CESTAT Quashes ₹3.85 Lakh Service Tax Demand, Holds TDS Paid Separately by NHAI Not Part of Taxable Value [Read Order]

In a recent ruling The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside ₹ 3,85,930 service tax demands and ruled that Tax Deducted at Source (TDS) paid by the National Highways Authority of India (NHAI) over and above the contract value cannot be included in the taxable value for service tax purposes.

The appellant, Sheladia Rites, had challenged the Commissioner (Appeals)’s order upholding a demand of ₹3.85 lakh along with interest under Section 75 of the Finance Act, 1994.

The dispute arose because NHAI, under the contract for consulting engineering services in road widening projects, paid income tax (TDS) directly to the government on behalf of the appellant, but the appellant had not included the TDS amounts, which were paid by NHAI, while arriving at the taxable value.

The appellant submitted that service tax had already been discharged on the invoiced contract value, and since NHAI bore the TDS obligation separately, it could not be treated as consideration for services.

Even though no counsel appeared in person for the appellant during the hearing, the Tribunal still considered the appellant’s side because they had filed written submissions in compliance with the Tribunal’s direction.

On the other hand, the revenue submitted that the issue was already settled by earlier Tribunal and High Court decisions, and therefore the demand for service tax on the TDS portion was legally sustainable.

After examining the submissions, the Bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) distinguished the facts from earlier cases. It observed:

“In the present case, TDS/deductions are not part of the agreed contractual value and therefore, not liable to service tax.”

Tribunal noted that TDS is a statutory obligation under the Income Tax Act, borne by NHAI, and not part of the contract value charged by the appellant and applied the Supreme Court’s ruling in Bhayana Builders Pvt. Ltd. and the Chennai Bench’s decision in Indian Additives Ltd. (2025), both holding that amounts not forming part of contract value cannot be added to taxable service value.

Accordingly, the appeal was allowed

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