The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside three orders confirming service tax demands holding that the construction activities undertaken by the assessee were composite contracts involving both supply of goods and provision of services and, therefore, could not be sustained under the category of “Construction of Complex Service” as proposed in the show cause notices.

The Bench of Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) has observed that the adjudicating authority had failed to properly follow the earlier remand directions and had violated the principle of judicial protocol by confirming the demand under a classification that was inconsistent with the nature of the activity already determined by the Tribunal.

The assessee was engaged in construction of residential complexes for the Greater Noida Industrial Development Authority (GNIDA). The Department investigated whether service tax had been paid on the construction activities and subsequently issued show cause notices covering different periods.

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The Department’s case was that the activities undertaken by the assessee were taxable under the category of Construction of Complex Services.

The works included construction of individual residential houses for GNIDA, including 60 houses in Sector Omicron-II (Part-E), 146 houses in Sector XU-1 (Package-I), and 48 houses in Sector Omicron 1A. The assessee had also undertaken internal development work involving roads, drinking water, sewerage and water-supply infrastructure.

Apart from the residential construction, the Department had also raised demands concerning construction of a boys’ hostel at Gautam Budh University, Greater Noida.

However, the original adjudicating authority had initially dropped substantial portions of the demands.

In particular, the adjudicating authority held that construction of single-storey houses in different localities would not fall within the definition of construction of a complex because a single building containing at least 13 residential units had not been constructed. The authority also concluded that internal development works such as roads and other infrastructure could not be classified as construction of residential complexes.

The demand relating to construction of the boys’ hostel was also dropped on the reasoning that a hostel could not be treated as a residential complex and that the construction was for an educational institution.

A significant aspect of the present decision was the Tribunal’s earlier order dated July 11, 2017, in which it had examined the same dispute.

In that earlier decision, CESTAT had held that the clusters of houses constructed by the assessee constituted residential complexes comprising several individual residential houses along with common areas and facilities. However, it simultaneously found that the construction was composite in nature, involving both supply of materials and provision of services, subject to verification.

The matter had therefore been remanded to the original authority for a fresh decision in accordance with the law laid down by the Supreme Court in Larsen & Toubro.

The earlier Tribunal decision had also upheld the dropping of service tax demands relating to internal development works and the boys’ hostel. The Tribunal noted that the infrastructure works were in the nature of civic amenities being provided by a statutory authority and that the hostel could not be treated as a residential unit for the purpose of construction of complex service.

The Department did not appeal against the dropping of these portions of the demand. Consequently, according to the present order, the surviving controversy was essentially confined to the construction of residential houses and the proper classification of that activity.

Before the present Bench, the assessee argued that the disputed construction activity was appropriately classifiable as Works Contract Service (WCS) and not as Construction of Complex Service.

The assessee pointed out that the Department itself had allowed a 67% abatement at the stage of issuance of the show cause notice, which, according to the assessee, demonstrated that the Department recognised the composite nature of the activity. Despite this, the adjudicating authority had confirmed the demand under Construction of Complex Service.

The assessee relied heavily on the Supreme Court’s decision in Commissioner, Central Excise and Customs, Kerala v. Larsen & Toubro Ltd., contending that composite contracts involving transfer of property in goods could not be subjected to service tax under the categories of Construction of Complex Service or Commercial or Industrial Construction Service in the manner adopted by the Department.

It was argued that for the period prior to June 1, 2007, service tax could not be imposed on such composite contracts under those categories and that, after introduction of Works Contract Service with effect from June 1, 2007, a composite construction contract had to be dealt with under that specific taxable category.

The Tribunal examined the constitutional and statutory principles laid down by the Supreme Court concerning works contracts.

Referring to the Supreme Court’s decision in Larsen & Toubro, the Tribunal noted that the expression “works contract” is broad and encompasses different varieties of contracts involving the undertaking or bringing into existence of works. A contract does not cease to be a works contract merely because it contains additional obligations alongside the supply of goods and materials and performance of labour or services.

The Tribunal further explained the impact of the Supreme Court’s ruling on the service tax regime. According to the CESTAT, the Supreme Court had settled the question of whether composite contracts involving both provision of service and transfer of property in goods could be taxed under Construction of Complex Service and Commercial or Industrial Construction Service.

Since the valuation provision under Section 67 of the Finance Act, 1994, referred to the gross amount charged for taxable services, taxing composite contracts under those categories would effectively result in service tax being levied on the value attributable to transfer of property in goods as well. The Tribunal noted that such a levy would be constitutionally impermissible.

The Tribunal accordingly reiterated that Construction of Complex Service and Commercial or Industrial Construction Service, as relevant to the dispute, covered pure service contracts, whereas the statutory mechanism for dealing with the goods component of a composite contract was introduced with the separate taxable category of Works Contract Service.

A particularly important observation in the ruling concerns the scope of the show cause notice.

The Tribunal emphasised that once a show cause notice proposes a service tax demand under a particular category of taxable service, the adjudicating or appellate authority cannot travel beyond the allegations contained in that notice and confirm the demand under an entirely different category.

The reason is fundamental: the assessee must be put on notice about the precise taxable service alleged against it so that it can properly defend itself.

In the present case, the show cause notices had proposed the levy under the category of Construction of Complex Service. The Tribunal found that the activity had already been held in its earlier order to be composite in nature, involving supply of goods as well as services.

The Department had accepted that earlier determination, yet the adjudicating authority, while undertaking the remand proceedings, proceeded to confirm the demand under Construction of Complex Service.

The Tribunal took serious note of the fact that its earlier directions had not been properly followed.

The earlier CESTAT order had directed reconsideration of the matter in light of the Supreme Court’s ruling in Larsen & Toubro. However, despite the earlier finding that the disputed residential construction was composite in nature, the adjudicating authority reconfirmed the service tax liability under the same Construction of Complex Service classification.

The present Bench held that this approach amounted to a failure to follow the directions contained in the earlier remand order and constituted a violation of the principle of judicial protocol.

The finding is significant because it reinforces the principle that an adjudicating authority, while deciding a matter on remand, cannot disregard binding findings and directions already rendered by the appellate forum.

The Tribunal also took note of the distinction between the periods before and after June 1, 2007, the date from which Works Contract Service was introduced as a separate taxable service.

It recorded the assessee’s contention, consistent with the Supreme Court’s jurisprudence, that composite services could not be subjected to service tax under the Construction of Complex Service category for the period prior to June 1, 2007.

For the subsequent period, where the activity was composite and involved transfer of property in goods, the appropriate classification was Works Contract Service rather than the pure-service category invoked in the show cause notices.

The assessee also informed the Tribunal that service tax collected from GNIDA had been deposited with the Government under protest.

It undertook that if the liability was ultimately held not to exist because of the incorrect classification adopted by the Department, the amount would either be refunded to GNIDA after sanction of the refund by the tax department or GNIDA could directly seek refund from the Department.

The assessee had additionally challenged the imposition of penalties, arguing that the relevant information regarding the nature of its business was already available with the Department and that it was incorrect to conclude that supporting documents had not been furnished.

After examining the records, the earlier Tribunal decision and the Supreme Court’s law on composite contracts, the CESTAT concluded that the service tax demands had been wrongly confirmed under Construction of Complex Service.

The Tribunal specifically held that the activity had already been determined to be composite in nature, involving supply of goods as well as services. Since the Department had accepted the earlier Tribunal order, the subsequent confirmation of the demand under Construction of Complex Service was unsustainable.

The Tribunal set aside the impugned orders in all three appeals and allowed all three appeals. 

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