Composite Works Contracts Not Taxable as ECIS: CESTAT Sets Aside ₹36 Lakh Service Tax Demand and Penalty [Read Order]

The principal bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi held that composite works contracts are not taxable as ECIS and the Tribunal set aside ₹36 lakh servicetax demand and penalty

The present appeal arises from the order-in-appeal filed by the appellant Chankya Enterprises to challenge the confirmation of the service tax demand and penalty.

The appellant was engaged in providing installation, erection, and commissioning services, which included fixing poles, wiring, installing streetlights, laying cables, constructing tennis and basketball courts, fixing swings, and constructing railings for the Jodhpur Development Authority and other authorities. The appellant, however, had not registered under service tax for the period 2005-06 to 2009-10.

During scrutiny, the department observed non-payment of service tax amounting to ₹36,38,492 (comprising ₹35,36,163 principal tax, ₹70,723 Education Cess, and ₹13,606 SHE Cess) under the category of Erection, Commissioning & Installation Services (ECIS). A show cause notice dated was issued, proposing recovery of the demand along with proportionate interest and penalties.

The demand was initially confirmed in Order-in-Original. Subsequently, the OIA granted partial relief by allowing abatement under Notification No. 01/2006-ST, but the appellant remained dissatisfied and approached CESTAT.

The appellant contended that the works performed fell under composite contracts, involving both goods and services, and hence should be classified as Works Contract Services (WCS) rather than ECIS. They argued that service tax under ECIS could not be demanded on contracts that included the transfer of goods, relying on the Supreme Court judgment in Larsen & Toubro Ltd. (2015). The Hon'ble Supreme Court in the case held that indivisible works contracts cannot be taxed under other service categories before 01 June 2007, and post-01 June 2007, only the service portion of a composite contract is taxable.

Reliance was also placed on Tribunal rulings in Gurjar Construction vs. CCE and Anand Construction Work vs. CCE, which supported the appellant’s position that misclassification under ECIS was legally unsustainable.

The appellant further submitted that due to divergent views on the taxability of WCS before the Supreme Court’s clarification, the allegation of suppression of facts with intent to evade tax was not sustainable, making the extended period of limitation inapplicable. Consequently, the penalty under Section 78 was also liable to be set aside under Section 80 of the Finance Act, 1994.

On review, the Tribunal observed that the services performed clearly constituted WCS, as the contracts involved both material supply and service elements. i t was further noted that following the Supreme Court in Larsen & Toubro, ECIS and other service categories under Section 65(105) of the Finance Act, 1994, cover service contracts simpliciter, not composite contracts.

The Tribunal noted that demands for periods before 31.03.2009 were barred by limitation, and that mere non-payment of tax could not be construed as intentional evasion. The Tribunal also referred to the decision in Uniworth Textiles Ltd. vs. CCE, holding that the burden of proving malafide on the part of the taxpayer rests on the department.

In light of the above, the two-member bench of Dr Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) concluded that the demand for service tax and penalty was unsustainable. The impugned OIA confirming demand under ECIS, even for the abated amount, was therefore set aside. The appeal was allowed, and the service tax demand of ₹36.38 lakhs along with penalty was set aside.

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