Pre-2007 Composite Work Contracts for Hydro & Road Projects Not Taxable Under CICS: CESTAT [Read Order]

The Hyderabad Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has partially allowed the appellants' appeal against service tax demands for the period April 2006 to March 2010, holding that composite work contracts prior to 2007 are not taxable under Commercial or Industrial Construction Service (CICS).

The ECI Engineering & Construction Company Ltd filed an appeal before the CESTAT challenging the order dated 29.01.2013, which confirmed service tax demands for the period April 2006 to March 2010.

The department, based on a report from the Comptroller & Auditor General of India (CAG), alleged that the appellant provided Commercial or IndustrialConstruction Service (CICS) up to March 2007 and Works Contract Service (WCS) thereafter.

The appellant, primarily engaged in the construction of roads, dams, hydroelectric projects, and related infrastructure, contested the demand on several grounds. They argued that service tax on works executed prior to 01.06.2007 is not sustainable, relying on the Supreme Court ruling in Larsen & Toubro Ltd and multiple Tribunal decisions.

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They further contended that constructions related to dams, canals, and hydroelectric power projects fall outside the purview of WCS and are eligible for exemptions under Notification No. 45/2010-ST.

The appellant also claimed abatement benefits, argued that the supply of Ready Mix Concrete (RMC) should be treated as a sale and not a service, and highlighted that sub-contractors cannot be independently taxed if the main contractor is exempt.

The department, through the adjudicating authority, maintained that the contracts were composite in nature and taxable, invoking extended period provisions and Section 78 penalties. It was noted that contracts included civil works for hydroelectric projects, BT road construction for exclusive industrial use, laying of RCC M30 at raw water reservoirs, and other related infrastructure. The SCN was primarily based on the CAG audit report dated 12.10.2010 and statements recorded from the appellant.

After hearing both sides, the Tribunal partially allowed the appeal. Regarding pre-1.6.2007 contracts, it was held that these were essentially works contracts involving material transfer. Following the principle laid down in Larsen & Toubro Ltd, such contracts are not taxable under CICS. Consequently, the demand of ₹91,72,146 for this period was set aside.

For contracts executed post-01.06.2007, the Tribunal noted that the adjudicating authority had not sufficiently examined the exact scope of work. Many contracts involved multiple components such as construction of power canals, intake structures, power houses, outdoor switchyards, roads, and other auxiliary structures.

The Tribunal emphasised that certain works, like dams and canals, are excluded from WCS and may qualify for exemptions. It directed the adjudicating authority to review each contract and the actual work undertaken to determine the service tax liability, including eligibility for abatement and exemption notifications.

Additionally, the Tribunal clarified that sub-contractors are independently liable to discharge service tax if applicable, regardless of the main contractor’s exemption status. It also observed that the supply and laying of RMC constituted a service and not a mere sale.

The two-member bench comprising AK Jyothishi (Technical Member) and Angad Prasad (Judicial Member) quashed the service tax demand for pre-2007 works contracts and remanded the post-2007 levy for detailed, contract-specific examination, ensuring that exemptions, abatement, and the nature of each project component are properly assessed.

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