Conversion Of Bare Structures Into Retail Showrooms Is Taxable As “Original Works”: CESTAT New Delhi

On 6 August, the New Delhi Customs, Excise and Service Tax Appellate Tribunal (CESTAT), held that converting bare commercial structures into fully functional retail showrooms constitutes “original works” under the service tax law and not merely completion and finishing services, while also ruling that service tax cannot be levied on forfeited customer advances or insurance compensation received for goods destroyed in a fire.

A Bench of Judicial Member Ashok Jindal and Technical Member P.V. Subba Rao set aside a service tax demand of over Rs. 2.61 crore raised against West Wind Concepts Private Limited, along with the interest and penalties imposed under the Finance Act, 1994. It observed:

“...a demand of service tax of Rs. 43,56,671/- has been confirmed on account of miscellaneous income shows by the appellant which is reimbursement of the loss of goods happened due to fire broke out in the showroom. The said reimbursement is against the loss incurred by the appellant which cannot be termed as service provided by the appellant. Therefore, no service tax is payable on the said reimbursement on account of fire broke out in the showroom of M/s Reebok India Pvt Ltd.”

The dispute arose from a departmental audit covering the period from October 2014 to June 2017. The Department alleged that West Wind Concepts had wrongly classified its showroom fit out contracts as “original works” instead of “completion and finishing services” under Rule 2A of the Service Tax (Determination of Value) Rules, 2006, thereby wrongly claiming the higher statutory abatement available for original works. It also demanded service tax on customer advances forfeited after cancellation of orders and on insurance reimbursement received for goods destroyed in a fire.

West Wind Concepts challenged the demand, arguing that it had regularly filed ST 3 returns and that the entire case was based solely on a departmental audit, making the demand barred by limitation. It also questioned the validity of the adjudication proceedings, contending that although the show cause notice had originally been made answerable to the Commissioner of Central Goods and Services Tax (CGST), Delhi South Commissionerate, it was ultimately adjudicated by the Commissioner of CGST Audit I through a corrigendum that had never been served upon it.

The company further argued that Central Board of Indirect Taxes and Customs (CBIC) circulars authorised Audit Commissioners only to issue show cause notices and not adjudicate them.

The Department contended that the company merely carried out completion and finishing activities in existing commercial buildings. It argued that Explanation 1 to Rule 2A confined “original works” mainly to new construction and specified additions, and that showroom fit out work in completed buildings qualified only as completion and finishing services.

Rejecting the Department's contention, the Tribunal relied on its earlier decision in Kalpakaaru Projects Pvt. Ltd. and held that the company did not merely decorate completed structures but converted skeletal commercial buildings into fully functional retail showrooms. It observed that the work involved extensive civil, electrical, mechanical and interior works, including flooring, ceilings, partitions, plumbing, heating, ventilation and air conditioning systems, fire suppression systems and electrical installations, which went far beyond mere finishing work.

It also noted that the company had paid Value Added Tax (VAT) on 80 per cent of the contract value, demonstrating substantial transfer of goods during execution of the works contracts. It held that the company had correctly treated the contracts as original works and rightly claimed the statutory 60 per cent abatement. Consequently, no additional service tax could be demanded on the ground that it should have claimed only a 30 per cent abatement.

Further, it examined the demand of over Rs. 4.37 lakh on the advance forfeited after Virat Kohli cancelled the purchase of goods. It held that forfeiture of an advance because a customer abandoned the purchase did not amount to consideration for any taxable service, as no service had been provided.

The Bench set aside the demand of over Rs. 43.56 lakh on insurance reimbursement received from Reebok India Company for goods destroyed in a showroom fire. It held that the amount represented compensation for the loss suffered by the company and not consideration for any service rendered.

Accordingly, the CESTAT held that none of the three components of the demand survived and set aside the service tax demand of over Rs. 2.61 crore. It also quashed the interest liability, the equal penalty imposed under Section 78 of the Finance Act, 1994.

For Appellant: Shri J.K Mittal, Senior Advocate, Shri Harshvardhan Tyagi and Ms. Monisha

For Respondent: Shri Shashank Yadav, Authorised Representative