Service Tax on Composite Contracts Before 01.06.2007 Unsustainable: CESTAT Held Classification Beyond SCN Not Permissible [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Bench, held that service tax demand on composite contracts cannot be sustained under “Erection, Commissioning and Installation Service” prior to 01.06.2007 and that classification beyond the scope of ShowCause Notice (SCN) is not permissible in law.

The appellant, Sri Renukadevi Enterprises, is an electrical contractor engaged in installation of electrical systems for BSNL, CPWD and other entities.

The SCN was issued to appellant on 14.07.2009 proposing demand of service tax amounting to ₹33,78,029 under the category of “Erection, Commissioning and Installation Service” along with interest and penalty under Section 78 of the Finance Act, 1994.

Upon appeal made by the appellant to Commissioner of service tax (Appeals – II), the commissioner of service tax upheld the demand, reclassified the services as “Works Contract Service” with effect from 01.06.2007 and remanded the matter for re-quantification.

S. Viswanathan, the counsel for the appellant, contended that the contracts executed were composite in nature involving both supply of goods and provision of services and therefore, not liable to service tax under any category prior to 01.06.2007.

It was further contended by the appellant counsel that the respondent exceeded jurisdiction by confirming demand under a different category not proposed in the show cause notice.

N. Satyanarayana, appeared as counsel for the respondent, relied upon the findings of the lower authorities and supported the impugned order.

Ajayan T.V, Judicial Member and M. Ajit Kumar, Technical Member, observed that the activities undertaken by the appellant were composite works contracts involving supply of materials and labour.

The Tribunal relied on the decision of the Supreme Court in Larsen and Toubro Vs. CCE, Kerala, 2015, held that composite contracts cannot be subjected to service tax under “Erection, Commissioning and Installation Service” prior to 01.06.2007 and therefore, the demand for such a period is unsustainable.

The Tribunal further held that the SCN is the foundation of demand and the Customs Department cannot travel beyond the allegations contained and it was observed that the respondent erred in confirming demand under “Works Contract Service” when the SCN proposed classification only under “Erection, Commissioning and Installation Service.”

Accordingly, the Tribunal held that the demand confirmed under a new category beyond the scope of the show cause notice is unsustainable and liable to be set aside.

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