The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of Rs. 4.49 lakh raised against a construction company after holding that the contracts executed by its sub-contractors were works contracts and not manpower supply services, making the demand under the reverse charge mechanism unsustainable. 

The bench of  R. Muralidhar (Judicial Member) has observed that  the documentary evidence on record clearly established that the appellant had not availed manpower supply services from its sub-contractors. Instead, the contracts involved execution of construction work for a lump-sum consideration.

The appeal arose from an order passed by the Commissioner (Appeals), who had partly upheld the service tax demand for the financial years 2016-17 and 2017-18 while setting aside the demand relating to 2014-15 and 2015-16, observing that those earlier periods had already been covered during departmental audit proceedings. Aggrieved by the confirmation of the remaining demand, the assessee approached the Tribunal. 

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The Department had issued a show cause notice on 16 October 2019, demanding service tax under the reverse charge mechanism on the allegation that the company had received “Supply of Manpower Services” from its sub-contractors. The original notice sought recovery of Rs. 8,03,073, invoking the extended limitation period, and the adjudicating authority confirmed the demand. 

Before the Tribunal, the appellant contended that the sub-contractors had been engaged for execution of construction activities such as plastering, brickwork, concreting and similar civil works under lump-sum contracts. It argued that the agreements clearly established the nature of the work as works contracts and not manpower supply services. The appellant relied upon a Spot Memo dated 7 August 2018 as well as the contract awarded by the principal contractor, which described the scope of work as construction-related activities. 

The appellant also placed reliance on a Chartered Accountant’s Certificate dated 17 April 2021, certifying that the sub-contractors had raised invoices on a rate contract/lump-sum basis for execution of construction work and not for supplying manpower.

The certificate further clarified that in the lone instance where a subcontractor had actually billed for manpower supply services, the appellant had already discharged the applicable service tax under the reverse charge mechanism and informed the Department accordingly. The appellant argued that this material evidence had not been properly appreciated by the lower authorities. 

The company further argued that it was already registered under the service tax law and regularly paid service tax on the services rendered by it. Therefore, even assuming service tax was payable under reverse charge, the amount paid would have been available as CENVAT credit, making the entire exercise revenue neutral.

On this basis, it submitted that there was no suppression of facts with an intention to evade tax and consequently the invocation of the extended limitation period was legally unsustainable. 

After examining the records, the Tribunal found a significant inconsistency between the Department’s own documents.

It observed that while the Spot Memo prepared during the audit described the services as “Works Contract Service,”the subsequent show cause notice classified the very same transactions as “Supply of Manpower Services.” The Tribunal noted that for the same consideration amount of approximately Rs. 21.99 lakh relating to the financial year 2016-17, the audit team had initially computed a substantially lower tax liability treating it as works contract service, whereas the show cause notice demanded a much higher amount by reclassifying the activity as manpower supply. 

The Bench also accepted the Chartered Accountant’s Certificate, observing that it clearly demonstrated that the subcontractors were engaged only for concreting and other works contract activities and were not supplying manpower to the appellant.

The Tribunal noted that the only instance involving manpower supply had already been subjected to service tax, which had been duly paid and intimated to the Department. 

Holding that the Department had wrongly classified the services as manpower supply despite the evidence pointing to works contract services, the Tribunal concluded that the confirmed demand could not survive.

Accordingly, the Bench set aside the impugned order, allowed the appeal, and held that the appellant would be entitled to all consequential relief available under law. 

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