The Allahabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that a works contractor providing taxable services to the Public Works Department (PWD) is entitled to the benefit of the reverse charge mechanism under Notification No. 30/2012-Service Tax, thereby substantially reducing the service tax liability. 

At the same time, the bench of Sanjiv Srivastava (Technical Member) upheld the invocation of the extended period of limitation, observing that the contractor had failed to obtain service tax registration, file statutory returns, or discharge tax despite being aware of the taxability of the services. 

The dispute arose from information received by the Service Tax Department from the Income Tax Department regarding the appellant’s receipts during the financial year 2015-16. Based on the information reflected in the income tax records and Form 26AS, the department alleged that the contractor had provided taxable services without obtaining service tax registration or paying the applicable tax.

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Following investigation, the department sought financial records, including Form 26AS, balance sheets, income tax returns and work orders. Although the contractor submitted certain documents and claimed that the services rendered to the Uttar Pradesh Public Works Department were exempt under Notification No. 25/2012-Service Tax relating to construction services provided to the Government, the department alleged that the contractor failed to furnish all supporting documents and proceeded to issue a show cause notice demanding service tax of over ₹13.22 lakh, along with interest and penalties, by invoking the extended period of limitation. 

During adjudication, the contractor produced additional documents demonstrating that several contracts executed for the PWD qualified for exemption under the Mega Exemption Notification. The Commissioner (Appeals), in an earlier round, remanded the matter for fresh examination of the work orders and supporting records.

After denovo adjudication, the adjudicating authority accepted that a substantial portion of the receipts related to exempt services and reduced the demand from more than ₹13 lakh to about ₹3.72 lakh while confirming interest, equal penalty under Section 78, and separate penalties for failure to obtain registration and file statutory returns.

The Commissioner (Appeals) further reduced the demand marginally to ₹3.43 lakh by deleting the tax relating to the supply of stone ballast but refused to extend the benefit of the reverse charge mechanism under Notification No. 30/2012-Service Tax. 

Before the Tribunal, the appellant argued that although certain services were taxable, it was entitled to pay only 50% of the service tax liability because the remaining liability was required to be discharged by the service recipient under the reverse charge mechanism prescribed under Notification No. 30/2012-Service Tax.

The contractor relied heavily on the Tribunal’s earlier decision in G.N. Construction v. CCE, Jalandhar, which had held that contractors executing works contracts for specified government bodies were entitled to the benefit of the reverse charge mechanism.

The appellant also contended that the demand was barred by limitation since the transactions were reflected in its books of account and income tax records, leaving no basis for alleging suppression of facts. 

The Tribunal observed that after the denovo proceedings, the principal surviving dispute was not whether the services were taxable, but whether the contractor could claim the benefit of Notification No. 30/2012-Service Tax.

Referring extensively to the Chandigarh Bench decision in G.N. Construction, the Tribunal held that contractors providing eligible works contract services to bodies such as the Public Works Department were entitled to the benefit of the reverse charge mechanism. Consequently, the appellant could not be saddled with the entire service tax liability and was liable only to the extent prescribed under the notification.

The Tribunal therefore directed that the demand be recomputed after extending the benefit of Notification No. 30/2012-Service Tax, while leaving the appellant liable for the recalculated tax, applicable interest and penalty. 

However, the Tribunal declined to interfere with the invocation of the extended period of limitation.

It observed that the appellant had neither obtained service tax registration nor filed ST-3 returns despite being aware that a portion of the services was taxable. In these circumstances, the Tribunal held that the department was justified in invoking the extended limitation period under the Finance Act, 1994.

The Bench also distinguished the authorities relied upon by the appellant on limitation, holding that those decisions were not applicable to the facts of the present case. 

The Tribunal held that the appellant was entitled to the benefit of Notification No. 30/2012-Service Tax relating to the reverse charge mechanism. It directed the appellant to quantify and discharge the recomputed tax liability together with interest under Section 75 and penalty under Section 78 of the Finance Act, 1994. The finding regarding invocation of the extended period of limitation was, however, sustained. 

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