By TIOL News Service

BANGALORE, MAR 27, 2014: THE appellant is engaged in the activity of development and construction of residential apartments. They did not charge and collect serviced tax on the activity of development and construction of apartments during the period 2006 to 2009. The properties in dispute (residential apartments) were constructed and completion certificate was obtained in 21.8.2009. Since the appellant had no clarity on liability of service tax while settling the accounts finally with the buyers of the apartments, they collected certain amount which was in the interest of protecting both the buyers and the appellant from any future exposure to service tax liability if their service falls under the category of ‘works contract'; and the amounts collected were kept in a separate escrow account. Taking a view that the collection of amount and deposit in bank account amount to collection of service tax and this amount should have been paid to the Government as per the provisions of Section 73A of the Finance Act, 1994, proceedings were initiated. In the impugned order, the amount of service tax of Rs. 2, 44, 17,471/-, collected from the apartment owners and kept in the escrow account, has been demanded with interest. Penalty of Rs. 5000/- under the provisions of Section 77 of the Finance Act, 1994 has been imposed.

The only issue to be considered in this case is whether service tax collected from the customers and kept in the escrow account and not paid to the Government would attract provisions of Section 73A of the Finance Act, 1994 or not.

The claim made by the appellant that the appellant has not collected service tax but they had collected only a ‘caution deposit' which was kept in separate account to be paid to the Government if held to be liable to pay or otherwise, to be returned to the party has not been considered by the Commissioner in the impugned order. The issue whether the appellant is liable to pay service tax or not has also not been considered. In the absence of determination of liability of service tax, the only question remains to be answered is whether provisions of Section 73A is attracted or not.

As per Section 73A(2);- Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government .

The Tribunal observed that:-

It can be seen that if a person has collected any amount as service tax, that amount has to be paid to the Government. In this case, question is whether that amount can be said to have been collected. Admittedly, the meaning of ‘escrow account' is that amount is kept with a third party and has to be disbursed to a person who is eligible to get the same as and when the issue attains finality. It is stated that the amount collected by the appellant was kept in escrow account and he has given an assurance to the buyer that if the amount is not liable to be paid, the same shall be paid with interest. It is only a deposit which is not taken into account of the appellant and kept in a separate account to ensure safety of money and to ensure disbursement to the ultimate customer. Needless to say that if the liability exists and if it is held that the appellant is liable to pay, the amount will have to be paid to the Government since it is in escrow account. Therefore Commissioner should have determined the liability and if there was liability, the amount in escrow account would have been paid to the Government. Therefore, at this stage, we cannot say that the amount has been collected as service tax and therefore, the clause (2) of Section 73A is attracted and the amount should have been paid to the Government by the appellant. It is not the case of the department that the appellant is liable to pay service tax on the service rendered .

In view of above discussion, the impugned order is set aside and the appeal is allowed.

(See 2014-TIOL-458-CESTAT-BANG)