Dam and Powerhouse Construction Not Taxable: CESTAT Directs Refund to Be Processed u/s 11B [Read Order]

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed the appeal relating to the taxability of dam and powerhouse construction works, holding that such activities fall within the exclusion for dams under Section 65(25b) and Section 65(30a) of the Finance Act, 1994, and therefore cannot be subjected to service tax.

The dispute arose from construction works executed by SNC Power Corporation Pvt. Ltd. (appellant) between 2006 and 2008, involving the Nagarjuna Sagar Tail Pond Project and the Almatti Dam Power House.

As construction “in respect of dams” stood expressly excluded from Commercial or Industrial Construction Service, the appellant did not pay service tax during this period.

However, during an audit in February 2008, officers insisted that the construction of the powerhouse was “not part of the dam” and therefore taxable. Under these audit objections, the appellant paid ₹48,26,036 with interest between February and March 2008.

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Subsequently, believing the levy to be erroneous, the appellant filed a refund claim, invoking the statutory refund mechanism under Section 11B of the Central Excise Act, 1944, as made applicable to service tax through Section 83 of the Finance Act, 1994.

A Show Cause Notice (SCN) was issued proposing rejection of the refund. The adjudicating authority rejected the claim on 28.10.2010, and the Commissioner (Appeals) affirmed the rejection. The appellant then approached the Tribunal.

Before the Tribunal, the appellant relied on several decisions such as Continental Construction Ltd Vs. CST (ADJ) (2018), MCM Service Pvt. Ltd. Vs. CST, Delhi (2017) and the Larger Bench ruling in Lanco Infratech Ltd. Vs. CC, CE & ST Hyderabad (2015), in which all confirms that works such as spillways, hydro-mechanical installations, and powerhouses are integral parts of dams, and therefore are excluded from the scope of Works Contract Service under Section 65(105)(zzzza) both before and after 01.06.2007.

The Bench comprising P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) found merit in the appellant’s argument and held that a dam or tunnel is never an end in itself, its associated constructions are essential for it to serve its purpose, and therefore, the exclusion for dams must be interpreted expansively.

The Tribunal held that the finding of the lower authority that the powerhouse was not part of the dam was unsustainable.

On the refund issue, the Tribunal relied on the Supreme Court judgment in Mafatlal Industries Ltd. Vs, Union of India (1997), which authoritatively held that all refund claims must mandatorily pass through the mechanism of Section 11B of the Central Excise Act.

Since the appellant had paid the amount “accepting the audit observations,” the Tribunal held that such payment was not a mere deposit, but tax, and therefore the refund could only be processed under Section 11B, not outside it.

The Tribunal accordingly held that the works relating to dam and powerhouse construction were not taxable, that the demand was unsustainable on merits, and that the refund claim must be decided strictly under Section 11B(5)(ec).

Accordingly, the Tribunal set aside the lower orders, allowed the appeal, and directed the original authority to process the refund strictly in accordance with Section 11B of the Central Excise Act.

The appellant was represented by N. Anand, while Rajashekar. B. N. N appeared for the Revenue.

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