The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi has set aside a service tax demand of ₹2,61,24,786 against West Wind Concepts Private Limited, holding that the company’s extensive showroom interior fit-out activities constituted “original works” under the Service Tax (Determination of Value) Rules, 2006. The Tribunal held that the assessee was therefore entitled to claim 60% abatement and pay service tax on 40% of the value of the works contract.

The Bench of Justice Ashok Jindal (Judicial  Member) and P. V. Subba Rao (Technical Member) has observed that  the assessee had correctly discharged service tax on the prescribed 40% portion of the works contract value after claiming the 60% abatement. Consequently, the additional service tax demand arising from the department’s attempt to treat the activities as completion and finishing services was held unsustainable.

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The appellant/assessee was engaged in providing interior decoration and designing services and was registered with the service tax department. It had been regularly filing ST-3 returns. The department initiated an audit covering the period from October 2014 to June 2017. 

During the audit, discrepancies were raised concerning miscellaneous income received from an individual customer, reimbursement received from Reebok India Company for goods destroyed in a showroom fire, and the service tax treatment adopted for works contract services.

Following the audit, the department issued a show cause notice dated June 25, 2020. The notice proposed three principal demands: ₹4,37,568 as service tax on an advance of ₹30,17,713 received from Virat Kohli and subsequently forfeited; ₹43,56,671 on ₹3,00,46,008 received from Reebok India Company in relation to goods destroyed in a showroom fire; and ₹2,13,30,547 on the allegation that the assessee had wrongly claimed the higher abatement applicable to original works.

The final audit report was issued only on January 14, 2021, several months after the show cause notice had already been issued. The assessee challenged the proceedings on several grounds, including limitation, jurisdiction, validity of the audit, the competence of the adjudicating authority and the substantive classification of its works contract activities.

The Commissioner of CGST Audit-I ultimately confirmed the entire service tax demand of ₹2,61,24,786 under Section 73(2) of the Finance Act, 1994, along with interest under Section 75. Equal penalties under Section 78 and additional penalties under Section 77 were also imposed.

The assessee challenged the order before CESTAT, arguing, among other things, that the extended period of limitation could not be invoked because the relevant details had been disclosed in its periodic returns and the proceedings arose out of an audit conducted by the department itself.

While the assessee raised several technical and jurisdictional objections, CESTAT identified the principal substantive question as whether the work performed by West Wind Concepts amounted to “original work” or merely “completion and finishing work.”

The dispute was significant because the classification directly affected the amount of taxable service value under Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

Under Rule 2A(ii)(A), in the case of works contracts involving original works, service tax was payable on 40% of the total amount charged, effectively providing a 60% abatement. For completion and finishing services under the applicable provision, the taxable portion was higher.

The Revenue argued that the assessee had worked on already existing structures and had undertaken activities such as flooring, tiling, electrical installations, painting, lighting, fire-fighting systems, glazing, HVAC, plumbing and carpentry. According to the department, these were completion and finishing services rather than original works.

CESTAT relied heavily on its earlier decision in Kalpakaru Projects Pvt. Ltd. v. Principal Commissioner, CGST, Delhi South, where it had examined substantially similar showroom fit-out activities.

In that case, the Tribunal had considered work involving the transformation of bare commercial structures into fully functional showrooms, including flooring, ceilings, internal walls, partitions, HVAC, fire-suppression systems, plumbing, toilets and other fit-outs. It concluded that such extensive activity went beyond mere finishing work and qualified as original work.

The Tribunal noted that the assessee in the present case similarly received structures of newly constructed commercial buildings with roofs and floors and transformed them into modern commercial showroom outlets. The work included making floors usable, constructing ceilings and internal walls, partitions, HVAC systems, fire-suppression arrangements, plumbing and other client-specific fit-outs.

Importantly, materials were used in execution of the contracts and the assessee had paid VAT on 80% of the value of the work contract as goods. The Tribunal found these facts consistent with the assessee’s treatment of the contracts as works contracts qualifying for the original-work abatement.

After examining the nature of the activities, CESTAT expressly held that the work undertaken by West Wind Concepts was original work within the meaning of Rule 2A(ii)(A).

The Tribunal’s reasoning follows its earlier observation in Kalpakaru Projects that converting a bare skeletal structure into a complete showroom through extensive electrical, HVAC, plumbing, flooring, ceiling, air-conditioning and partitioning work cannot appropriately be described as merely finishing or completion work.

CESTAT also rejected the service tax demand of ₹4,37,568 relating to the forfeiture of an advance received from Virat Kohli.

The amount represented an advance paid for the purchase of goods which were ultimately not taken by the customer. The Tribunal held that the forfeiture of the advance, in these circumstances, could not be characterised as consideration for any service provided by the assessee.

Accordingly, the Tribunal held that no service tax was payable on the forfeited advance.

The Tribunal similarly rejected the service tax demand of ₹43,56,671 concerning the amount received from Reebok India Company.

The amount represented reimbursement towards the loss of goods caused by a fire in the showroom. CESTAT held that such reimbursement represented compensation for loss suffered by the assessee and could not be treated as consideration for a service supplied by it.

Consequently, the Tribunal held that no service tax was payable on the reimbursement received in connection with the fire loss.

The assessee had also challenged the invocation of the extended limitation period, arguing that the department had access to its ST-3 returns and that the alleged wrong classification was already apparent from the returns and records examined during audit. It relied on several judicial precedents to contend that mere non-payment or short payment of tax, without deliberate suppression or intent to evade, was insufficient to invoke the extended limitation period.

The assessee also questioned the authority of the Commissioner (Audit) to adjudicate the show cause notice. It relied upon Board Circular No. 985/9/2014-CX dated September 22, 2014, and the Tribunal’s earlier ruling in Telenor Consult AS, contending that the Audit Commissioner was empowered to issue the notice but not to adjudicate it.

Further objections concerned the corrigendum allegedly shifting adjudication from the Commissioner of CGST, Delhi South Commissionerate to the Commissioner of CGST Audit-I, as well as the timing of the show cause notice, which preceded the final audit report.

Having found that the assessee’s works contract activities qualified as original works and that the two miscellaneous receipts were not consideration for taxable services, CESTAT concluded that no service tax demand remained payable under the impugned order.

The Tribunal consequently set aside the Order-in-Original dated February 12, 2024 and allowed the appeal with consequential relief. Since the underlying demand itself was unsustainable, the penalties imposed against the assessee also could not survive.

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