No Service Tax Demand for Construction Activity in Nature of Composite Works Contract up to 31st May 2007: CESTAT [Read Order]

Works Contract - AAR -NCBS - Taxscan

The Delhi Bench of the Customs Excise & Service Tax Appellate Tribunal ( CESTAT ) in Ganesh Narayan Sharma vs. C.C.E. & S.T., set aside the Service Tax demand made towards construction activity in the nature of composite works contract for the period up to 31st May 2007.

In the instant case, the appellant engaged in Constructional activities. They were registered under the category of Construction of Residential Complex, Commercial or Industrial Construction Service and Works Contract Service for payment of Service Tax.  During the concerned period, the appellants constructed independent houses, houses for Police Employees, various other Government buildings. The Revenue Department was of the view that the appellants had failed to pay the full Service Tax. Show Cause notices were served and after the adjudication proceedings, an order was passed in which Rs.1.35 Crores was demanded along with interest and penalties under carious sections of the Finance Act,1994.

The Counsel for the appellant contended that the construction works executed by the appellant were rendered under composite contracts which involved both renderings of service as well as the supply of goods and hence such contracts are in the nature of works contracts. He relied on the decision of the Supreme Court in Larsen & Toubro wherein the Court has held that ‘composite works contracts’ would be liable to service tax only with effect from 01/06/2007 when a separate entry was added in the statute for works contract under Section 65 (105) (zzzza) of the Finance Act, 1994. Accordingly, it was submitted that no Service Tax can be levied on the construction activity of the appellant for the period up to 31/05/2007. He submitted that taxability of works contract was subject matter of dispute for a long time before various benches and the matter was resolved by the Supreme Court in the case Larsen & Turbo, hence the Department is unjustified in enforcing the demand for service tax for extended period.  He further argued that demand falling within the normal time limit under Section 73 of the Finance Act, 1994 is not liable to service tax in respect of Construction of residential houses for Police Department & Construction undertaken for ITI and other Government buildings.

The Counsel for the Revenue contended that with effect from 01/06/2007 there is no ambiguity in the statute wherein a specific entry for works contract service has been included. He stated that the appellant had failed to pay the Service Tax in spite of the clarity in the statute and had also failed to file statutory returns. Consequently, he argued that extended period of limitation will be available to the Revenue to recover such Service Tax.

The bench comprising of Judicial Member S.K. Mohanty and Justice V. Padmanabhan observed that the both the parties had agreed that no service tax would be payable up to the period of 31st May 2007 as the construction activity of the appellant is in nature of composite works contract in which transfer to property in goods involved in the execution of such contracts is liable to tax as sale of goods.

Relying on the decision of the Tribunal in the case of Anand Construction Work vs. Commissioner, the bench observed that the claim of the appellant that demand cannot be sustained for the period within extended period under Section 73 as the liability of Service Tax of composite works contracts has been the subject matter of a large number of litigations and clarifications by the Board is valid and that such invocation of extended period as unsustainable. The bench set aside the demand falling within the extended period of limitation.

Regarding the part of the demand that falls within the normal period of limitation under Section 73 the bench observed “It has been contended before us that a part of the demand which falls within the normal period of limitation under Section 73 is not sustainable in respect of the construction work undertaken by the appellant to various Government departments including the Police Department. In this connection, we are of the view that in principle no Service Tax can be charged in respect of construction work for Government departments such as residential house for police but we are of the view that individual contracts are required to be scrutinized before such benefit is extended.”

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