No service tax on construction services for the period before June 1, 2007

Commissioner Of Service Tax Vs Solux Galfab Private Limited (CESTAT Kolkata)

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Kolkata recently issued a significant ruling in the case of M/s. Solux Galfab Private Limited vs. Commissioner of Central Excise & Service Tax, Kolkata. This ruling, dated September 25, 2023, sheds light on the liability of service tax on construction services provided before June 1, 2007, with a particular focus on composite contracts that involve the supply of materials.

CESTAT, Kolkata in above case held that the assessee was not liable to pay service tax on construction services for the period before June 1, 2007. As there is a composite contract wherein supply of materials is also involved, therefore, it merits classification as works contract service, which was not in service tax net prior to June 1, 2007.

Facts:

M/s. Solux Galfab Private Limited, (“the Appellant”) operated as a service provider, offering various services, including Business Auxiliary Service (“BAS”), Construction Service, Erection and Painting Service, and Goods Transport Agency (“GTA”) Service. Directorate General of Central Excise Intelligence (“DGCEI”) conducted an investigation and found that the Appellant had not paid service tax prior to July 03, 2006 for the services rendered.

A Show Cause Notice dated December 31, 2008 (“the SCN”) was issued demanding service tax along with interest and penalty under Section 78 of the Finance Act, 1994 (“the Finance Act”).

The appeal arose in response to an order issued by The Commissioner (Appeals) (“the Respondent”) vide Order in Original No. 14/Commr./ST/ Kol/2010-11 dated September 08, 2010 (“the Impugned Order”) confirmed the demand for service tax under the category of Construction Service. Aggrieved by the Impugned Order, the Appellant filed appeal before this Tribunal.

The Appellant, contended that the service tax had been confirmed under BAS, construction services and GTA services from June 1, 2007. However, the Appellant was engaged in construction services along with the supply of materials prior to June 1, 2007 and was not liable to pay services tax on the services rendered before June 1, 2007.

The Appellant further contended the payment of Rs. 42,50,000/- against the demand and if construction services were conducted prior to June 1, 2007, therefore the penalty is not leviable.

Issue:

Whether service tax is leviable on the Construction services, BAS and GTA services entered before June 1, 2007?

Held:

The CESTAT, Kolkata in the case of Service Tax Appeal No 09 of 2011 held as under:

• Opined that, the Appellant does not dispute the liability for Business Auxiliary Service, Construction Service, and Goods Transport Agency Service from June 1, 2007, onwards, with a total service tax demand of Rs. 22,70,491.
• Observed that, prior to June 1, 2007, when there was a composite contract involving the supply of materials, the appropriate classification is works contract service, which was not subject to service tax before that date. Therefore, no service tax is payable by the Appellant for the period prior to June 1, 2007, under the category of construction services, and the demand for that period is set aside.
• Held that, no penalty is imposed on the Appellant and the demand for BAS, GTA services and construction services are taxable from June 1, 2007, and any excess amount paid by the Appellant will be refunded within 30 days.

Conclusion: The CESTAT Kolkata ruling in the case of M/s. Solux Galfab Private Limited provides clarity on the service tax liability related to construction services provided before June 1, 2007, in situations involving composite contracts with material supply. The ruling, in line with the principles established by the Hon’ble Apex Court, ensures that service tax is not applicable to such works contracts prior to June 1, 2007. This ruling serves as a significant reference point for businesses and service providers navigating the complex landscape of service tax regulations.

Relevant Provision:

Section 76 of the Finance Act:

Penalty for failure to pay service tax:

Any person, liable to pay service tax in accordance with the provisions of section 68 or the rules made under this Chapter, who fails to pay such tax, shall pay, in addition to such tax and the interest on that tax amount in accordance with the provisions of section 75, a penalty which shall not be less than one hundred rupees for every day during which such failure continues or at the rate of two per cent. of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax.

Provided that the total amount of the penalty payable in terms of this section shall not exceed the service tax payable in terms of this section shall not exceed fifty per cent of the service tax payable.

 FULL TEXT OF THE CESTAT KOLKATA ORDER

Both are in appeals against the impugned order.

2. The facts of the case are that the assesse is a service provider and registered themselves with the respondent during the year 2004.

2.1 On the basis of investigation conducted against the assessee by the DGCEI, it was alleged that during the financial year, 2004-05 to 2007-08, the assessee has provided services,namely, Business Auxiliary Service, Construction Service, Erection and Painting Service and Goods Transport Agency Service and did not pay any service tax prior to 03.07.2006.

2.2 During the course of investigation, the assessee paid a sum of Rs .42,50,000/-.

2.3 Later on, a show-cause notice dated 3 1.12.2008 was issued to the assessee to demand service tax on the above mentioned services rendered by them along with interest and penalty under Section 78 of the Finance Act, 1994, which was adjudicated and the demand proposed was confirmed and a penalty under Section 78 of the Act, was also imposed, but no penalty was imposed on the assessee under Section 76 of the Finance Act, 1994.

2.4 The assessee is in appeal against the said confirmation of demand whereas the Revenue is in appeal against the order of non-imposition of penalty under Section 76 of the Act. Therefore, both sides are in appeal.

3. The ld.Advocate for the assessee submits that the service tax has been confirmed under Business Auxiliary Service, construction service and GTA service. It is the submission that the assessee does not dispute the confirmation of service tax under Business Auxiliary Service and GTA service and construction service w.e.f. 01.06.2007, but for the period prior to 01.06.2007, it is their submission that as the assessee was providing services along with the materials, in that circumstances, the said period prior to 01.06.2007, the demand of service tax is not sustainable against the assessee in the light of the decision of the Hon’ble Apex Court in the case of Commissioner of Central Excise & Customs, Kerala Vs. Larsen & Toubro Limited reported in 2015 (39) STR 913 (SC), wherein it has been held that the composite indivisible works contracts were not liable to pay service tax prior to 01.06.2007 and admittedly, they are engaged in the activity of construction services along with materials. He further submits that the assessee has paid an amount of Rs.42,50,000/- and if the demand on construction service prior to 01.06.2007 is not considered, then the total liability works out Rs.22,70,491/-,whereas the assessee paid Rs.42,50,000/- before issuance of show-cause notice. In that circumstances, no penalty, is imposable on the assessee. Therefore, the penalty is not leviable on the assessee.

4. The ld.A.R. for the Revenue supported and impugned order for quo demanding the service tax and argued that the penalty under section 76 of the Act is also imposable on the assessee.

5. Heard both sides and considered the submissions.

6. On carefully considered the submissions made from both the parties, we find that the assessee is not disputing the liability towards Business Auxiliary Service, Construction Service & GTA Service from 01.06.2007 onwards and the total demand of service tax for those services works out Rs.22,70,491/-. The said demand is confirmed against the assessee along with interest. If any amount is payable by the assesse, the same shall be adjusted as the assessee has already paid an amount of Rs.42,50,000/- during investigation and 14,13,327/ after issuance of show-cause notice. The said amount is to be adjusted against the confirmed demand along with interest.

7. We further hold that prior to the period 0 1.06.2007 as there is a composite contract wherein supply of materials is also involved, therefore, merits classification is works contract service, which was not in service tax net prior to 01.06.2007. Therefore, no service tax is payable by the assessee for the period prior to 01.06.2007 under the category of construction services, therefore, the said demand is set

8. In the facts and circumstances of the case, we hold that no penalty is imposable on the assessee.

9. Therefore, we hold that the demand on account of business auxiliary service, GTA service and construction service w.e.f. 01.06.2007 onwards are confirmed along with interest and the amount already paid by the assessee are to be appropriated if any excess amount is paid, the same is to be refunded to the assessee within a period of 30 days from the date of receipt of this order.

10. We further hold that no demand is sustainable against the assessee under construction service prior to 01.06.2007 and no penalty is imposable on the assesse.

11. In these terms, the Revenue’s appeal is dismissied and the assessee’s appeal is disposed off.

(Pronounced in the open court on…25.09.2023.)

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