The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Allahabad, has held that construction of a road and protection work undertaken on the bank of the River Ganga for the Irrigation Department were exempt from service tax under Notification No. 25/2012-ST.

However, the bench of  P.A. Augustian (Judicial Member) and Sanjiv Srivastava (Technical  Member) rejected the contractor’s claim that Bharat Coking Coal Limited (BCCL) qualified as a “government authority” for claiming exemption on repair work undertaken for the company. It accordingly upheld the contractor’s share of service tax payable under the reverse-charge mechanism.

The appellant/assessee was engaged in providing works contract and construction services to various authorities and entities, including the Varanasi Development Authority, Uttar Pradesh Jal Nigam, Irrigation Department, Bharat Coking Coal Limited, municipal authorities and a private infrastructure company.

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The department alleged that the contractor had provided taxable services without obtaining service tax registration, paying the applicable tax or filing the prescribed ST-3 returns.

Three show cause notices were issued for different periods. These notices initially proposed substantial service tax demands based on payments reflected in the contractor’s records and Form 26AS.

After examining the nature of individual contracts, the Commissioner substantially dropped the proposed demands. However, demands relating to receipts from the Irrigation Department, BCCL and Siddheevinayak Infravillage Private Limited were confirmed.

Following two corrigenda to the adjudication order, the disputed service tax demand stood at ₹12,80,170, comprising:

• ₹5,69,945 on receipts from the Executive Engineer, Irrigation Department, Varanasi;
• ₹6,87,725 on works performed for BCCL; and
• ₹22,500 on payments received from Siddheevinayak Infravillage Private Limited.

Interest and penalties under Sections 76 and 77 of the Finance Act, 1994, were also imposed.

The demand of ₹5,69,945 related to receipts of approximately ₹51.81 lakh from the Executive Engineer, Irrigation Department, Varanasi, during financial year 2014-15.

The adjudicating authority had confirmed the demand because the contractor had allegedly failed to produce the relevant contracts and agreements establishing the exempt nature of the services.

Before the Tribunal, the contractor produced documents showing that the payments related to two categories of work: construction of an interlocking cement concrete block road from Dildarnagar Railway Station to the bypass road, and protection work at Narva Ghat on the right bank of the River Ganga in Gahmar village, Ghazipur.

After examining the documents, CESTAT found that the services had been provided to the government or a government authority and were covered by Serial No. 12(a) of Notification No. 25/2012-ST dated June 20, 2012.

The Tribunal also noted that the adjudicating authority had granted exemption for similar services performed for the same Irrigation Department during subsequent periods.

“Thus, we do not find any merits in this demand,” the Bench observed while setting aside the service tax demand of ₹5,69,945.

The Tribunal reached a different conclusion concerning repair work undertaken for Bharat Coking Coal Limited.

The contractor argued that BCCL was a government authority and, therefore, services relating to the repair of residential quarters provided to the company were exempt under Notification No. 25/2012-ST.

CESTAT rejected the contention after examining the statutory definition of “government authority” and BCCL’s corporate documents, including Form MGT-7.

The Bench observed that the contractor had failed to establish that BCCL was constituted under any Central or State legislation or that it satisfied the prescribed shareholding conditions under the relevant definition.

The fact that BCCL was a subsidiary of Coal India Limited did not, by itself, make it a government authority for the purpose of the service tax exemption notification.

Accordingly, repair services provided to BCCL could not be treated as exempt merely because of its public-sector character.

The Tribunal further noted that BCCL had paid 50% of the applicable service tax under the reverse-charge mechanism.

Under Notification No. 30/2012-ST, service tax liability on specified works contract services was divided equally between the service provider and the service recipient. Consequently, BCCL’s payment of its 50% share did not extinguish the contractor’s liability for the remaining half.

The Bench observed that when the service recipient itself had discharged its portion of the tax, there was no merit in the contractor’s argument that the entire service was exempt because BCCL was a government authority.

CESTAT therefore upheld the service tax demand of ₹6,87,725 relating to the works performed for BCCL.

The department had also confirmed service tax of ₹22,500 on ₹1.50 lakh received from Siddheevinayak Infravillage Private Limited during financial year 2016-17.

The contractor claimed that the payment was related to road construction. However, it admitted before the Tribunal that it did not possess any agreement, work order, invoice or other supporting document demonstrating that the services were exempt.

In the absence of documentary evidence, the Tribunal upheld the demand.

The Tribunal sustained the penalties imposed under Sections 76 and 77 of the Finance Act, 1994, observing that the contractor had failed to obtain service tax registration, file statutory returns and pay the tax within the prescribed time.

Referring to the Supreme Court’s decision in Gujarat Travancore Agency and the Allahabad High Court’s ruling in Usha Martin Construction Steel Ltd., the Bench reiterated that tax penalties of this nature are civil obligations.

Unless the statutory provision specifically requires proof of mens rea, the occurrence of the statutory default is sufficient for imposing such a penalty, the Tribunal observed.

Since part of the service tax demand was set aside, the penalty under Section 76 was proportionately reduced to ₹71,022. The penalties of ₹10,000 each imposed under Sections 77(1)(a) and 77(2), respectively, were upheld.

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