Construction of Buildings for Educational Institutions Not “Primarily for Commerce or Industry”: CESTAT sets aside Service Tax Demand [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Bench at Chennai has held that construction services rendered to educational institutions are not liable to service tax under ‘Works Contract Service’ prior to July 1, 2012, while partly upholding the demand for the subsequent period and remanding the matter for re-quantification.

The Bench was adjudicating an appeal against the Order passed by the Commissioner of Central Excise confirming a service tax demand of Rs. 48.33 lakh along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994.

The appellant, M/s J.M. Constructions, Coimbatore engaged in civil construction for Karunya Institute of Technology and Sciences, a charitable educational institution, had neither obtained service tax registration nor filed returns during 2009 - 2014. Based on departmental investigation, a show cause notice demanded Rs. 87.23 lakh invoking the extended period under Section 73(1) of the Finance Act, 1994. The adjudicating authority confirmed part of the demand after classifying the activity under “Works Contract Service” as per Section 65(105)(zzzza).

The appellant contended that their construction work for a charitable educational institution was non-commercial in nature and therefore not taxable, citing a CBEC Circular which clarified that buildings used solely for educational or charitable purposes are outside the tax ambit. It was further submitted that even post 2012, the taxable value should exclude the cost of free supplied materials such as cement and steel.

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The Tribunal comprising Vasa Seshagiri Rao (Technical Member) and P. Dinesha (Judicial Member) noted that the construction undertaken was for an educational institution registered under Section 12AA of the Income Tax Act and not primarily for “commerce or industry.” Referring to judicial precedents including SRM Engineering Construction Ltd. [2018 (11) GSTL 174], Banna Ram Choudhary [2017 (3) GSTL 338], and Jatan Construction Pvt. Ltd. [2019 (24) GSTL 552 (Raj.)], the Bench held that such works were non-commercial and hence, not exigible to service tax prior to July 1, 2012.

“The Revenue has not adduced any evidence that the educational buildings constructed were primarily for the purposes of commerce or industry,” the Bench observed, adding that the burden of proof in establishing taxability lies with the department.

However, post-July 1, 2012, with the insertion of the new definition of “works contract” under Section 65B(54) and introduction of the negative list regime, the levy no longer depended on whether the construction was for commercial purposes. The Tribunal therefore upheld the taxability of services rendered after this date, subject to recalculation of the correct taxable value.

Following the Supreme Court’s ruling in Commissioner v. Bhayana Builders (P) Ltd. [2018 (10) GSTL 118 (SC)], the Tribunal held that the cost of materials supplied free of charge by the recipient cannot be added to the taxable value. It directed the adjudicating authority to recompute liability for 2012 - 2014 after allowing cum-tax benefit and excluding free-supplied material costs.

Setting aside the demand up to June 30, 2012, the Tribunal remanded the matter to the adjudicating authority for re-quantifying the service tax for the period from July 1, 2012 to March 31, 2014, allowing cum-tax adjustment and following principles of natural justice.

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