CESTAT Slams Service Tax Dept for Shortcut Approach in Taxing Entire Contract Without Examining Bills or Invoices [Read Order]

The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) criticized the Service Tax Department for adopting a shortcut approach in taxing the entire contract value of Varad Vinayak Gardens without examining the underlying bills, invoices, or scope of services rendered under the contract with the Municipal Corporation of Greater Mumbai (MCGM).

Varad Vinayak Gardens, a proprietorship concern, had entered into contracts with MCGM for developing, maintaining, and securing public gardens and traffic islands. The Service Tax Department raised a demand of Rs. 3.6 crore on total receipts of approximately Rs. 33.96 crore for the period from 2010–11 to 2012–13, treating the entire consideration as taxable under “management, maintenance or repair service” before July 2012 and as a “bundled service” post-July 2012.

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The adjudicating authority dropped huge portions of the demand by acknowledging certain activities, like horticulture, road divider upkeep, and civil works, as either exempt or non-taxable, while confirming tax of Rs. 48.02 lakh and Rs. 2.83 crore for respective periods.

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Both the assessee and the revenue filed cross-appeals. The assessee argued that the adjudicating authority had erroneously taxed exempt services and exceeded the scope of the show cause notice by introducing new classifications like security services. They argued that activities such as horticulture were specifically exempt under the negative list and relevant notifications.

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The assessee also claimed that the supply of goods used in maintaining gardens was wrongfully included in the taxable value. On the other hand, the revenue challenged the exclusion of sub-contracting income and the granting of exemption for horticultural work, asserting that all services were part of a composite taxable service.

The two-member bench comprising Member (Technical) C.J. Mathew and Member (Judicial) Ajay Sharma found that the tax department had failed to scrutinize the actual bills, invoices, or contractual documents, and had instead mechanically treated the entire contract as taxable.

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The tribunal found that the use of composite or bundled service classification under Sections 65A and 66F was unjustified, as the department did not show the impossibility of disaggregating services or any special rate applicability and that government contracts with municipal bodies like MCGM, particularly for non-commercial services, are often exempt or excluded by law and should not be broadly classified as taxable services without specific legal basis.

It also explained that circulars issued by the CBEC were binding and had been ignored by the lower authority. The tribunal set aside the adjudication order and remanded the case back for a fresh decision. It directed the adjudicating authority to reassess the matter strictly under the show cause notice and the legal provisions applicable both before and after July 1, 2012. The appeals were allowed by way of remand.

To Read the full text of the Order CLICK HERE

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