Service tax demand under Commercial Industrial Construction Services set aside for pre-July 2012 composite construction works

CESTAT Chennai set aside service tax demand raised under Commercial or Industrial Construction Services (CICS) for pre-01.07.2012 period. Assessee provided construction services to Department of Atomic Energy, HAL, and Bharat Earth Movers Limited. Tribunal held construction works were composite in nature involving both goods supply and services, evidenced by 67% abatement allowed under Notification 1/2006. Following SC precedent in CCE v. Larsen Toubro and subsequent decisions, demand for composite construction services can only be raised under works contract services, not CICS. Appeal allowed.

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Issues Involved:
1. Classification of services rendered by the assessee.
2. Liability of service tax on services rendered to public sector undertakings.
3. Imposition of penalties under Section 78 of the Finance Act, 1994.

Detailed Analysis:

1. Classification of Services Rendered by the Assessee:
The primary issue was whether the demand of service tax under the classification of Commercial or Industrial Construction Services (CICS) is sustainable. The assessee argued that the contracts executed were composite in nature, involving both supply of goods and services, and should fall under Works Contract Services (WCS). The Tribunal noted that the department allowed a 67% abatement as per Notification No.1/2006, indicating the composite nature of the contracts. Citing the Supreme Court decision in CCE Vs. Larsen & Toubro and the Tribunal's decision in Real Value Promoters Pvt. Ltd., it was concluded that composite contracts should be classified under WCS. Therefore, the demand under CICS could not be sustained.

2. Liability of Service Tax on Services Rendered to Public Sector Undertakings:
The assessee contended that services rendered to M/s. HAL and M/s. Bharat Earth Movers Ltd., both public sector undertakings under the Defence Ministry, should not attract service tax as these entities are not commercial concerns. The assessee relied on Circular No. 80/10/2004, which clarifies that constructions provided to government buildings are non-commercial and not subject to service tax. However, this argument was countered by the department, stating that the nature of the service provided falls under CICS, and the public sector status of the recipient does not exempt the service from tax.

3. Imposition of Penalties under Section 78 of the Finance Act, 1994:
The department appealed against the non-imposition of penalties under Section 78 by the adjudicating authority. The assessee argued there was no suppression of facts, as they had accounted for the amounts received and did not discharge service tax based on a bona fide belief that services to public sector undertakings were not taxable. The Tribunal, having already determined that the demand under CICS was unsustainable, found the department's appeal for penalties to be without merit and dismissed it.

Conclusion:
The Tribunal held that the demand of service tax under CICS for the disputed period could not be sustained and required to be set aside. Consequently, the appeals filed by the assessee were allowed with consequential reliefs, and the appeal filed by the department was dismissed.

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