V.K. Aggarwal & Co. Vs Commissioner of Service Tax (CESTAT Delhi)
Free Materials Supplied by Customers Excluded from Service Tax Demand; Hospital Construction Needs Proof of Charitable Use
Background: Registered Contractor Neither Paid Tax Nor Filed Returns
The appellant was registered for providing construction services but had neither paid service tax nor filed ST-3 returns during financial year 2012–13.
An investigation revealed receipts of approximately ₹57.26 crore from various clients. In the absence of supporting documents and returns, the Department proposed a best-judgment assessment under section 72 of the Finance Act, 1994 and demanded service tax of ₹7,07,68,111.
After examining the appellant’s reply, the Commissioner substantially reduced the demand to ₹2,18,69,271. Penalties of ₹21 lakh under section 76 and ₹10,000 under section 77(2) were also imposed.
The appellant challenged the valuation, treatment of customer-supplied materials, denial of relief for hospital construction, adjustment of earlier payments and penalty.
Tribunal Decided the Appeal on the Available Record
The appeal had earlier been dismissed for non-prosecution and was subsequently restored. At restoration, counsel undertook to argue the matter on the next hearing date, and the Tribunal expressly warned that another absence or adjournment request would result in disposal on merits.
Nevertheless, a proxy counsel sought a further adjournment. CESTAT declined the request and examined the appeal grounds and records after hearing the Department.
The resulting order granted limited substantive relief rather than disposing of the appeal solely because the appellant failed to argue it.
Hospital Construction Was Not Automatically Non-Commercial
For April–June 2012, the appellant contended that construction undertaken for Shri Agrasen North Ex Welfare Society concerned a hospital and therefore fell outside commercial or industrial construction service.
It relied on the Board’s clarification concerning institutions established solely for educational, religious, charitable or health purposes.
The Tribunal rejected the argument because a hospital may be charitable or commercial. Merely identifying the building as a hospital did not establish its non-commercial character.
No evidence demonstrated that the hospital constructed for the society was intended to operate as a charitable hospital. Consequently, the appellant was not entitled to exclusion on that ground.
The finding turned on absence of proof of charitable use, rather than a conclusion that every hospital construction is necessarily commercial.
Abatement and Reverse Charge Had Already Been Considered
The appellant argued that the Commissioner had incorrectly applied the post-negative-list provisions to the entire financial year, including April–June 2012. It also claimed entitlement to abatement and reduction of its liability where the service recipient was responsible for paying part of the tax.
The Tribunal found that the disputed commercial construction activities were taxable during both periods. On the record before it, it found no basis to disturb the demand merely because the appellant questioned the provisions referred to in the assessment.
Regarding valuation, CESTAT noted that the Commissioner had already allowed abatement in the relevant calculations. The recipient’s share of liability had also been excluded where applicable.
For July 2012–March 2013, the appellant sought valuation under Rule 2A by deducting the actual value of goods or using the prescribed percentage method. However, it produced nothing showing that the actual goods component warranted a deduction greater than the relief already allowed.
These objections therefore failed.
Tax on Free-of-Cost Materials Was Deleted
The appellant separately challenged inclusion of materials supplied free of cost by its customers.
Relying on the Larger Bench decision in Bhayana Builders Pvt. Ltd. v. Commissioner of Service Tax, Delhi, 2013 (32) STR 49, CESTAT accepted this contention.
The Commissioner’s computation separately identified ₹28,38,912 as service tax on free-of-cost materials. The Tribunal directed deletion of that component.
This was the principal relief granted in the appeal.
Unsupported Works-Contract Claim and Earlier Payments
The appellant also disputed the treatment of certain transactions as service contracts simpliciter, asserting that they were works contracts.
CESTAT found no material in the appeal substantiating that assertion and upheld the corresponding demand. The description “works contract” could not secure valuation relief without supporting evidence.
As regards tax allegedly deposited through eight challans during investigation, the Tribunal directed that verified service tax payments must be appropriated against the confirmed demand.
The order mentions inconsistent amounts for these deposits in different paragraphs. Accordingly, the amount eligible for adjustment depends on verification of the challans rather than either figure being accepted without scrutiny.
Penalties Sustained and Appeal Partly Allowed
The Tribunal declined to interfere with the section 76 penalty. It noted that the appellant had not paid tax, filed returns or declared the services, and the transactions came to light through investigation.
The order was modified by deleting the demand on customer-supplied free materials. The remaining order was upheld, subject to verification and adjustment of tax already deposited.
Author’s Comments
The decision demonstrates that each claim requires its own factual support. The free-material valuation objection succeeded, while the hospital exclusion and works-contract assertions failed for want of evidence.
A society’s involvement or a building’s use as a hospital does not, by itself, prove charitable operation. Likewise, works-contract treatment requires documents establishing the transaction’s composite nature.
The ruling also should not be read as permitting provisions from different tax periods to be used interchangeably in every case. The Tribunal’s conclusion concerned the particular taxable activities and computation before it.
Finally, prior tax payments must be reconciled with challans and assessment workings so that the surviving liability does not result in duplicate recovery.
Cases Discussed
- Bhayana Builders Pvt Ltd vs Commissioner of Service Tax, Delhi, 2013 (32) STR 49 (Tri. LB)
FULL TEXT OF THE JUDGMENT/ORDER OF CESTAT, NEW DELHI
The order dated 06.04.2016 passed by the Commissioner of Service Tax Audit I1 is assailed by M/s VK Agarwal and Co.2 in this appeal, In the impugned order the Commissioner decided the proposals made in the show cause notice dated 22.05.2014 issued to the appellant.
2. The appellant was registered with the service tax department for providing construction services but had not filed ST-3 returns nor paid any service tax during the period 2012-13. The anti-evasion branch of the Commissionerate investigated the appellant and found that during the period the appellant had received consideration of Rs. 57,25,57,532/- for various services provided by it to its clients. The appellant had not provided any documents or balance sheets to show that the amounts received were gross amounts nor did it file any ST-3 returns. Accordingly, it was proposed to carry out best judgment assessment under section 72 of the Finance Act, 19943 and demand service tax of Rs. 7,07,68,111/- under section 73 of the Act being 12.36% of the total value received by the appellant.
3. The appellant submitted its reply to the show cause notice and resisted the proposals. After considering the submissions, the Commissioner passed the impugned order confirming service tax demand of Rs. 2,18,69,271/- as service tax and dropped the remaining demand. He also imposed a penalty of Rs. 21,00,000/-under section 76 of the Act on the appellant and further imposed a penalty of Rs. 10,000/- under section 77(2) of the Act for not filing the returns.
4. Aggrieved, the appellant filed this appeal. However none appeared on behalf of the appellant. The appellant has been seeking adjournments repeatedly. Therefore, by an order dated 08.12.2024 this appeal was dismissed for non-prosecution. Thereafter, the appellant filed an application seeking restoration of appeal. By an order dated 07.07.2026 the appeal was restored to its original number. Shri Amit Dahiya who represented the appellant on that day assured and undertook that on the next date of hearing he would argue the appeal. Accordingly, the appeal was listed for today, i.e., 25.08.2026. It was made clear that if the appellant is either not present or seeks an adjournment, the appeal would be disposed of on merits. Despite the assurances made by Mr. Dahiya and the fact that the order was passed in his presence in the court, he has not appeared today. Mr. Lakshay Chaprana appearing proxy for Mr. Dahiya sought an adjournment. In view of the order dated 07.07.2026, we decline the adjournment.
5. We, therefore, have heard Ms. Jaya Kumari, learned authorised representative for the department and perused the records and proceed to decide the issue on merits.
6. Eight grounds taken in appeal in this appeal are as follows:
i. The impugned order is erroneous in the eyes of law and is ought to be set aside and quashed;
ii. The demand has been confirmed without considering the relevant provisions of service tax applicable during the relevant period;
iii. The demand of service tax on free of cost material supplied by different customers is not maintainable;
iv. The quantum of service tax was wrongly determined in case of exclusive service contracts;
v. The service of Rs. 80,96,730/- was already deposited by the appellant through 8 challans during investigation which needs to be appropriated against the confirmed demand;
vi. No penalty is imposable on the appellant under section 76 of the Act;
vii. The impugned order was passed without appreciating the relevant provision of law applicable during the relevant period and is required to be set aside;
viii. The appellant prays to add, modify or remove any grounds before the appeal is posted for hearing.
7. No grounds were subsequently added through any application. We find that the grounds i, iii and vii are essentially the same and the submission is that the demand has been confirmed contrary to the relevant provisions applicable to the period.
8. We find that the service tax confirmed in the impugned order is as follows:
“Accordingly on the basis of the above discussion total Service Tax liability of the Noticee during the period 2012-13 comes to Rs. 2,18,69,271/-instead of Rs. 2,00,97,995/- as claimed by the Noticee, as detailed below:
TABLE – A
| Service Contracts only | |||
| S.No. | Name of the Client | Taxable Amount (in Rs.) | S.Tax @ 12.36% (in Rs.) |
| 1 | Amrit Bottlerd Ltd | 21,74,980 | 2,68,828 |
| 2 | Spacon Engineers & Contractor Pvt Ltd | 38,44,148 | 4,75,197 |
| 3 | Delhi Edu. Charitable & Foundation | 13,19,257 | 1,63,060 |
| 4 | Triump Softtech Pvt Ltd | 2,94,000 | 36,338 |
| 5 | TDI Infrastructure | 2,33,76,161 | 28,89,293 |
| Total | 3,10,08,546 | 38,32,656 | |
TABLE – B
| Work Contracts to Company | |||||
| S.No
. |
Name of the Client | Gross Work Done (in Rs.) |
Amt. After 60% abatement (in Rs.) |
S.Tax @ 12.36% (inRs.) |
50% of the ST payable by the Noticee (inRs.) |
| 1 | Ajnara Infrastructu re Pvt Ltd |
2,66,56,181 | 1,06,62,472 | 13,17,882 | 8,58,941 |
| 2 | Aggarwal Associates (Promoters) Ltd |
13,81,09,454 | 5,52,43,782 | 68,28,131 | 34,14,066 |
| 3 | APV Reality Ltd |
1,09,73,714 | 43,89,486 | 5,42,540 | 2,71,270 |
| 4 | MPG Realty Pvt Ltd |
18,46,07,666 | 7,38,43,066 | 91,27,003 | 45,63,502 |
| Total | 36,03,47,015 | 14,41,38,806 | 1,78,15,556 | 89,07,778 | |
TABLE – C
| Work Contracts where benefit of Notf No. 30/2012-ST not availed | ||||
| S.No. | Name of the Client | Gross Work Done (in Rs.) | Amt. After 60% abatement (in Rs.) | S.Tax @ 12.36% (in Rs.) |
| 1 | Aggarwal Associates (Promoters) Ltd | 7,59,52,773 | 3,03,81,109 | 37,55,105 |
| 2 | Jay Prakash Associates | 37,23,400 | 14,89,360 | 1,84,085 |
| 3 | MPG Realty Pvt Ltd | 1,48,48,259 | 59,39,304 | 7,34,098 |
| 4 | Shree Agrasen North Ex Welfare Society Regd. | 3,17,93,633 | 1,27,17,453 | 15,71,877 |
| 5 | SSGR Hospital & Research Center |
9,05,318 | 3,62,127 | 44,759 |
| Total | 12,72,23,383 | 5,08,89,353 | 62,89,924 | |
TABLE – D
| S.No. | S.Tax Payable Notice | ||
| 1 | TABLE A | 38,32,656 | |
| 2 | TABLE B | 89,07,778 | |
| 3 | TABLE C | 62,89,924 | |
| 4 | Tax on FOC material | 28,38,912 | |
| Grand Total | 2,18,69,271 | ||
9. The first contention of the appellant is that the adjudicating authority had considered only provisions applicable with effect from 01.07.2012 for the entire financial year whereas for the period April 2012 to June 2012 the erstwhile provisions of the pre negative list were applicable. During that period, the appellant had provided commercial and industrial construction service to three customers, namely, M/s Agarwal Promoters Limited, M/s MPG Reality Pvt Ltd and Shri Agrasen North Ex Welfare Society (Reg.). Of these Shri Agrasen North Ex Welfare Society got constructed an international hospital and, therefore, it should be treated as not commercial or industrial services because it was not used for commerce or industry. Therefore, no service tax should have been levied on that portion of the services amounting to Rs. 48,44,837/-. Further, in the impugned order the Commissioner had not allowed abatement of 67% of the gross amount charged as was available to it under Notification No. 1/2006-ST dated 01.07.2006.
10. The next submission of the appellant is that for the period from July 2012 to March 2013 appellant had provided works contract service and, therefore, the liability of service tax has to be determined as per rule 2A as per the Service Tax (Determination of Value) Rules, 20064 which reads as follows:
2A. Determination of value of service portion in the execution of a works contract.- Subject to the provisions of section 67, the value of service portion in the execution of a works contract , referred to in clause
h. of section 66E of the Act, shall be determined in the following manner, namely:-
i. Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.
Explanation.- For the purposes of this clause,-
(a) gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;
(b) value of works contract service shall include, –
i. labour charges for execution of the works;
ii. amount paid to a sub-contractor for labour and services;
iii. charges for planning, designing and architect’s fees;
iv. charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
v. cost of consumables such as water, electricity, fuel used in the execution of the works contract;
vi. cost of establishment of the contractor relatable to supply of labour and services;
vii. other similar expenses relatable to supply of labour and services; and
viii. profit earned by the service provider relatable to supply of labour and services;
(c) Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause.
(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-
(A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract;
(B) in case of works contract, not covered under sub-clause (A), including works contract entered into for,-
i. maintenance or repair or reconditioning or restoration or servicing of any goods; or
ii. maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, service tax shall be payable on seventy per cent. of the total amount charged for the works contract
Explanation 1.- For the purposes of this rule,-
(a) “original works” means-
i. all new constructions;
ii. all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
iii. erection, commissioning or installation of plant, machinery or equipment or structures, whether prefabricated or otherwise;
(d) “total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-
i. the amount charged for such goods or services, if any; and
ii. the value added tax or sales tax, if any, levied thereon:
Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.
Explanation 2.- For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.
11. As per the above rule, taxable value shall be determined after excluding the value of goods from the gross amount charged if it is possible and if not, it should be charged only on 40% of the gross amount charged. Further as per Notification No. 30/2012-ST dated 20.06.2012, 50% of the tax liability has to be discharged by the service recipient and only 50% can be fastened against the service provider.
12. The third submission of the appellant is that for the calculating the gross amount charged for works contract, the value of free of cost material supplied by different customers should not be included as has been held by the Tribunal (Larger Bench) in the case of Bhayana Builders Pvt Ltd vs Commissioner of Service Tax, Delhi5 which decision was followed in several subsequent judgments. The Commissioner has, in the impugned order, treated taxable value of Rs. 3,10,08,546/- as exclusive service contracts and confirmed a demand of Rs. 38,32,656/- on them (Table A above). Of these, the service provided to Delhi Educational Charitable and Foundation was in the nature of works contract and, therefore, service tax needs to be computed accordingly.
13. With respect to the above submissions we find that there is no dispute that the appellant was engaged in construction of commercial or industrial structures, both during the period April 2012 to June 2012 and thereafter. These services were chargeable to service tax during both periods. Therefore, it will not make any difference if the provisions contained in the post negative list period were considered, even for the period April 2012 to June 2012. The next submission of the appellant is that during the period April 2012 to June 2012 it had provided services to M/s Shri Agrasen North Ex Welfare Society for construction of a hospital and, therefore, it is not a commercial or industrial construction service. The appellant also placed reliance on the CBIC Circular No. 18/10/2004-ST dated 17.09.2004 to insist the constructions which are used for organisations and institutions being established solely for educational, religious, charitable, health, etc. are not of commercial nature. We find that hospitals can be charitable hospitals or they could be commercial hospitals. Unless there is evidence that the hospital which was constructed by the society was meant to be a charitable hospital, the construction of the building would certainly qualify as commercial or industrial service. Needless to say that running hospitals is a big source of commerce nowadays. For these reasons we do not find that the appellant deserves any exemption for the services for construction of hospital to Shri Agrasen North Ex Welfare Society.
14. The next submission of the appellant for the services rendered during this period is that it was entitled to abatement of 67%. It is further the submission of the appellant that 50% of the service tax has to be paid by the service recipient in such cases. We find that the Commissioner has, in the impugned order, included all services provided to M/s Agarwal Promoters Limited, M/s MPG Reality Pvt Ltd and Shri Agrasen North Ex Welfare Society (Reg.) in Table C and has allowed the abatement. Further, we find that where the service recipient was supposed to discharge the service tax, the Commissioner had also reduced the service tax liability, accordingly. Therefore, we find no infirmity in the confirmation of demand during this period.
15. As far as the service tax liability during the period July 2012 to March 2013 is considered, the submission of the appellant is that works contract services are entitled to abatement under rule 2A of the Valuation Rules either by deducting the actual value of the goods used or on presumptive basis. We find that in Tables B and C, the Commissioner has calculated the service tax after considering the abatement and also after considering the 50% service tax liability payable by the service recipient wherever applicable. Nothing has been brought out before us to show the appellant had produced the actual figures of the value of the goods used and it was more than the abatement allowed. We, therefore, find no infirmity whatsoever in the impugned order in so far as this issue is considered.
16. The next submission of the appellant is that the free of cost materials supplied by different customers should not be included while allowing abatement under works contract. Reliance is placed on Bhayana Builders Pvt Ltd. decision of this Tribunal. We find in favour of the appellant on this decision and, therefore, the demand needs to be reduced to that extent. We find that the amount of service tax on the free of cost material supplied by the customers has been indicated as Rs. 28,38,912/- in Table D above.
17. The next submission of the appellant is with respect to the services indicated in Table A above which are held to be exclusively service contract. It is the submission of the appellant that these were also works contracts. There is nothing in the appeal to substantiate the assertion that these services were works contract and that the Commissioner has erroneously considered as services simpliciter. We, therefore, find no reason to interfere with this part of the demand.
18. The next submission of the appellant is that an amount of Rs. 18,96730/- was already deposited during investigations through 8 challans and the same needs to be appropriated and the demand may be reduced accordingly. This is a matter of verification and if the amounts have been indeed deposited as service tax, they shall be appropriated towards the confirmed demand.
19. The last submission of the appellant is that no penalty can be imposed on the appellant under section 76. We find no reason to set aside penalty imposed on the appellant under section 76, considering that the appellant had not paid the service tax, nor filed returns and nor declared the services provided and everything came to light only as a result of investigation. In view of the above, we modify the impugned order to the extent of setting aside the demand of service tax on free of cost materials supplied by the customers to the appellant. Rest of the impugned order is upheld. The appeal is allowed to the extent indicated above.
(Order pronounced on 06.10.2026)
Notes:
1. the impugned order
2. appellant
3. the Act
4. Valuation Rules
5. 2013 (32) STR 49 (Tri. LB)
