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 a governmental authority and the construction is not for commercial purposes. The court also ruled that the Board cannot shift its share of the service tax liability onto the contractors. Consequently, no service tax is chargeable on the construction contract from 1.7.2012 onwards, and the Board cannot pass on its tax burden to the contractors. The writ petitions were disposed of in favor of the petitioners.

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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.

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