The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bengaluru, has held that composite contracts involving both the supply of materials and the provision of services could not be subjected to service tax before the introduction of the taxable category of “Works Contract Service” on June 1, 2007.

The Bench of P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) upheld the appropriation of service tax and interest already paid by the contractor for the period from June 1, 2007 to March 2008 under the Works Contract Service category.

The appellant/assessee was engaged in executing civil construction contracts, including the construction of Bharat Sanchar Nigam Limited (BSNL) exchange buildings, telecommunication towers and tower foundations. It had also constructed a building for the Rubber Board and a meditation centre for the Marthoma Sabha.

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Based on information received by the preventive wing of the Service Tax Department, an investigation was initiated on the allegation that the appellant had failed to pay service tax on the services provided under various taxable categories.

A show cause notice dated December 18, 2008 was issued demanding service tax for the period from 2004-05 to 2007-08. The department sought to classify the activities under categories including “Commercial or Industrial Construction Service,” “Erection, Commissioning or Installation Service” and “Works Contract Service.”

The adjudicating authority, through an order dated March 5, 2010, confirmed the demand and imposed penalties under different provisions of the Finance Act, 1994.

The Commissioner (Appeals), by an order dated April 28, 2015, rejected the contractor’s appeal. However, the appellate authority set aside the penalty imposed under Section 76, subject to the payment of penalty under Section 78 of the Finance Act.

The contractor then approached the CESTAT.

The appellant argued that the dispute was squarely covered by the Supreme Court’s decision in Commissioner of Central Excise and Customs v. Larsen & Toubro Limited.

Relying on that judgment, the appellant submitted that a composite contract involving the supply of materials as well as the provision of services falls within the category of a works contract. Such contracts could not be taxed under the pre-existing categories of construction or erection services before the introduction of Works Contract Service on June 1, 2007.

The contractor pointed out that the adjudicating authority itself had granted an abatement of 67% from the gross amount because the consideration charged under the contracts included the value of the materials used in executing the works. According to the appellant, this established that the contracts were composite in nature and involved both goods and services.

The appellant further contended that its construction activities did not necessarily qualify as Commercial or Industrial Construction Service or Erection, Commissioning or Installation Service because the projects had been executed for government departments, government companies and a religious institution.

The appellant relied upon CBEC Circular No. 80/10/2004-ST dated September 17, 2004 to argue that the taxability of a building or civil structure depended primarily on whether it was intended to be used for commerce or industry.

The circular clarified that constructions meant for organisations or institutions established solely for educational, religious, charitable, health, sanitation or philanthropic purposes, and not for earning profit, were non-commercial and therefore not taxable.

It further stated that government buildings and civil constructions were generally used for residential or official purposes or for providing civic amenities and, therefore, would ordinarily not be taxable. An exception would apply where a government or local body undertook construction for a commercial purpose, such as building shops to be rented out.

On this basis, the appellant maintained that the nature and end use of the projects undertaken by it had not been properly considered by the authorities.

The contractor also challenged the invocation of the extended limitation period under the proviso to Section 73(1) of the Finance Act, 1994.

The department had invoked the extended period on the ground that the appellant had neither registered as a taxable service provider nor filed ST-3 returns. The authorities alleged that the provision of taxable services without complying with service tax formalities came to light only because of the departmental investigation.

The appellant contended that the dispute concerned the taxability of composite works contracts and the exemption available to construction projects undertaken for government bodies and religious institutions. It claimed to have genuinely believed that such contracts were not liable to service tax.

According to the contractor, the non-payment arose from an interpretational dispute and not from any intention to evade tax. It was further submitted that the contracts had been executed for government departments and government companies and, therefore, suppression of turnover with an intent to evade tax could not reasonably be alleged.

The appellant consequently argued that the extended limitation period and the penalty under Section 78 were unjustified.

After hearing both sides, the Tribunal observed that the evidence on record established that the activities carried out by the appellant fell within the category of works contracts.

The Bench noted that service tax on Works Contract Service was introduced only with effect from June 1, 2007. Since the contracts executed by the appellant were composite contracts that included the supply of materials, the demand for the period before the introduction of the works contract levy could not be sustained.

“It is an admitted fact that Appellant had carried out activities which is falling under the category of ‘works contract’ and service tax was introduced on works contract with effect from 01.06.2007,” the Tribunal observed.

The CESTAT held that the composite contracts entered into by the appellant, including the supply of materials, were classifiable as works contracts. Therefore, no service tax demand could be raised for the period prior to June 1, 2007.

The Tribunal noted that, before the issuance of the show cause notice dated December 18, 2008, the appellant had already paid the applicable service tax along with interest for the period from June 1, 2007 to March 2008. The payment was made on March 31, 2008.

Accordingly, while setting aside the demand for the period prior to June 1, 2007, the CESTAT upheld the appropriation of the tax and interest paid for the subsequent period under the Works Contract Service category.

The Tribunal also set aside the penalties imposed under the orders passed by the lower authorities.

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