The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Allahabad Regional Bench, has held that erection services were not liable to service tax prior to September 10, 2004, setting aside a service tax demand raised on amounts received for erection work undertaken before that date.
The bench of P.K. Choudhary (Judicial Member) and K. Anpazhakan (Technical Member) observed that the extended period of limitation could not be invoked where the department had access to the relevant information and there was no suppression of facts by the assessee.
The dispute originated from an inspection by officers of the Central Excise Commissionerate, Kanpur. The department noticed that the appellant had obtained registration under the category of “Commissioning and Installation” services only on March 9, 2005, although it had been undertaking work for BHEL from an earlier period.
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According to the department, BHEL had paid substantial amounts towards commissioning and installation services during the period from July 2003 to March 2004. The department treated the amounts as taxable receipts and calculated service tax of ₹13,81,054 at the applicable rate of 8 percent.
The department further compared the taxable values declared in the assessee’s ST-3 returns for 2004-05 and 2005-06 with the amounts reflected in Form 16A issued by BHEL. On this basis, it alleged that service tax had not been paid on a differential amount of ₹3,71,68,606, resulting in a service tax liability of ₹33,71,596 and Education Cess of ₹39,811. The total alleged short payment was consequently quantified at ₹34,11,408.
A Show Cause Notice dated February 18, 2008, was issued demanding ₹34,11,408 along with interest and penalty. The adjudicating authority confirmed the demand and imposed an equivalent penalty. The Commissioner (Appeals) subsequently upheld the demand, prompting the assessee to approach the CESTAT.
Before the Tribunal, the appellant contended that it had been awarded the work of erection of two 250 MW boilers at Parichha, Jhansi, by BHEL on April 25, 2003, and that erection activities had commenced in April 2003.
The central submission was that erection services were not taxable during the period in dispute prior to September 10, 2004. According to the appellant, erection services were brought within the service tax regime only from September 10, 2004. Therefore, the amount of approximately ₹1.72 crore received for erection work during 2003-04 could not be subjected to service tax retrospectively.
The appellant also pointed out that it had subsequently paid short-paid service tax of ₹4,01,408 relating to 2004-05 and 2005-06. It therefore argued that the remaining demand, particularly the portion relating to erection work performed before September 10, 2004, was legally unsustainable.
The assessee relied upon Board Circular No. 80/10/2004-S.T. dated September 17, 2004. The circular clarified that erection services were to be taxed along with commissioning and installation services from September 10, 2004.
The appellant also relied upon Notification No. 25/2004-ST dated September 10, 2004, which, according to the Tribunal’s order, specifically exempted erection services provided by a “Commissioning and installation Agency” where the services had been received prior to September 10, 2004.
The appellant further cited the Tribunal’s decision in Power Best Electricals Limited v. CCEX, Calicut, reported at 2008 (9) S.T.R. 497 (Tri.-Bang.), where the Tribunal had held that erection services became taxable only from September 10, 2004.
After examining the record, the CESTAT accepted the appellant’s contention regarding the period prior to September 10, 2004.
The Tribunal noted that the assessee had been awarded the boiler erection project on April 25, 2003, and had commenced erection work in April 2003. It categorically observed that services rendered in connection with erection work were not liable to service tax until September 10, 2004.
Accordingly, the Tribunal held that no service tax was payable on the amount of approximately ₹1.72 crore received by the appellant for erection work during 2003-04.
The Bench relied upon the Board circular as well as Notification No. 25/2004-ST and the earlier Power Best Electricals ruling. On that basis, it concluded that the service tax demand concerning the ₹1.72 crore received for erection services rendered before September 10, 2004, was legally unsustainable and set aside that portion of the demand.
With respect to the balance demand, the Tribunal took note of the appellant’s submission that it had already discharged the short-paid service tax amounting to ₹4,01,408 for 2004-05 and 2005-06.
The Tribunal therefore considered that there was no surviving basis for sustaining the service tax demand confirmed in the impugned order.
The Tribunal also addressed the department’s invocation of the extended period of limitation.
It found that the issue had been raised by the audit on the basis of information already available in the department’s records. The Tribunal specifically observed that the appellant had not suppressed any information from the department. Consequently, the extended period of limitation could not be validly invoked against the appellant.
This finding provided an additional ground for the Tribunal to reject the demand, apart from its conclusion on the substantive taxability of erection services.
Since the underlying service tax demand was found unsustainable both on merits and on limitation, the Tribunal held that the consequential interest and penalty could not survive.
The Bench expressly held that once the service tax demand itself was not sustainable, there was no question of demanding interest or imposing penalty. Both were therefore set aside.
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