Composite Contracts Involving Supply of Materials Cannot Be Taxed Under Construction Service: CESTAT Sets Aside Demand on PSU [Read Order]

The Kolkata Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that composite contracts involving supply of materials cannot be taxed under construction or other service categories and only the service portion is liable to tax.

Braithwaite Burn and Jessop Construction Company Ltd is a PSU doing construction work. The Department issued show cause notice for service tax demand for 2007-08 to 2011-12 under different categories and also denied CENVAT credit. Demand with interest and penalty was confirmed, so the appellant went to CESTAT.

The appellant’s counsel argued that contracts for BHEL, SAIL, CLW and university were works contracts since materials and services were both involved. They said such contracts cannot be taxed under construction or other services.

The counsel also argued that for university projects, tax should apply only on 8.5% agency charges and not full project value. They asked for verification of CENVAT credit. They also said no suppression since they are PSU.

The department’s counsel argued that classification and demand made in order is correct.

The bench comprising R. Muralidhar and Rajeev Tandon observed that contracts are composite and fall under works contract. It observed that such contracts cannot be taxed under construction service. The Tribunal observed that for university project, full project cost cannot be taxed. It explained that only 8.5% agency charges are taxable.

The tribunal observed that CENVAT credit needs verification and sent it back. It also observed no suppression and said the extended period was not valid. The tribunal set aside the demand for BHEL. It sent the SAIL issue back for checking. It allowed tax only on 8.5% for university. It also sent the CENVAT issue back. Appeal was partly allowed.

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