Service Tax Demand cannot be raised in category for which SCN was not issued

India Guniting Corporation Vs Commissioner of Central Tax (CESTAT Delhi)

Commissioner was not justified in confirming the demand of service tax under the category of ^‘works contract’ for the period post June 1, 2007 even if the levy of service tax was not exempted under Notifications, since, the show cause notice that demand it service tax under the three categories namely (i) commercial or industrial construction, (ii) construction of complex and (iii) management, maintenance or repair.

FULL TEXT OF THE CESTAT JUDGEMENT

India Guniting Corporation¹ has filed this appeal to assail the order dated January 31, 2018, by which the two show cause notices dated October 13, 2011 and March 25, 2015 have been adjudicated upon by the Commissioner, Central Tax, Delhi². In regard to the first show cause notice, an amount of Rs.4,72,33,255/- has been confirmed and the remaining demand of Rs.79,96,862/- has been dropped. In regard to the second show cause notice, an amount of Rs.1,05,19,077/- has been confirmed and the remaining demand of Rs.63,08,584/- has been dropped. The Commissioner has also imposed penalty and interest. The appeal assails that part of the order passed by the Commissioner that has confirmed the demand of service tax.

2. The appellant is engaged in commercial construction and management, maintenance and repair. The first show cause notice dated October 13, 2011 for the period 2006-07 to 2010- 11 was earlier adjudicated upon by an order dated March 20, 2013. This order was assailed by the Appellant by filing Service Tax Appeal bearing number 57966 of 2013. Initially an interim order dated September 21, 2015 was passed, requiring the Appellant to furnish a detailed chart on matters enumerated in paragraph 5 of the order. The appeal was ultimately allowed by order dated October 27, 2015. The impugned order was set aside and the Adjudicating Authority was directed to scrutinise the nature of each of the work covered in the show cause notice. The demands made on ^‗works contract‘ prior to June 1, 2007 were directed to be excluded. The Authority was also directed to re-examine whether any of the repairs and alteration contracts related to buildings that are being rented out to public offices so that the demand made on such contracts could also be excluded. The relevant portion of the order passed by the Tribunal is reproduced below:

^“4. We find that in consequences of the decision of the Hon‘ble Supreme Court in the case of Commissioner of Central Excise and Customs, Kerala vs. Larsen and Toubro Ltd.[2015 (39) S.T.R 913 (S.C)] on taxability of works contract prior 1^st June 2007 which the original authority did not have as a guide when adjudicating the show cause notices, each of the contracts undertaken by the appellant would need to be examined for taxability itself. We also find that some of the buildings for which works were undertaken by the appellant are undoubtedly rented out but these can hardly be categorized as being put to commercial lease as to bring it within the ambit of the definition of commercial or industrial construction in section 65(25b) of Finance Act, 1994. We also observe that in a few of the contracts executed for the Delhi Government and municipal bodies, consideration was yet to be received by the appellant.

5. Considering the factual matrix and the decision of the Hon‘ble Supreme Court supra, we are of the opinion that the original authority would need to have a fresh look at the claims made by the appellant. We, therefore, direct the original authority to scrutinize the nature of each of the works covered in the show cause notice for excluding demand on works contracts prior to 1 June, 2007 and to re-examine whether any of the repair and alteration contracts relate to buildings that are being rented out to public offices for exclusion from demand. The appeal, is thereby, allowed by way of remand to the original authority with the impugned order set aside.”

(emphasis supplied)

3. It needs to be noted that in the mean time a second show cause notice dated March 24, 2014 was issued to the appellant for the subsequent period from 2011-12 to 2012-13.

4. The first show cause notice that was required to be adjudicated upon pursuant to the order dated October 27, 2015 passed by the Tribunal and the second show cause notice were adjudicated upon by a common order dated January 31, 2018 passed by the Commissioner.

5. It needs to be noted that the three taxable services indicated in the two show cause notices are as follows:

(1) ’Commercial or industrial construction‘ service as defined under section 65 (25b) of the Finance Act and taxable under section 65 (105) (zzq);

(2) ’Construction of complex‘ service as defined under section 65 (30a) of the Finance Act and taxable under section 65 (105) (zzzh); and

(3) ’Management, maintenance or repair‘ service as defined under section 65 (64) of the Finance Act and taxable under section 65 (105) (zzg).

6. The Commissioner noted, in connection with the first show cause notice dated October 13, 2011, that the activities undertaken by the appellant could be divided into eight groups. These activities, including in the category of service and the taxability status, as mentioned in the show cause notice, are indicated in the following Tabular Form:

7. The second show cause notice dated March 24, 2014 for the subsequent period mentions that the issues involved in the notice are basically the same as raised in the earlier show cause

8. The Commissioner proceeded to examine the contracts in the light of directions issued by the Tribunal and scrutinised each of the contracts to determine whether the projects undertaken by the appellant would fall in the classification alleged in the show cause notices or would be more appropriately classifiable under ^―works contract^‖, if the contracts involved both goods as well as services.

9. After referring to the decision of the Supreme Court in Commissioner of Central Excise and Customs, Kerala vs. Larsen and Toubro Ltd. ³ , the Commissioner observed as follows:

^“(i) In this case, it was further established that all the contracts which are Composite Indivisible Works Contracts and covered in the definition of ^―Works Contract Service^‖ as prescribed under section 65 (105) (zzzza), they would be leviable for service tax w.e.f. 01.06.2007 i.e. the introduction of ^―Works Contract Service^‖. In other words, if the nature of activities carried out by the service provider is covered under Composite Indivisible Works Contracts, it would not be leviable for service tax levy before 01.06.2007.

IGC, in their fresh submissions stated that, all the projects undertaken by them are not falling under any of the services mentioned in the classification alleged in the show cause notice, but in accordance with the definition were more appropriately classifiable under the “Works Contract Service” as it involves goods as well a labour and services and composite contracts for non-commercial purposes provided to Government were exempted, retrospectively by virtue of Section 98 of the Finance Act, 1994 and thereafter by the Mega Exemption Notification.

(ii) Thus, for any contract to be covered under ^―Works Contract Service^‖ as prescribed under Section 65 (105) (zzzza), following two conditions are required:

(i) There must be transfer of property in goods involved in the execution of such contract and that property should be leviable to tax like VAT etc.

(ii) The contract must be covered under the one of the five categories as prescribed in the definition of Works Contracts;

On perusal of the each of the works contracts, I am of the view that all the above mentioned projects undertaken by the IGC are not covered under the services mentioned in the classification alleged in the show cause notice. In view of the decision 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)] and the definition of Works Contracts as prescribed under section 65 (105) (zzzza) of Finance Act, 1994, I am of the view that the activities of IGC are more appropriately classifiable under the “Works Contract Service” as it involves goods as well as labour i.e. services.”

(emphasis supplied)

10. It would, therefore, be seen that a categorical finding has recorded by the Commissioner that the projects undertaken by the appellant would not be covered under the category of service mentioned in the show cause notices and would appropriately be classifiable as ^―works contract^‖, which service became taxable e.f. June 1, 2007

11. The Commissioner, thereafter, proceeded to examine whether the period involved in each of these contracts was prior to June 1, 2007 or from on June 1, 2007. In regard to the period prior June 1, 2007, the Commissioner observed that in view of the decision of Supreme Court in Larsen and Toubro, the demands could not have been confirmed under the three categories mentioned in three show cause notice namely:- (i) commercial or industrial construction, (ii) construction of complex and (iii) management, maintenance or repair as the activities were classifiable as ^―work contract^‖. In regard to the period commencing from June 1, 2007, the Commissioner examined whether the levy of service tax was exempted under any notifications. For services which were exempted, the demand has been dropped but for services which were not exempted, the demand has been confirmed.

12. Shri Ved Prakash Batra, learned Consultant appearing for the appellant submitted that even for the period commencing from June 1, 2007, the levy of demand of service tax could not have been confirmed under ^―works contract^‖ for the simple reason that the show cause notices had not proposed levy of demand under ^―works contract^‖.

13. Shri A. Thaplial, Authorised Representative of the Department, however, supported the impugned order and submitted that it does not suffer from any illegality so as to call for any interference in this appeal. Learned Authorised Representative also submitted that the demand made under a particular category of service can always be confirmed under a different category, if it is found as a fact that the nature of service provided actually fall in that category of service.

14. The submissions advanced by the learned Consultant for the appellant and the learned Authorised Representative of the Department have been considered.

15. It is w.e.f. 1 June, 2007 that clause (zzzza) was inserted in section 65(105) of the Finance Act in relation to execution of ^“works contract^”. Taxable Service under Section 65(105)(zzzza) is defined as :

^“65(105)(zzzza) ^‗taxable service‘ means any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation — For the purposes of this sub-clause, ^―works contract^‖ means a contract wherein,^—

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,^—

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;‖

16. The Supreme Court in Commissioner of Central Excise and Customs, Kerala vs. Larsen and Toubro Ltd.⁴ noted that a ^“works contract^” is different from a contract for service simpliciter and could be subjected to service tax only with effect from June 1, 2007. The observations are as follows:-

^“This group of appeals is by both assessees and the revenue and concerns itself with whether service tax can be levied on indivisible works contracts prior to the introduction, on 1st June, 2007, of the Finance Act, 2007 which expressly makes such works contracts liable to service tax.

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……….  This being the case, we feel that the learned counsel for the assessees are on firm ground when they state that the service tax charging section itself must lay down with specificity that the levy of service tax can only be on works contracts, and the measure of tax can only be on that portion of works contracts which contain a service element which is to be derived from the gross amount charged for the works contract less the value of property in goods transferred in the execution of the works contract. This not having been done by the Finance Act, 1994, it is clear that any charge to tax under the five heads in Section 65(105) noticed above would only be of service contracts simpliciter and not composite indivisible works contracts.

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17.We find that the assessees are correct in their submission that a works contract is a separate species of contract distinct from contracts for services simpliciter recognized by the world of commerce and law as such, and has to be taxed separately as such.^″

17. The Commissioner has recorded a categorical find that each of the “works contract” undertaken by the appellant are not covered under the three services namely (i) commercial or industrial construction, (ii) construction of complex and (iii) management, maintenance or repair mentioned in the first show cause notice. The Commissioner further recorded a categorical finding that the activities undertaken by the appellant would be classifiable as ^―works contract^‖ as they involved goods as well as labour services.

18. The Commissioner therefore, dropped the demand for the period prior June 1, 2007. But for the demands for the period e.f. June 1, 2007 the Commissioner proceeded to examine whether the particular work performed under ^―works contract^‖ is exempted from levy of service tax under Notifications issued from time to time.

19. Learned Counsel for the appellant has submitted that there was no necessity for the Commissioner to examine whether service tax is exempted under the Notifications because a demand made under a particular category of service cannot be confirmed under a different category of service.

20. That submission advanced by the learned Counsel for the appellant has force and it is not possible to accept the contention of the learned Authorized Representative of the Department that a demand made under a particular category can be confirmed under a different category.

19. In this connection it would be pertinent to refer to the decision of the Mumbai Tribunal in Ashish Ramesh Dasarwar vs Commissioner of Central Excise & Service Tax, Nagpur⁵. The Division Bench of the Tribunal held as follows :

^“6. As regards the period after 1.6.2007, since the demand was raised under „commercial or industrial construction service, whereas admittedly the service is correctly classifiable under works contract service, the demand raised under wrong head of service cannot sustain.

7. As per above discussion, the demand raised under „commercial or industrial construction service^‟ shall not sustain. Hence, the same is set aside.^‖

20. In M/s. Choudhary Stone Crushing Company versus Commissioner of Central Excise and Service Tax – Jaipur-II⁶, the Tribunal observed as under:-

“8. For period commencing on 1/06/2007, the composite services would be liable for classification under Works Contract Service only. But we note that Show Cause Notice has proposed the demand for service tax under the category of Commercial and Industrial Construction Service as well as Repair and Maintenance Service. Hence we are of the view that the confirmation of demand under the category of WCS will not be proper particularly in view of the decision of the Tribunal in case of Ashish Ramesh Dasarwar (supra) wherein Tribunal has taken the view that demand for Service Tax is to be set aside if the Show Cause Notice proposed a classification different from WCS for construction activity.^‖

21. A Division Bench of the Tribunal in M/s Gurjar Construction as Commissioner of Central Excise, Jaipur II⁷ also examined such a position and observed that a demand made under a particular category cannot be sustained under a different category.

22. In view of the aforesaid decisions of the Tribunal, it has to be held that the Commissioner was not justified in confirming the demand of service tax under the category of ^“works contract” for the period post June 1, 2007 even if the levy of service tax was not exempted under Notifications, since, the show cause notice that demand it service tax under the three categories namely (i) commercial or industrial construction, (ii) construction of complex and (iii) management, maintenance or repair.

23. The order dated January 31, 2018 passed by the Commissioner that has confirmed the demand of service tax, therefore, deserves to be set aside and is set aside. The appeal is, accordingly, allowed.

(Dictated and pronounced in the open Court)

Note:-

1. the appellant

2. the Commissioner

3. 2015 (39) STR 913 (SC)

4. 2015 (39) STR 913 (SC)

5. 2017-TIOL-3230-CESTATMUM

6. 2019 (3) TMI 38 –CESTAT, New Delhi

7. 2019 (5) TMI 717 –CESTAT, New Delhi