Land and Material Costs Must Be Excluded When Calculating Service Tax on Works Contracts: CESTAT [Read Order]

Vishal Projects Ltd, the appellant, is a builder engaged in constructing residential and commercial projects in Hyderabad, including a project named Srinivasa Krupa. The department issued show cause notices demanding service tax under “Works Contract Service” on the total value of the agreements, including the cost of land and materials, for the period after July 2010.

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The appellant’s counsel argued that the value of land and materials could not be included while calculating service tax on works contracts, relying on the Supreme Court’s judgment in Larsen & Toubro Ltd. The counsel also argued that before the retrospective amendment in 2017, there was no statutory mechanism to value the service component in composite works contracts, and so the demand raised without such a mechanism was unsustainable.

The counsel submitted that even if service tax was found payable, it should be recalculated under Rule 2A of the Service Tax (Determination of Value) Rules by excluding the land and material portions and providing the cum-tax benefit since tax was not collected from customers.

The revenue counsel argued that the service component in the agreements was taxable under “Works Contract Service” and that the department was correct in calculating service tax on the total amount received by the appellant for the construction activities.

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The two-member bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) observed that while service tax is leviable on the service component of works contracts, the value of land and materials must be excluded while calculating the tax. The tribunal referred to the judgments of the Supreme Court and High Courts, which held that the central government could levy service tax only on the service portion of a works contract, not on the value of land and materials involved.

The tribunal explained that the department must recalculate the service tax liability in compliance with Rule 2A and the principles established in judicial decisions. The tribunal remanded the matter back to the adjudicating authority for re-quantification of the service tax demand on the Srinivasa Krupa project by excluding the land and material costs from the taxable value. The appeal was partly allowed and partly remanded for re-determination.

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