collections were intended to assess members' requirements and determine the land needed for the project.

The company argued that the amounts were refundable earnest money deposits, not construction advances. Its member agreements provided for refunds if it failed to secure suitable land. It also refunded around ₹2.80 crore to 13 applicants who withdrew their interest. SDB secured land and executed a lease deed with DREAM City Ltd. on April 13, 2017. It then reclassified the deposits as advances towards office space.

The department argued that service tax became payable when the amounts were received, irrespective of whether they were described as deposits or advances. It also alleged that the company had failed to disclose the collections in its returns and sought interest and penalties.

The tribunal found that the project remained uncertain until the land was allotted. It observed, “Therefore, appellant collected the amount from the members as refundable EMD so that it could be refunded in case proposed Surat Diamond Bourse does not see light of the day. We therefore, are of the opinion that the said amount cannot be equated to advances because construction of Bourses itself was uncertain in this case due to nonavailability of land with the appellant company”

The tribunal noted that SDB had shown around ₹554.97 crore as earnest money deposits in its books as of March 31, 2017. It reclassified the amount as advances after executing the lease deed and disclosed it in its service tax return for April to June 2017. The company had also deposited around ₹26.96 crore towards service tax under protest between April 2016 and March 2017, before the department issued its show-cause notice.

Holding that the deposits became advances only on April 13, 2017, the tribunal ruled that the company had paid service tax within the applicable time. It therefore set aside the interest demand and the penalty for suppression. However, it upheld the penalty for filing the April-June 2017 return 42 days late. It did not consider the penalties imposed on the directors, as they had not filed separate appeals.

For Appellant: Shirish Shah and Raveena Narang

For Respondent: M.G. Rayka