In a significant ruling, the bench of Vasa Seshagiri Rao (Technical Member) and Sulekha Beevi C.S. (Judicial Member) of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has declared that the demand for service tax on composite contracts for Commercial or Industrial Construction Services (CICS) is not sustainable, both before and after 01.06.2007.
This verdict stems from a case in which the appellant, engaged in construction services and holding Central Excise registration for providing CICS, faced a service tax demand for the period spanning 2007-08 to 2011-12, along with interest and penalties. The demand arose from the appellant’s receipt of free supplies from the customer, without discharging the service tax liability in accordance with the prevailing laws.
The appellant’s counsel, Mr. G. Natarajan, contended that the construction activities undertaken during the disputed period primarily involved projects for educational institutions. Most of the construction materials, such as cement and steel, were supplied by the customer, while the appellant procured all other necessary materials.
The appellant argued that the nature of the works performed was not purely a service; instead, it was composite in nature, encompassing both the supply of materials and the provision of services. As such, the demand for service tax under CICS could not be sustained. The counsel cited a precedent where the Tribunal had reached a similar conclusion in the case of M/s. Real Value Promoters Pvt. Ltd. vs. CGST & Central Excise, Chennai – 2018-TIOL-2867-CESTAT-MAD.
Furthermore, the appellant’s counsel contended that the service tax demand under CICS had been calculated on the gross amount without extending the benefit of the 67% abatement under Notification No. 1/2006-ST dated 1.3.2006. This was based on the assertion that the value of all materials used in the contract was not included in the contract value because a portion of the materials had been supplied free of cost by the customer. The counsel relied on a Supreme Court decision in the case of CST vs. Bhayana Builders Pvt. Ltd. – 2018 (10) GSTL 118 (SC), which argued that even if the customer provided some materials free of cost, the abatement under Notification No. 1/2006 should be applied to determine the taxable value. Given the interpretational nature of the issue, the counsel contended that the extension of the extended period for raising the demand could not be justified.
On Contrary, the Revenue’s representative, Ms. Anandalakshmi Ganeshram, supported the findings in the impugned order. It was argued that even if construction was carried out for educational institutions, these activities were still taxable, as clarified by the Board in its circulars dated 17.09.2004 and 1.11.2006. Additionally, some customers had not paid sales tax or VAT on the materials used in construction because they had not filed any VAT returns. The appellant fell under clause (i) of Section 65(105)(zzza), and therefore, the Commissioner’s classification under ‘Commercial or Industrial Construction Services’ was accurate. The adjudicating authority was correct in not extending the benefit of Notification No. 1/2006-ST because some materials were obtained free of cost.
The central issue at hand was whether the demand for service tax under ‘Commercial or Industrial Construction Services’ was sustainable. The Tribunal noted that the definition of “Commercial or Industrial Construction Service” referred to a simple contract that did not involve the supply of goods or materials. However, after the introduction of ‘Works Contracts Service’ (WCS) on 01.06.2007, the definition incorporated the value of goods used in composite contracts.
The Tribunal relied on a previous decision by the Supreme Court, which held that the demand for WCS on composite contracts, such as construction of residential complexes, commercial or industrial construction services, erection, commissioning, and installation services, could not be sustained. This was especially applicable when the composite contract included both the supply of goods or materials and the rendering of services. The decision in M/s. Real Value Promoters Pvt. Ltd. was cited as a precedent, and the Tribunal reiterated its stance that the demand under CICS was untenable. In light of the above analysis and legal precedents, the Tribunal concluded that the demand for service tax under ‘Commercial or Industrial Construction Services’ (CICS) is not sustainable.
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