The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Allahabad, has set aside an order sustaining a service tax demand of ₹39.72 lakh against a government works contractor, holding that the adjudicating authority could not reopen exemptions that had already been accepted by the Department and had attained finality.
The bench of P.K. Choudhary (Judicial Member) has observed that construction of a railway training school and hostel qualified for exemption, rejected a demand based on incorrectly recorded income tax return figures, and found that the Department had failed to establish deliberate suppression necessary to invoke the extended limitation period.
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The contractor undertook works contracts for Indian Railways, U.P. Project Corporation, U.P. State Construction and Infrastructure Development Corporation, and the Agriculture Extension Department. The projects included a railway training school and hostel, government hospitals, educational establishments, government offices, staff quarters and soil conservation works.
Acting on third-party information concerning receipts disclosed in financial and tax records, the Department initiated an inquiry because the contractor had neither obtained service tax registration nor paid service tax.
A show cause notice dated October 13, 2021, proposed a demand of ₹1,07,86,840 for April 2016 to June 2017, along with interest and penalties. The proposed tax was calculated at 15% on work order values of approximately ₹7.19 crore.
In the first adjudication order, dated August 30, 2022, the authority accepted the exemption for railway works, allowed cum-tax valuation and reduced the demand to ₹45,82,762.
Both the contractor and the Department appealed. By a common order dated January 13, 2023, the Commissioner (Appeals) remanded the matter for examination of specified issues, including the nature of the contracts, valuation, applicable exemptions and discrepancies in receipts.
During fresh adjudication, however, the authority reopened the railway exemption and denied the previously allowed cum-tax benefit. It confirmed a demand of ₹39,71,959, together with interest and penalties. The Commissioner (Appeals) upheld that order on January 15, 2026, leading to the appeal before CESTAT.
The Tribunal held that the construction of the new railway training school and hostel was covered by Entry 14(a) of Notification No.25/2012-ST, which exempted construction of original works pertaining to railways.
Since the Finance Act, 1994, did not define “railways”, the Tribunal referred to Section 2(31) of the Railways Act, 1989. That definition extends beyond railway tracks to include institutes, hospitals, staff dwellings and other works constructed for railway purposes or in connection with railways.
The training school and hostel therefore fell within the statutory definition, the Tribunal found.
The fresh adjudicating authority had denied the exemption after seeking confirmation from Railways by a letter dated June 20, 2024, and passing its order on June 28, 2024, without receiving a response. CESTAT nevertheless found the works exempt on the record before it.
The Tribunal separately held that the railway demand of ₹24,25,840 was beyond the permissible scope of the remand.
The first adjudicating authority had expressly accepted the railway exemption. The Department had not challenged that finding in its appeal, allowing it to attain finality.
An authority conducting fresh adjudication pursuant to a remand must follow the appellate directions and cannot expand the proceedings to reconsider settled issues, the Tribunal held. It characterised the reopening of the railway exemption as an act without jurisdiction and a violation of judicial discipline.
The Commissioner (Appeals) consequently erred in sustaining the demand arising from that reopening.
The Tribunal also examined works undertaken through U.P. Project Corporation for government buildings, clinical and educational establishments, offices and residential buildings.
It held that the relevant works contract services against contracts awarded before March 1, 2015, were exempt under Entry 12A of Notification No.25/2012-ST.
In addressing the governmental authority issue, the Tribunal relied on the Supreme Court’s decision in Commissioner, Central Excise & Service Tax, Patna v. Shapoorji Pallonji and Company Pvt. Ltd. That decision dealt with the interpretation of the definition of “governmental authority”, including the alternative conditions expressed through the word “or”.
The Tribunal applied that reasoning in accepting the exemption for the qualifying pre-March 2015 contracts.
CESTAT held that the contractor was entitled to cum-tax treatment under Section 67(2) of the Finance Act, 1994, because service tax had not been collected separately from the clients.
The first adjudicating authority had allowed this benefit after examining a certificate from U.P. Project Corporation, work orders and payment documents. The Department had not appealed against that finding.
The Tribunal therefore held that the benefit had attained finality and could not be denied in fresh adjudication. It also found no documentary evidence establishing that the contractor had separately charged or received service tax.
Accordingly, where tax required computation, the gross consideration had to be treated as inclusive of service tax.
Another component of the demand arose from an alleged difference of ₹8,83,833 between receipts recorded in the income tax return and Form 26AS.
The Department treated the income tax return receipts as ₹5,59,98,614 and compared that figure with Form 26AS receipts of ₹5,51,14,781. It then taxed the alleged difference at the full rate.
The Tribunal found that the income tax return placed on record showed gross receipts of ₹5,43,76,184. The earlier appellate order had also recorded that figure.
Consequently, the demand founded on the alleged differential receipts rested on an incorrect factual premise and could not be sustained.
The Tribunal further held that the contractor was eligible for the ₹10 lakh threshold exemption under Notification No.33/2012-ST for financial year 2016-17.
Eligibility depended on the aggregate value of taxable services in the preceding financial year. Since the contractor’s services in financial year 2015-16 were entirely exempt, the preceding year’s taxable service value was nil.
The authorities had failed to grant that exemption without a valid reason, CESTAT observed.
The Tribunal found no positive or affirmative evidence of fraud, collusion, wilful misstatement or suppression with intent to evade tax.
It noted that the withdrawal and subsequent restoration of exemptions under Entries 12 and 12A had created interpretational confusion. The contractor had acted under a bona fide belief that the government construction services remained exempt and had disclosed receipts in financial statements and income tax returns.
The Tribunal held that reproducing statutory allegations in the notice, without identifying a deliberate act of concealment, did not discharge the Department’s burden.
Relying on judicial precedents, it reiterated that suppression requires deliberate conduct intended to evade tax; mere omission or non-payment is insufficient. It accordingly rejected invocation of the extended limitation period and found the penalty under Section 78 unwarranted.
The Tribunal also rejected the other penalties in the circumstances of the case, including the ₹6,000 late fee imposed under Section 70 read with Rule 7C.
CESTAT additionally held that the proceedings were invalid because the Department had not conducted mandatory pre-show cause notice consultation.
The original notice proposed a demand exceeding ₹1.07 crore, above the ₹50 lakh threshold specified in the CBIC instructions and circulars relied upon by the Tribunal.
The Commissioner (Appeals) had rejected the objection by referring to exceptions concerning fraud and collusion. However, CESTAT held that the exception had to be assessed on the facts of the particular case. Mere suspicion or the possibility of an offence did not justify dispensing with consultation.
The Tribunal concluded that failure to comply with the binding consultation requirement vitiated the notice and subsequent proceedings.
CESTAT set aside the impugned order and granted consequential relief in accordance with law.
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