2025 (8) TMI 88 - AT - Service Tax

Service tax demand on educational works contracts upheld post-01-07-2012; penalties under Sections 77(2) and 78 set aside

The CESTAT Chennai held that service tax demand on works contract services for construction rendered to educational institutions up to 01-07-2012 is ... Levy of service tax - works contract services of construction rendered to education institutions can be treated as construction of a new building or civil structure or a part thereof, primarily for the purposes of commerce or industry during the relevant period - service tax on the works contract service rendered by the appellant as a sub contractor - time limitation - Levy of penalties. Whether the demand made on works contract services of construction rendered to education institutions can be treated as construction of a new building or civil structure or a part thereof, primarily for the purposes of commerce or industry during the relevant period and the demand so made is tenable? - HELD THAT:- In the instant case while the appellant has discharged its burden of proof as regards its contention of non-taxability, the Revenue has not been able to adduce an iota of evidence that the buildings the construction of which the appellant has undertaken for these educational institutions are primarily for the purposes of commerce or industry, which burden was on it so to discharge. Thus, the confirmation of demand on the works contract of construction services rendered by the appellant with respect to educational institutions for the period upto 01-07-2012 cannot sustain and is liable to be set aside. The demand of service tax on the works contract services rendered by the appellant to educational institutions upto 01-07-2012, which is part of the demand on works contract services rendered by the appellant that has been upheld in the impugned OIO, cannot sustain - the exemption given in the Mega Exemption Notification 25/2012-ST dated 20-06-2012, was also confined only to, inter-alia, construction of a structure meant predominantly for use as an educational establishment only for services provided to the Government, a local authority or a governmental authority, at Sl.No.12 of the notification ibid; which too remained only upto 01-04-2015. For the period after 01-07-2012, in as much as the definition of “works contract” itself has been recast and does not hinge on whether the construction is primarily for commerce or industry, the appellant is exigible to tax under the said category of “works contract service” and demand made on the appellant for the period post 01-07-2012 for the services of “works contract” provided with respect to educational institutions on this count will sustain, subject to our findings on applicability of extended period. Whether the demand of service tax on the works contract service rendered by the appellant as a sub contractor is tenable? - HELD THAT:- In the decision in Jay Yushin Ltd v CCE, New Delhi, [2000 (7) TMI 105 - CEGAT, COURT NO. I, NEW DELHI-LB], the Larger Bench of this Tribunal has held that it has to be shown that the revenue neutral situation comes about in relation to the credit available to the assessee himself, which is not the situation in the instant case. Therefore, respectfully, following the said decision in Melange Developers [2019 (6) TMI 518 - CESTAT NEW DELHI-LB], it is held that the demand of service tax on the works contract service rendered by the appellant as a sub-contractor is tenable and the demand on this count will sustain, subject to our findings on applicability of extended period. Whether the demand is barred by limitation? - HELD THAT:- The show cause notice too while alleging that the appellant has not registered with the department, not discharged the service tax liability and not filed the ST-3 returns and that but for the action initiated by the Department the irregularities would not have come to light; has not alleged any deliberate act of wilful suppression or misstatement of facts with intent to evade payment of duty. It is also held that the appellant’s belief as to the non exigibility to tax of the services rendered stemming from the Department’s Circular is plausible. In such circumstances, the Department is not justified in invoking the extended period of limitation. Only the demand on the services rendered by the appellant that would come within the normal period, as per the demands upheld, would sustain. Levy of penalties - HELD THAT:- The penalties imposed on the appellant under Section 78 and Section 77(2) of the Finance Act, 1994 are unsustainable and set aside the same. Appeal allowed in part. ISSUES: Whether the demand of service tax on works contract services for construction rendered to educational institutions can be sustained, considering whether such constructions qualify as primarily for commerce or industry.Whether the demand of service tax on works contract services rendered by the appellant as a sub-contractor is tenable.Whether the demand is barred by limitation, specifically the applicability of the extended period under the proviso to Section 73(1) of the Finance Act, 1994.Whether penalties imposed under Sections 77(2) and 78 of the Finance Act, 1994 are justified.Whether the appellant is entitled to the benefit of cum-tax treatment under Section 67(2) of the Finance Act, 1994. RULINGS / HOLDINGS: On the first issue, the Court held that the demand of service tax on works contract services rendered to educational institutions up to 01-07-2012 cannot be sustained, as the appellant discharged its burden of proof showing a bona fide belief based on CBEC Circular No. 80/10/2004-ST that such constructions are non-commercial in nature; the Revenue failed to prove that the buildings were primarily for commerce or industry.For the period post 01-07-2012, the demand is sustainable because the definition of 'works contract' under Section 65B(54) no longer hinges on whether the construction is primarily for commerce or industry, making all such constructions taxable.Regarding the second issue, the Court affirmed that a sub-contractor is liable to pay service tax on works contract services rendered, irrespective of the main contractor's discharge of service tax liability, following the Larger Bench decision in Melange Developers Pvt Ltd.On the third issue, invocation of the extended period of limitation was held unjustified, as there was no evidence of deliberate suppression or intent to evade tax; the appellant's bona fide belief in non-taxability negated the grounds for extended limitation.The penalties under Sections 77(2) and 78 were set aside, being unsustainable in the absence of wilful suppression or evasion.The appellant is entitled to cum-tax benefit under Section 67(2) while computing the duty liability. RATIONALE: The Court applied the definitions of 'works contract' service as per Section 65(105)(zzzza) (pre-01-07-2012) and Section 65B(54) (post-01-07-2012) of the Finance Act, 1994, noting the statutory changes effective from 01-07-2012.CBEC Circular No. 80/10/2004-ST was treated as contemporanea expositio, providing legitimate aid in interpreting the scope of taxable construction services, particularly exempting constructions for educational, religious, charitable, health, sanitation, or philanthropic institutions not established for profit.The Court distinguished the Supreme Court decision in BWSSB v. R. Rajappa (1978) on the industrial character of educational institutions, relying instead on the eleven-judge bench decision in T.M.A. Pai Foundation v. State of Karnataka (2002), which recognized educational institutions as charitable with permissible reasonable surplus, not profit-making ventures.The Court emphasized the burden of proof principle: the Revenue must prove that the construction was primarily for commerce or industry to tax it under works contract service; once the appellant showed a bona fide belief based on the Circular, the onus shifted back to the Revenue, which failed to discharge it.The Court followed the Larger Bench ruling in Melange Developers Pvt Ltd, overruling contrary precedents, to hold that sub-contractors must discharge service tax liability independently of the main contractor's payments.Regarding limitation, the absence of deliberate evasion and the appellant's bona fide belief negated the justification for invoking the extended limitation period under the proviso to Section 73(1).Penalties under Sections 77(2) and 78 require evidence of wilful suppression or evasion, which was absent, leading to their setting aside.The Court directed remand for computation of duty within the normal limitation period, allowing the appellant to claim cum-tax benefit, and mandated adherence to principles of natural justice in re-adjudication.