Works Contract Cannot Be Taxed as Residential Complex Construction Service: CESTAT Sets Aside Rs 80 Lakh Service Tax Demand, upholds Penalty for Non-Registration
The Tribunal held that the penalty under Section 77 was upheld for failure to register and file ST-3 returns, and the appeal was partly allowed.
The Chandigarh Bench of Customs, Excise & Service Tax Appellate Tribunal(CESTAT) held that composite works contracts cannot be taxed under Constructionof Residential Complex Services and such works contract services became taxable only from 1 June 2007 and cannot be classified under pre-existing service categories. Accordingly, the ₹80.23 lakh service tax demand along with...
The Chandigarh Bench of Customs, Excise & Service Tax Appellate Tribunal(CESTAT) held that composite works contracts cannot be taxed under Constructionof Residential Complex Services and such works contract services became taxable only from 1 June 2007 and cannot be classified under pre-existing service categories.
Accordingly, the ₹80.23 lakh service tax demand along with interest and penalties under Sections 76 and 78 was set aside. Thus, penalty under Section 77 was upheld for failure to register and file ST-3 returns.
The appeal was filed by the appellant challenging the order dated 17.02.2012 affirming service tax demand of Rs. 80,23,389/- under Section 73(1) of theFinance Act, 1994, along with interest under Section 75 and penalties under Sections 76, 77 and 78.
The Section 73(1) of the Finance Act, 1994 explained that: Recovery of Service Tax Not Levied or Paid or Short lived or Short-paid or Erroneously Refunded.
“Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the [Central Excise Officer] may, within one year from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice:
Provided that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of--
(a) fraud; or
(b) collusion; or
(c) wilful misstatement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax,
by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words "one year", the words "five years" had been substituted.”
The Appellant, M/s Indermohan Singh, a government contractor engaged in construction works for government/semi-government authorities, was found unregistered with the department. Based on investigation and the appellant's statement dated 24.09.2010, service tax demand under 'Construction of Residential Complex Services' was raised for the period 10.09.2004 to 31.03.2010 concerning seven work orders involving construction of residential flats and dwelling units in Ludhiana.
A show cause notice dated 22.10.2010 was issued invoking the extended limitation period under Section 73(1) of the Finance Act, 1994. The Commissioner confirmed the demand of Rs. 80,23,389/- along with interest and imposed penalties under Sections 76, 77 and 78, leading to the present appeal.
The Counsel for the Appellant, Sanya Thakur, stated that the impugned order is legally unsustainable as it failed to appreciate facts, law, and binding precedents and argued that the Revenue itself admitted the works were 'composite contracts' involving both materials and services, granting 67% abatement.
Further, the Counsel submitted that 'works contract service' was introduced only from 01.06.2007 and was not taxable prior thereto under 'Construction of Residential Complex Services', nor could it be taxed under this category even after introduction and relied on the Supreme Court judgment in Commissioner of CE & Cus., Kerala vs. Larsen & Toubro Ltd – 2015 (39) STR 913 (SC), and similar Tribunal decisions including M/s Passi Construction vs. CCE & ST, Ludhiana and Bajrang Lal Gupta vs. CCE, Delhi-III – (2023) 9 Centax 199 (Tri. Chan.), where demands under identical circumstances were set aside.
On the other hand, the Authorized Representative for the Respondent, Shantanu Kumar Meena, reiterated the impugned order's findings, stating that 67% abatement was already granted under Notification No. 1/2006-ST dated 01.03.2006, and the demand on the service component was confirmed by the Adjudicating Authority and also submitted that the appellant remained unregistered and failed to file ST-3 returns as required under Sections 69 and 70 of the Finance Act during the disputed period.
The Counsel also observed that the demand raised under 'construction of residential complex services' was unsustainable in view of the Supreme Court's judgment in Commissioner of CE & Cus., Kerala vs. Larsen & Toubro Ltd – 2015 (39) STR 913 (SC). Thus, the Counsel stated that the appellant, despite admittedly providing 'works contract services', failed to register and file ST-3 returns under the correct category, thereby justifying the penalty under Section 77 of the Act.
The Tribunal consisted of Judicial Member, S.S Garg and Technical Member, P. Anjani Kumar, heard and reviewed the matter.
The Tribunal, after considering the submissions made, pointed out that the department itself admitted the work constituted a 'composite contract' involving both materials and construction services, with 67% abatement already granted. Following the Supreme Court's decision in Commissioner of CE & Cus., Kerala vs. Larsen & Toubro Ltd- 2015 (39) STR 913 (SC), the Tribunal held that Section 65(105) of the Finance Act, 1994 covers only service contracts simpliciter, not composite works contracts.
The Tribunal found that works contract service was introduced only from 01.06.2007, and its introduction presupposes it was not covered by pre-existing entries and held that composite works contracts cannot be taxed under 'Construction of Residential Complex Services' either before or after 01.06.2007.
Consequently, the service tax demand of Rs. 80,23,389/- along with interest and penalties under Sections 76 and 78 were set aside. However, the penalty under Section 77 was upheld as the appellant admittedly provided works contract services but failed to register and file ST-3 returns under the correct category.
Accordingly, the Tribunal partially allowed the appeal. The Order was pronounced in the open court on 18.12.2025.
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