Service Tax Demand Quashed as Composite Contracts Not Taxable Before 01.06.2007

Sri Renukadevi Enterprises Vs Commissioner of GST & Central Excise (CESTAT Chennai)

The appeal before the Customs, Excise and Service Tax Appellate Tribunal challenged an Order-in-Appeal dated 03.03.2015, which upheld classification of the appellant’s services under “Erection, Commissioning or Installation Service” for the period from 16.06.2005 to 30.05.2007 and under “Works Contract Service” from 01.06.2007 onwards, while directing re-quantification of service tax demand and sustaining penalty under Section 78.

The appellant, an electrical contractor, was engaged in installation of electrical gadgets and undertook contracts involving supply and installation of electrical wiring and related materials for entities such as BSNL, CPWD, and private parties. The Department alleged non-payment of service tax on such services and issued a show cause notice dated 14.07.2009 proposing demand of Rs. 33,78,029 along with interest and penalty, invoking the extended period on grounds of suppression of facts. The demand was computed based on gross turnover reflected in profit and loss accounts.

The appellant contended that the disputed activities were composite contracts involving both supply of goods and provision of services, and that such contracts were subject to VAT/sales tax. It was argued that prior to 01.06.2007, such composite contracts were not taxable under service tax, and liability arose only after introduction of “Works Contract Service” from that date. The appellant also relied on the decision of the Supreme Court in Larsen & Toubro, which held that composite contracts cannot be taxed under service tax categories prior to 01.06.2007. It was further argued that the Appellate Authority exceeded the scope of the show cause notice by reclassifying services under “Works Contract Service,” as the notice proposed classification only under “Erection, Commissioning and Installation Service.”