The Allahabad Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that construction and soil work undertaken for Government irrigation projects, including canal-related works, is exempt from Service Tax under the Mega Exemption Notification No. 25/2012-ST.
The bench of Justice (Dr.) P. K. Choudhary (Judicial Member) has observed that the contractor had undertaken soil work on canals, construction of culverts (pulia), and allied irrigation infrastructure works. The certificates issued by the Executive Engineers and Form 26AS had been placed on record to substantiate the nature of the projects.
The appellant was registered with the Rural Engineering Services (RES) Department of the Government of Uttar Pradesh, a nodal agency entrusted with executing construction works for Government and semi-Government departments. During FY 2016-17, the contractor received payments aggregating to over ₹61.53 lakh from Rural Engineering Services, Zila Panchayats of Varanasi and Chandauli, and two Irrigation Department divisions.
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Although registered under the Uttar Pradesh VAT Act, the contractor was not registered under the Service Tax law, believing that the services rendered were fully exempt under the Mega Exemption Notification No. 25/2012-ST dated 20 June 2012. Before the adjudicating authority, the contractor produced exemption notifications, work agreements, certificates issued by Rural Engineering Services, work orders from Zila Panchayats, Form 26AS, and VAT assessment records to establish that the works were Government infrastructure projects eligible for exemption.
The adjudicating authority accepted that construction of cement concrete roads, drains, and interlocking roads undertaken for Rural Engineering Services and Zila Panchayats qualified for exemption under the Mega Exemption Notification.
However, the authority denied exemption in respect of receipts from the Executive Engineer, Irrigation Construction Division, Robertsganj and the Executive Engineer, Bundhi Division-II, holding that the contractor had failed to furnish sufficient documentary evidence such as work orders and agreements for those projects. Consequently, it confirmed a Service Tax demand of ₹87,861 together with interest and penalties while dropping the remaining demand exceeding ₹8.80 lakh.
The Commissioner (Appeals) dismissed the contractor’s appeal, observing that several documents—including tax invoices, measurement books, challans, bank statements, stock registers, VAT returns, work completion certificates and other records—had not been produced. According to the appellate authority, these documents were necessary to establish the precise nature of services and determine whether they qualified for exemption under the notification.
Before the Tribunal, the dispute was confined to the services rendered to the two Irrigation Department divisions.
The Bench found that these activities squarely fell within Serial No. 12(d) of Mega Exemption Notification No. 25/2012-ST, which exempts services provided to the Government by way of construction, repair, maintenance or alteration of canals, dams or other irrigation works.
Accordingly, the Tribunal ruled that the services were fully exempt and that the impugned order could not be sustained.
Allowing the appeal, the CESTAT set aside the Service Tax demand of ₹87,861; quashed the interest liability; set aside penalties imposed under Sections 78, 77(1) and 77(2) of the Finance Act, 1994; and granted consequential relief to the appellant in accordance with law.
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