Case Law Details
Pavani Engineers Vs Commissioner of Central Tax (CESTAT Hyderabad)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad allowed the appeal filed against an order confirming service tax demand, interest, and penalties on contracts executed during April 2005 to May 2007. The appellant, engaged in executing contracts involving the supply of machinery and equipment along with installation, erection, commissioning, and allied services, was registered under the category of “Maintenance or Repair Services.” Following an investigation, the Department alleged that the contracts were taxable under Erection, Commissioning and Installation Service (ECIS) and that the appellant had suppressed the taxable value of services. A show cause notice dated 18 October 2010 proposed recovery of Rs. 39,20,441, along with interest and penalties, which was confirmed by the adjudicating authority and upheld by the Commissioner (Appeals).
Before the Tribunal, the appellant contended that the contracts were composite works contracts involving both the supply of goods and the provision of services for a consolidated consideration. It argued that, prior to 1 June 2007, there was no charging provision under the Finance Act, 1994 to levy service tax on indivisible works contracts. Reliance was placed on the Supreme Court’s decision in Larsen & Toubro Ltd., which held that composite works contracts were not liable to service tax before the introduction of the taxable category of works contract service with effect from 1 June 2007. The appellant also submitted that it had discharged VAT/Sales Tax on the goods portion of the contracts, demonstrating a bona fide belief that the contracts were works contracts rather than pure service contracts. It further argued that the extended period of limitation could not be invoked because the issue involved interpretation of law, and there was no suppression, fraud, wilful misstatement, or intent to evade tax.
The Revenue maintained that the contracts primarily involved installation and commissioning activities and were correctly classifiable under ECIS. It contended that the appellant had failed to declare the correct taxable value and that suppression had been established, justifying the confirmation of demand and imposition of penalties.
The Tribunal identified four issues for determination: whether the contracts were composite works contracts; whether such contracts were liable to service tax before 1 June 2007; whether the invocation of the extended period of limitation was sustainable; and whether penalties were imposable.
After examining the contracts on record, the Tribunal found that they involved the supply of machinery, equipment, and components together with erection, installation, and commissioning services for a consolidated consideration. It held that these were not pure service contracts but composite, indivisible works contracts involving both transfer of property in goods and service elements.
The Tribunal observed that the principal issue was no longer res integra, as the Supreme Court in Larsen & Toubro Ltd. had categorically held that prior to 1 June 2007, composite works contracts could not be subjected to service tax under existing taxable service categories such as Erection, Commissioning and Installation Service, because there was no machinery provision to segregate the service component from the goods component. Applying this ratio, the Tribunal held that the appellant’s contracts executed during the disputed period were not taxable under ECIS, rendering the very basis of the service tax demand unsustainable.
On limitation, the Tribunal noted that the show cause notice issued on 18 October 2010 covered transactions commencing from April 2005, resulting in a substantial portion of the demand falling beyond the normal limitation period. It held that the extended period under the proviso to Section 73(1) of the Finance Act, 1994 could be invoked only where fraud, collusion, wilful misstatement, suppression of facts, or intent to evade tax was established. In the present case, the Tribunal found that the dispute arose from the interpretation of the taxability of composite works contracts, the appellant had maintained proper books of account, paid VAT on the goods component, and the transactions were not clandestine. Mere non-payment of service tax arising from an interpretational dispute, it held, could not amount to suppression. Consequently, the invocation of the extended period was held to be unsustainable.
The Tribunal further held that since the demand itself was unsustainable, the interest and penalties imposed under Sections 77 and 78 of the Finance Act, 1994 also could not survive. It additionally observed that no deliberate suppression or fraud had been established and that the dispute was purely interpretational, arising from the legal ambiguity prevailing during the relevant period.
Accordingly, the Tribunal set aside the impugned order and allowed the appeal with consequential relief in accordance with law.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
The present appeal has been filed by M/s Pavani Engineers, Hyderabad, against Order-in-Appeal No.201/2012(H-II) S.Tax dated 31.12.2012, passed by the Commissioner (Appeals-II), Hyderabad, whereby, the order of the Adjudicating Authority confirming service tax demand along with interest and penalties has been upheld.
2. The facts, in brief, are that the appellant is engaged in execution of contracts involving supply of machinery/equipment along with installation, erection, commissioning and allied services. The appellant was duly registered with the Service Tax authorities under the category of “Maintenance or Repair Services”.
3. Investigation by the Department revealed that during the period April 2005 to May 2007, the appellant had undertaken contracts which, according to the Department, were taxable under Erection, Commissioning and Installation Service (ECIS) and had suppressed the taxable value of services rendered.
4. Accordingly, a Show Cause Notice dated 18.10.2010 was issued proposing recovery of service tax amounting to Rs. 39,20,441/- under proviso to Section 73(1) of the Finance Act, 1994 along with interest under Section 75 and penalties under Section 77 and 78 of the Finance Act, 1994.
5. After adjudication, the Additional Commissioner confirmed the entire demand along with applicable interest and imposed penalty of Rs. 5,000/-under Section 77 and penalties equivalent to tax amount under Section 78 of the Finance Act.
6. Aggrieved by the said order, the appellant preferred an appeal before the Commissioner (Appeals), which came to be rejected. Hence, the present appeal.
7. Learned Counsel for the appellant submits that the contracts executed by them were composite works contracts, involving both supply of goods and rendering of services for a lump-sum consideration. It is argued that prior to 01.06.2007, there was no charging section under the Finance Act, 1994 to levy service tax on indivisible works contracts.
8. Learned Counsel relies on the judgment of Hon’ble Supreme Court in the case of Commissioner of Central Excise and Customs, Kerala Vs Larsen & Toubro Ltd., [2015 (39) STR 913 (SC)], wherein it was categorically held that composite works contracts were not liable to service tax prior to 01.06.2007. He further placed reliance on the following decisions:
i. M/s Total Environment Building Systems Pvt Ltd., Vs The Deputy Commissioner of Commercial Taxes & Ors [2022 (8) TMI 168 (SC)]
ii. M/s Ramky Infrastructure Ltd., Vs CCE-II, Visakhapatnam [2022 (8) TMI 165 (CESTAT-HYD)
iii .M/s Sai Teja Constructions Vs Commissioner of Service Tax, Hyderabad – ST [2019 (7) TMI 575 (CESTAT – HYD)]
iv. M/s Vishwanath Projects Ltd., Commissioner of Service Tax, Hyderabad [2019 (11) TMI 675 (CESTAT-HYD)]
9. It is further submitted that even otherwise, the extended period could not have been invoked because there existed considerable ambiguity in law during the relevant period regarding taxability of works contracts. The appellant also submits that they were discharging VAT/Sales Tax on the goods portion, demonstrating bonafide belief that the contracts were works contracts and not pure service contracts. It is further argued that no suppression, fraud, wilful misstatement or intent to evade payment of tax can be attributed. Learned Counsel also submits that penalty under Section 78 is not sustainable as the issue involved interpretation of law.
10. The Learned Authorised Representative reiterates the findings of the impugned order, inter alia, that substantial installation and commissioning activities were undertaken by the appellant and therefore the contracts were correctly classified under Erection, Commissioning and Installation Service. Learned AR also submits that the appellant failed to declare correct taxable value and therefore suppression is clearly established. It is further argued that the demand has been rightly confirmed and penalties imposed in accordance with the law.
11. We have heard both the parties and perused the records with their submissions.
12. The following issues arise for adjudication in the present appeal:
i) Whether the contracts executed by the appellant are composite works contracts ?
ii) Whether service tax was leviable on such contracts prior to 01.06.2007 ?
iii) Whether invocation of extended period is sustainable ?
iv) Whether penalties are imposable ?
13. From the contracts placed on record, we find that the agreement involves supply of machinery/equipment and components along with erection, installation and commissioning for consolidated consideration. Thus, the contracts are not pure service contracts but are clearly composite indivisible contracts involving transfer of property in goods as well as service elements. Such contracts squarely fall within the ambit of works contract.
14. The primary issue is no longer res-integra. The Hon’ble Supreme Court in the case of Larsen & Toubro Ltd., supra, held that prior to introduction of works contract service with effect from 01.06.2007, composite works contracts were not liable to service tax under existing taxable service categories such as Erection, Commissioning and Installation Services (ECIS), commercial considerations etc. The Apex Court held that in the absence of machinery provisions for segregating service portion from goods portion, levy could not sustain. Applying the ratio of above judgment, we hold that the contracts executed by the appellant during April, 2005 to May 2007 being composite works contract were not taxable under ECIS. Therefore, the very foundation of demand becomes unsustainable.
15. Even on limitation, we find considerable force in the submission of the appellant. The SCN dated 18.10.2010 covers a period commencing from April 2005. Therefore, substantial portion of the demand falls beyond normal limitation. Extended period under proviso to Section 73(1) of the Finance Act, 1994 can be invoked only when fraud, collusion, wilful misstatement, suppression of facts or intent to evade duty is established. In the present case, the issue involves interpretational dispute regarding taxability of composite works contracts. The appellant had been maintaining books of account and paying VAT on goods portion. The transactions were not clandestine. Mere non-payment of tax due to interpretation dispute cannot automatically amount to suppression. We find support from various decisions, where extended period of limitation was held inapplicable when the issue involves bonafide interpretation of taxability. Therefore, invocation of extended period is also not sustainable.
16. Since the demand itself is unsustainable, penalties automatically fail. Further, even independently, penalties under Section 77 and 78 cannot survive because no deliberate suppression or fraud is established. The dispute is purely interpretational and involves legal ambiguity prevailing during the relevant period.
17. In view of the above discussions, we hold that the contracts executed by the appellant were composite works contracts. Such contracts were not liable to service tax prior to 01.06.2007 in view of law laid down by the Hon’ble Supreme Court in the case of Larsen & Toubro Ltd., supra. Invocation of extended period is not sustainable. Interest and penalties are also not sustainable.
18. Therefore, impugned order is set aside and the appeal filed by the appellant is allowed with consequential relief, if any, as per law.
(Pronounced in the open court on 23.06.2026)
Author Bio
