The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, has held that repair, reconstruction and maintenance contracts involving both the supply of materials and provision of services constitute composite works contracts and cannot be subjected to service tax under the category of “Management, Maintenance or Repair Service.”

The Bench of P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) set aside the service tax demands raised against a Public Works Department contractor. The extended period of limitation was unavailable to the Revenue because the appellate authority had itself found that there was no deliberate suppression of facts or intention to evade tax.

The appellant/assessee was a licensed contractor undertaking work for the Public Works Department and other departments of the Kerala Government.

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Proceedings were initiated on the allegation that the contractor had failed to obtain service tax registration and pay tax on services rendered between June 16, 2005 and December 31, 2010.

In the first appeal, a show-cause notice dated May 31, 2010 sought service tax of ₹2,93,140 under the category of Management, Maintenance or Repair Service for the period from June 16, 2005 to March 31, 2009. The adjudicating authority confirmed the demand and imposed penalties.

In the second appeal, another show-cause notice dated June 14, 2011 was issued for the subsequent period. The adjudicating authority confirmed a demand of ₹46,919 under Management, Maintenance or Repair Service and ₹15,175 under Manpower Recruitment and Supply Agency Service.

The Commissioner (Appeals), through a common order dated April 28, 2016, dropped the penalties but upheld the service tax demands. The contractor consequently approached the CESTAT.

The appellant submitted that the disputed contracts involved the reconstruction and repair of damaged portions of irrigation canals, improvement work and maintenance of canal structures.

According to the contractor, the contracts involved the transfer of property in goods because materials were supplied and used in executing the work. VAT was accordingly paid by treating the transactions as works contracts.

The appellant produced a certificate issued under the Kerala Value Added Tax Rules, 2005, as evidence of the VAT payment.

It was argued that the Commissioner (Appeals) had recorded contradictory findings. While acknowledging the possibility that the contractor was paying sales tax or VAT on materials purchased for execution of the contracts, the appellate authority simultaneously held that the disputed repair or maintenance work did not involve any transfer of property.

The contractor contended that once the contracts involved both materials and labour and VAT had been paid on the transfer of goods, the transactions could not be treated as pure maintenance or repair services.

The appellant relied principally on the Supreme Court’s decision in Commissioner v. Larsen & Toubro Ltd., in which it was held that the taxable service categories existing before the introduction of works contract service applied to service contracts simpliciter and not to composite contracts involving both goods and services.

Reliance was also placed on the decisions in Lanco Infratech Ltd. v. Commissioner of Customs, Central Excise and Service Tax, Agarwal Engineering Works v. Commissioner of Customs, Central Excise and Service Tax and other cases concerning composite maintenance and repair contracts.

The Tribunal observed that the charging provisions governing the specified taxable services dealt with pure service contracts and not composite works contracts.

Referring to the Supreme Court’s ruling in Larsen & Toubro, the Bench noted that the earlier statutory provisions did not contain a mechanism to remove the value of goods from the gross consideration received under a composite works contract.

The Tribunal found that the contracts before it required the contractor to provide services as well as supply the materials necessary for undertaking the canal reconstruction, repair and maintenance work. The payment of VAT further supported the contractor’s claim that the transactions involved the transfer of property in goods.

The Bench also referred to the ruling in Agarwal Engineering Works, where a demand under Management, Maintenance or Repair Service was set aside because the contracts involved both services and materials, with VAT being deducted from the contractor’s bills.

Accordingly, the Tribunal concluded that the composite contracts could not be subjected to service tax under Management, Maintenance or Repair Service.

The CESTAT also accepted the contractor’s challenge to the invocation of the extended period of limitation.

The Bench noted that the Commissioner (Appeals) had already concluded that there was no deliberate suppression of facts or intention to evade service tax. That finding had resulted in the penalties imposed under Section 78 of the Finance Act, 1994 being set aside.

The Tribunal held that after recording an absence of deliberate suppression, the authorities could not invoke the extended limitation period to sustain the demand.

The certificate issued under the Kerala VAT Rules, evidencing the payment of VAT on the disputed contracts, was also considered relevant. It demonstrated that the transactions had been disclosed and treated by the contractor as works contracts.

The Bench consequently held that there was no justification for invoking the extended period and that the demands confirmed by the adjudicating and appellate authorities on this basis were unsustainable.

The contractor had also supplied manpower on a one-time basis in an emergency situation. While the Tribunal accepted that manpower recruitment and supply was a taxable activity, it found that the value of the activity remained below the applicable taxable exemption threshold.

The demand of ₹15,175 under Manpower Recruitment and Supply Agency Service was therefore also held to be unsustainable.

Allowing both appeals, the CESTAT set aside the impugned orders and granted consequential relief to the contractor in accordance with law.

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