Mall Construction Contract Taxable as Works Contract Only from June 2007: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad Bench, has ruled that the construction of a shopping mall under a composite contract cannot be taxed as “Commercial or Industrial Construction Service” prior to June 1, 2007, and is liable to service tax only under the category of “Works Contract Service” with effect from that date. The Tribunal also held that the value of steel supplied free of cost by the service recipient cannot be included in the taxable value for the relevant period. The Bench of Dr. Ajaya Krishna Vishvesha (Judicial Member) and Satendra Vikram Singh (Technical Member) has observed that the contract was a composite and indivisible works contract involving both supply of goods and provision of services. Relying heavily on the Supreme Court’s landmark judgment in Larsen & Toubro Ltd. and other precedents, the Tribunal reiterated that prior to June 1, 2007, there was no charging mechanism under the Finance Act, 1994, to levy service tax on indivisible works contracts. The case arose from a contract awarded in July 2006 for the construction of a shopping mall in Vadodara, with construction commencing in October 2006 and concluding in March 2008. The contract value exceeded ₹6.55 crore and was structured as a rate contract that included material costs, labour, taxes, and other incidental expenses. Steel required for the project was supplied free of cost by the project owner. Following an investigation initiated in 2010, the department alleged non-payment of service tax and issued a show cause notice in March 2012, proposing recovery of nearly ₹36 lakh along with interest and penalties by classifying the activity as “Commercial or Industrial Construction Service.” The adjudicating authority confirmed the demand, which was subsequently upheld by the Commissioner (Appeals). The Tribunal examined three principal questions. Firstly, whether the activity was classifiable as “Commercial or Industrial Construction Service” or “Works Contract Service”; Secondly, whether the value of free supply materials could be added to the taxable value; and Lastly, whether the extended period of limitation and penalties were justified. The Tribunal ruled that service tax could be levied only from June 1, 2007, when “Works Contract Service” was specifically brought into the tax net. Any demand for the period prior to that date under “Commercial or Industrial Construction Service” was held to be unsustainable. The Bench further held that the assessee was entitled to pay service tax under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, as the conditions for availing the scheme were satisfied. A minor CENVAT credit irregularity, already reversed by the assessee, was not considered fatal. On the issue of valuation, the Tribunal ruled that the value of steel supplied free of cost by the service recipient could not be included in the gross amount for service tax purposes, as the contract execution and payments had commenced well before July 7, 2009—the date from which the relevant explanation mandating such inclusion came into force. The demand of service tax on free supply steel valued at over ₹2.56 crore was therefore set aside. While granting substantive relief on classification and valuation, the Tribunal upheld the invocation of the extended period of limitation, noting that the assessee had neither sought clarification nor obtained registration at the initial stage of execution. Consequently, penalty under Section 78 of the Finance Act, 1994, was upheld, though the penalty under Section 76 was set aside to avoid double penalisation. A nominal penalty under Section 77 for procedural lapses was sustained. The matter was remanded to the adjudicating authority for re-determination of service tax liability strictly in accordance with the findings, including the benefit of the composition scheme and exclusion of free supply materials. The appeal was disposed of by way of remand. Case Details Case Title: Jagaji Construction Company Versus Commissioner of CGST & Central Excise Vadodara I Case No.: Service Tax Appeal No. 10009 of 2014- DB Date: 15.01.2026 Counsel For Appellant: Mrugesh Pandya, Advocate Counsel For Respondent: Himanshu P Shrimali, Superintendent (AR) Click Here To Read Order Read More: Drilling and Blasting for Road Construction as Exempt Works Contract Service: CESTAT

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Mall Construction Contract Taxable as Works Contract Only from June 2007: CESTAT

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