According to Rule 66E(b) of the Service Tax Rules, 1994, in the context of construction services, the service tax is required to be filed on the amount obtained from the buyers for booking the flats before the issuance of the finish certificate by the competent authority. It’s noteworthy that the booking can be cancelled by the buyer before opting for possession of the flat. Upon cancellation of the booking and the return of the consideration for the service, the service contract is terminated. In this scenario, if the flat is subsequently constructed and no service is furnished, a tax refund for these services becomes permissible.

The Mumbai Bench of CESTAT addressed the misconception that the cancellation of bookings of flats indicates an absence of service. The bench observed that if the booking is cancelled and the money is returned to the buyer, there is no question of any service being provided.

The case revolved around Kanakia Spaces Reality Pvt. Ltd., a business engaged in providing construction services for residential complexes. The company collected booking amounts from allottees and released the pertinent service tax concerning the booking amount collected. Subsequently, 29 allottees decided to cancel their respective bookings, leading to the refund of the advance amount, including the service tax, collected and deposited by the company with the department.

The petitioner faced a deficiency memo, a Show Cause Notice (SCN), and subsequent rejection of refund claims. Despite filing a plea to the learned commissioner (Appeals), which was rejected, the petitioner persevered with appeals before the Tribunal.

In its defense, the petitioner highlighted Section 67 of the Finance Act, which controls the valuation of taxable services for assessing or levying tax. The petitioner contended that only the gross amount ‘charged’ by the service provider is accountable to service tax. As such, when the amount is refunded to the customers, it could be construed as no amount being assessed by the service provider, and no tax being charged on it.

The tribunal recognized the petitioner’s right to credit or refund the excess service tax paid, citing Section 174 of the CGST Act, 2017, which necessitates upholding and protecting such rights. Additionally, Section 142(5) of the CGST Act, 2017 facilitates the refund of taxes paid under former laws, supporting the petitioner’s case.

The ruling of the Mumbai Bench of CESTAT in the case titled Kanakia Spaces Reality Pvt. Ltd. Vs. Commissioner Of Cgst & Central Excise has significant ramifications for service tax regulations in the construction services sector and provides clarity on the admissibility of tax refunds in cases of cancelled bookings of flats.

For further details, the full order can be accessed here.