2016 (8) TMI 722 - HC - Service Tax

Court Rules Government Authority Exempt from Service Tax on Construction Services for BPL Houses

The court held that the construction services provided by the petitioners to the Board for building BPL houses are exempt from service tax as the Board is ... Exemption from service tax for construction services provided to Government, local authority or governmental authority - definition of 'governmental authority' and 'original works' in exemption notification - construction of BPL houses predominantly for non-commercial/residential use - contractual clause attempting to shift statutory tax liabilityExemption from service tax for construction services provided to Government, local authority or governmental authority - definition of 'governmental authority' and 'original works' in exemption notification - construction of BPL houses predominantly for non-commercial/residential use - Service tax is not leviable on contracts for construction of BPL houses awarded by the Haryana Housing Board from 1.7.2012 - HELD THAT: - The Board is constituted under the Haryana Housing Board Act, 1971, is set up by State legislation and is subject to State Government control and supervision; hence it falls within the definition of a 'governmental authority' in the exemption notification. The contracts relate to construction of BPL houses for residential use and not for commerce, industry or any other business or profession. The exemption notification (No.25/2012) exempts construction and related services provided to Government, a local authority or a governmental authority for original works meant predominantly for non-commercial use. Applying the notification definitions and the statutory power under Section 93 of the Finance Act, 1994, the court held that the services rendered by the petitioners in the contracts with the Board fall within the exemption and therefore no service tax is leviable on such contracts w.e.f. 1.7.2012. The Board's unilateral deduction of service tax from the contractors' running bills, being an appropriation of an amount which, if leviable at all, would be the Board's liability, was declared illegal. [Paras 14, 19, 20, 21, 25]No service tax is leviable on the contracts for construction of BPL houses awarded by the Haryana Housing Board w.e.f. 1.7.2012; the Board's deduction of service tax from the contractors' bills is illegal.Contractual clause attempting to shift statutory tax liability - 50:50 levy on service provider and service recipient under works contract notifications - The Board cannot pass on to contractors its statutory share of service tax liability by contract clause - HELD THAT: - Condition No.3 of the contract requires the contractor to pay taxes directly to concerned departments. However, where the law casts liability on the Board (service recipient/governmental authority), such liability cannot be shifted onto contractors by contractual stipulation. The scheme applicable to works contracts (as reflected in notifications) contemplates allocation of liability between service provider and service recipient; even if a portion of tax were legally leviable on the Board, the contractual clause does not empower the Board to deduct and transfer its statutory share onto the contractors. Accordingly, the Board is not entitled to pass on its share of any service tax payable to the contractors and the deductions made from running bills on that premise are not permissible. [Paras 22, 23, 24, 25]Condition No.3 cannot be invoked to shift the Board's statutory share of service tax onto contractors; the Board is not entitled to pass on its share of service tax to the contractors.Final Conclusion: Writ petitions disposed: construction contracts for BPL houses awarded by the Haryana Housing Board are exempt from service tax w.e.f. 1.7.2012, and the Board may not pass its statutory service-tax liability onto contractors or deduct that share from their running bills. Issues Involved:1. Whether service tax is chargeable on the construction of BPL houses constructed by the petitioners for the BoardRs.2. Whether the petitioners are liable to discharge the service tax liability, if payable, by the Board as per the tender conditionsRs.Issue-wise Detailed Analysis:Issue No. (i): Whether service tax is chargeable on construction of BPL houses constructed by the petitioners for the BoardRs.Section 93 of the Finance Act, 1994 enables the Government to grant exemptions from service tax. Relevant notifications, such as Notification No. 25/2012-S.T. dated 20.6.2012, exempt services provided to the Government, a local authority, or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure meant predominantly for use other than for commerce, industry, or any other business or profession.The Board, constituted under the Haryana Housing Board Act, 1971, is a governmental authority fully controlled by the State Government. The Board engages contractors for the construction of BPL houses, which are not meant for commercial purposes. The petitioners argued that the services provided fall under the exemption clause of the notification dated 20.6.2012. The Board initially deducted service tax from the petitioners' bills based on an opinion that such tax was payable. However, the Patna High Court in Shapoorji Paloonji and Company Pvt. Ltd. v. Commissioner, Customs Central Excise and Service Tax held that similar contracts for construction by governmental authorities are exempt from service tax.The court concluded that the construction services provided by the petitioners to the Board are exempt from service tax, as the Board is a governmental authority and the construction of BPL houses is not for commercial purposes. Therefore, the Board's action of deducting service tax from the petitioners' bills was illegal.Issue No. (ii): Whether the petitioners are liable to discharge the liability of service tax, if payable, by the Board as per the tender conditionsRs.Condition No. 3 of the contract states that the contractor shall pay taxes such as royalty, sales tax, excise duty, octroi, and service tax directly to the respective department. The petitioners argued that the liability for service tax, if any, should not be shifted to them by the Board. According to the Finance Act, 1994, and Notification No. 30/2012-S.T. dated 20.6.2012, the liability for service tax on works contracts is 50% on the contractor and 50% on the contractee.The court found that the Board's action of deducting the entire service tax amount from the petitioners' bills, even if tax was leviable, was not justified. The contract clause does not envisage passing the Board's share of the tax burden onto the contractors. The assessment framed by the department in the Board's case does not affect the legal issue raised by the petitioners regarding the Board's deductions from their bills.Conclusion:1. No service tax is leviable on the contract for the construction of BPL houses awarded by the Board to the petitioners from 1.7.2012 onwards.2. The Board cannot pass on its share of the service tax burden to the contractors if the tax is leviable.The writ petitions were disposed of accordingly.