The question of whether service tax should be applied to construction contracts executed prior to June 1, 2007, has been addressed in a landmark ruling by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) in Chennai. The case involved Arasan Amuthan Construction, which faced claims for unpaid service tax under the category of “construction of residential complex service.”
Background: The origin of this case dates back to a show cause notice dated October 18, 2010. The notice claimed that Arasan Amuthan Construction had rendered taxable services but failed to pay the service tax and even neglected to file a Service Tax return. The appellant argued that the construction contracts fell under the category of works contracts involving both goods and services, and therefore, couldn’t be taxed under the construction of residential complex services.
Arguments from Both Sides: Arasan Amuthan Construction contended that their service falls under works contracts, a category which cannot be taxed for the period under dispute (2005-06 to 2006-07). The original authority and the Commissioner (Appeals), however, disagreed with this contention, confirming the tax demand.
Legal representatives for the appellant drew attention to a precedent set by the Hon’ble Supreme Court in the case of Commissioner of Central Excise and Customs, Kerala v. M/s. Larsen & Toubro Ltd. According to this decision, works contract services could not be taxed prior to June 1, 2007.
The Final Verdict: The CESTAT Chennai agreed with the appellant’s interpretation and emphasized that the period involved in the appeal was prior to June 1, 2007. They concluded that Arasan Amuthan Construction’s service was indeed a works contract, and therefore, not liable for service tax as per the Supreme Court’s ruling. Thus, the original order demanding the service tax was set aside.
Conclusion: The ruling by CESTAT Chennai adds a significant chapter to the ongoing debate about the taxability of works contracts. It establishes that for periods prior to June 1, 2007, construction companies like Arasan Amuthan Construction are not liable to pay service tax on contracts involving both goods and services.
FULL TEXT OF THE CESTAT CHENNAI ORDER
Facts of the case as emerging from the Show Cause Notice are that the appellant has been rendering taxable services under the category of “construction of residential complex service”. During the year under challenge, it is mentioned in the show cause notice dated 18.10.2010 that the appellant had undertaken construction of residential complex service for Tamil Nadu Police Housing Corporation Limited (TNPHCL), but however had not paid Service Tax on the taxable value of the services rendered. It is also mentioned that the appellant did not even file any Service Tax return.
1.2 It appears from the said Notice that the statement of the Managing Partner of the appellant-firm was recorded and thereafter, it was proposed in the said Show Cause Notice that the appellant was liable as a service provider to pay appropriate Service Tax on the taxable value of services rendered from 16.06.2005 under the category of construction of residential complex service. It also comes out from the Show Cause Notice that the appellant claimed that the value of contract included materials such as cement, steel, etc., and as such it was proposed in the said Show Cause Notice, at paragraph 5, to allow abatement in terms of Notification No. 01/2006-S.T. dated 01.03.2006 and thereby allowed 67% of abatement on the value of services in terms thereof. Consequently, further proposal was made to demand Service Tax, along with applicable interest under Section 75, penalties under Sections 78, 76 and 77CESTAT Chandigarh, of the Finance Act, 1994.
2. It appears that during personal hearing, the appellant had explained that the period of dispute being 2005–06 to 2006–07, the service, if at all, was under the category of works contract involving both value of goods as well as services and that being the situation, no Service Tax under construction of residential complex services could be demanded.
3. The original authority having considered the arguments of the appellant, however, vide Order-in-Original No. MAD-CEX-000-ASC-016-13 dated 08.05.2013 confirmed the demand as proposed in the Show Cause Notice.
4. It appears that the appellant filed an appeal before the Commissioner (Appeals) who also vide impugned Order-in-Appeal No. 194/2013 dated 28.11.2013 having not accepted their contentions, the present appeal has been filed before this forum.
5.1 Today, when the case was taken up for hearing, Smt. Radhika Chandrasekhar, Ld. Advocate appearing for the appellant, submitted at the outset that by granting abatement of 67% in terms of Notification No. 01/2006 (supra), the Revenue has not denied the fact that the service if at all rendered by the appellant, was works contract per se. She would thus argue that the contract being a composite contract, demanding Service Tax under the category of construction of residential complex service was out of question. Further, it is her case that TNPHCL is a Government organization with the entire share capital being held by the State Government of Tamil Nadu, and that even the ownership of the quarters that were being constructed by the appellant vested with the Government of Tamil Nadu and therefore, there was no ‘service’ as such which was liable to be taxed.
5.2 She would rely on the decision of Hon’ble Supreme Court in the case of Commissioner of Central Excise and Customs, Kerala v. M/s. Larsen & Toubro Ltd. [2015 (39) S.T.R. 913 (S.C.)] wherein it has been held that the works contract services cannot be taxed prior to 01.06.2007 and further, she would draw attention to various orders of CESTAT Benches wherein the above decision of the Hon’ble Supreme Court has been followed, to hold that there was no scope to levy Service Tax on works contract service prior to 01.06.2007.
6. Per contra, Shri N. Satyanarayanan, Ld. Departmental Representative, supported the findings of the lower authorities.
7. The period involved in the above appeal is clearly prior to 01.06.2007 and there is also no dispute that the nature of service alleged to have been rendered by the appellant was works contract. The Hon’ble Apex Court in the case of M/s. Larsen & Toubro Ltd. (supra) has observed at paragraph 24 as under: –
“24. A close look at the Finance Act, 1994 would show that the five taxable services referred to in the charging Section 65(105) would refer only to service contracts simpliciter and not to composite works contracts. This is clear from the very language of Section 65(105) which defines “taxable service” as “any service provided”. All the services referred to in the said sub-clauses are service contracts simpliciter without any other element in them, such as for example, a service contract which is a commissioning and installation, or erection, commissioning and installation contract. Further, under Section 67, as has been pointed out above, the value of a taxable service is the gross amount charged by the service provider for such service rendered by him. This would unmistakably show that what is referred to in the charging provision is the taxation of service contracts simpliciter and not composite works contracts, such as are contained on the facts of the present cases. It will also be noticed that no attempt to remove the non-service elements from the composite works contracts has been made by any of the aforesaid Sections by deducting from the gross value of the works contract the value of property in goods transferred in the execution of a works contract.”
8. In view of the above specific decision and the undeniable claim of the appellant that what they provided was only works contract service, no tax is liable to be demanded on the construction contracts executed prior to 01.06.2007. Consequently, the impugned order, which cannot sustain, is set aside and the appeal stands allowed with consequential benefits, if any, as per law.
(Order pronounced in the open court on 31.08.2023)