No Service Tax Exemption on non-commercial Works Contract Services rendered to Government: Madras HC [Read Order]

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In the recent ruling, Madras High Court (HC) chaired by Justice S. Vaidyanathan and Justice C. Saravanan held that there is no exemption for the service tax on commercial works contract services rendered to the Government.

The Writ Petitions (WP)  were clubbed together and entertained. All the WP deal with “service tax liability” of contractors who were specifically engaged by the Public Works Departments of both State & Central Government.

The Public Works Department of State & Central Government contracted the petitioners, who are contractors, to build school buildings and other structures. According to the petitioners, the services they performed were exempt from paying service tax under Entry 12(a), (c), and (f) of the Mega Exemption Notification of Service Tax, dated 20.06.2012.

The exemption which was withdrawn by the impugned Notification dated 01.03.2015, was re-introduced only for contracts entered into prior to 1st March, 2015 with some exemptions on Entry 12.

The petitioners may be relegated to argue their case before the adjudicating authority in cases where some of the petitioners who have provided services to the people for whom the services were rendered were non-Government Organizations, according to S. Muthuvenkatraman, the petitioners’ counsel.

The petitioners further argued that, given the negative list in Section 66D and the definition of a negative list in Section 65B(34) of the Finance Act of 1944, the services they provided to the Public Works Department should not have been subject to the imposition of a service tax.

Venkataswamy Babu, the respondent’s counsel, claimed that since the petitioners are responsible for paying the service tax, these Writ Petitions should be dismissed. The service tax liability must be calculated in accordance with the requirements of the act.

According to the bench of what Section 65B(44) of the Finance Act defines as a “service,” every action that is performed for pay by one person for another is a “service” that is taxable. The aforementioned definition did not apply to all activities. Only those were the actions that weren’t services. The definition of “service” does, however, encompass “declared service.”

The court noted that the services listed in the negative list did not require payment of service tax. These petitioners’ services were not included in the “negative list” either.

For the sake of reference, a negative list has been defined in section 65B(34) of the Finance Act, where it redirects to section 66D of the same act.

The bench emphasized that the claims that some of the petitioners were illiterate or only semi-literate and unaware of the amendment could not be accepted because it is a legal presumption that every person is aware of the law. As a result, these petitioners are unable to rely on the supposed ignorance to make any concessions.

The bench stressed that as Article 289 of the Indian Constitution deals with the exemption of property and income of a State or Union Territory, the reference to it is out of context and unimportant. It is irrelevant to the application of service tax in accordance with the terms of the Finance Act.

The HC held that the petitioners have to pay the respective service tax and recover the same from their clients namely, the Government Departments

Additionally it was ruled that the prayer for a direction to refund of tax already paid by the petitioner also cannot be countenanced as these petitioners are liable to tax.

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