Construction Contracts with Transfer of Goods Taxable as Works Contract Service: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad Bench, has held that construction contracts involving transfer of property in goods are appropriately classifiable under Works Contract Service (WCS) rather than Construction of Residential Complex Service (CRCS) under the service tax regime. The Bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) remanded the matter to the adjudicating authority for recalculation of the tax demand after extending the benefit of the composition scheme available for works contracts. The dispute pertained to the levy of service tax on construction works executed between 2007-08 and 2009-10, including residential housing projects under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and civil works connected with irrigation and drinking water supply projects. The department had issued a show cause notice demanding ₹4,19,486 in service tax, which was subsequently confirmed by the adjudicating authority along with a penalty under Section 78 of the Finance Act. The department classified the services provided by the appellant under Works Contract Service, noting that the contracts involved transfer of property in goods, evidenced by the payment of VAT on materials used in execution of the projects. The appellant, however, argued that the services should be classified under Construction of Residential Complex Service, under which it had already paid service tax after availing 33% abatement on the gross value. It further claimed that certain works—such as earthwork excavation and construction relating to the Kovvada Kalva Reservoir schemeand civil works for the Godavari Drinking Water Project for Visakhapatnam city—were public utility works and should not be treated as taxable commercial activities. After examining the agreements and the nature of the work, the Tribunal held that once Works Contract Service was introduced as a specific taxable category from 1 June 2007, any contract involving transfer of property in goods during execution would fall more appropriately under WCS. The Bench observed that the appellant had admittedly paid VAT on materials used in the projects, indicating transfer of property in goods. Therefore, the Tribunal concluded that the adjudicating authority was correct in classifying the services under Works Contract Service instead of Construction of Residential Complex Service. The appellant also contended that residential houses constructed for weaker sections under the JNNURM schemeshould be exempt from service tax. However, the Tribunal noted that the relevant exemption notification granting such relief was introduced only from 1 March 2011, whereas the disputed period in the present case ranged from 2007 to 2010. Consequently, the benefit of that exemption could not be applied retrospectively. With respect to the Godavari Drinking Water Project and irrigation-related works, the Tribunal observed that the adjudicating authority had assumed that the contracts were turnkey works without sufficient evidence to establish that they satisfied the requirements of Works Contract Service merely on the basis of expressions used in the work order. A significant issue noted by the Tribunal was that the adjudicating authority did not extend the benefit of the composition scheme available for Works Contract Service, which allows contractors to pay service tax at a concessional rate based on the contract value. The Bench held that while the classification under Works Contract Service was correct, the tax liability should be recalculated after granting the composition scheme benefit, if applicable. The appellant also challenged the invocation of the extended limitation period and the imposition of penalty under Section 78, arguing that the dispute involved interpretation of classification and that there was no suppression of facts. However, the Tribunal found no merit in this contention and upheld the invocation of the extended period as well as the penalty, observing that exemptions or exclusions can only be granted when specifically provided under law or notification. The tribunal ultimately remanded the matter to the adjudicating authority for the limited purpose of recomputing the service tax demand after extending the composition scheme benefit under Works Contract Service. Case Details Case Title: M/s Coastal Engineering Constructions Versus Commissioner of Central Excise & Service Tax, Hyderabad Citation: JURISHOUR-374-CES-2026(HYD) Case No.: Excise Appeal No. 26290 of 2013 Date: 13.03.2026 Counsel For Appellant: D. Venugopal, Advocate Counsel For Respondent: A. Rangadham, AR Click Here To Read Order Read More: OFC Network Project for Railways Is Composite Works Contract, Rs. 1.6 Crore Service Tax Demand Against Railtel Quashed: CESTAT

Construction Contracts with Transfer of Goods Taxable as Works Contract Service: CESTAT

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