2025 (11) TMI 8 - AT - Service Tax

Service tax demand set aside for pre-01.06.2007 works; post-date contracts remitted to verify exclusions; s.78 penalty deleted

M/s ECI Engineering & Construction Company Ltd Versus Commissioner of Central Tax Rangareddy - GST

CESTAT set aside service-tax demand for works prior to 01.06.2007, holding works contracts with significant material components were not taxable then. For ... Levy of service tax - work contracts executed prior to 01.06.2007 - constructions in respect of dam in a hydroelectric projects and canals in power project - eligibility for benefit of N/N.45/2010-ST - exemption from service tax on Construction of Road - Supply of RMC is service or sale - exemption from service tax to sub-contractor - eligibility for abatement under N/N. 1/2006-ST dt.01.03.2006 - time limitation - penalty u/s 78. Demand of service tax on work contracts executed prior to 01.06.2007 - HELD THAT:- It is observed that insofar as demand for the period prior to March, 2007 is concerned, since it is essentially in the nature of works contract where the material portion was also involved and therefore, in view of the judgment in the case of Larsen & Toubro Ltd [2015 (8) TMI 749 - SUPREME COURT], no service tax is leviable for the period prior to 01.06.2007 irrespective of their classification proposed under CICS by the department. There are force in the judgments cited in this regard and relying on the same, demand of Rs.91,72,146/- is set aside. Demand of service tax on work contracts executed for period post 01.06.2007 - HELD THAT:- A contract may be for execution of work, which has specified scope of work for different activities and each of these activities, if they involve material portion also, would be covered within the scope of WCS and the definition of WCS itself excludes construction of dams, canals, roads, etc., from its purview. Therefore, if there is a verifiable component indicating that they were engaged in providing services in relation to construction of dam, canal, road, etc., then they would be eligible for the exclusion from the purview of the scope of WCS itself. The invocation of section 65A(2)(b) of the Finance Act, 1994, by the adjudicating authority is misplaced as the scope of work itself clearly defines different component of work and each of these works would have the services in the nature of WCS - The auxiliary work of dam may include spillway, control and discharge of surplus water, intake structure, tunnels, and pipelines and therefore, dam is a central structure in a multi-purpose scheme aimed at conservation of water resources and may have several auxiliary works. Therefore, if the dam is excluded from the purview of the service tax ordinarily, it should also exclude all the auxiliary works undertaken in connection with dam. This needs to be examined in the context of various claims made by the appellant after going through the contract, as also, actual work undertaken by them. In other words, if any of these structures were intended primarily either for storing water or take the water to the hydroelectric power project, it would be considered as a part of dam or canal itself. However, if it is a standalone activity not relatable to either any canal or any dam, then it would not be covered within the expression of the word ‘dam’. Construction of road for M/s BRPL - HELD THAT:- Reliance placed on the judgment of M/s Shilpa Constructions Pvt Ltd [2010 (6) TMI 175 - CESTAT, AHMEDABAD], wherein, the issue was whether road being part of a composite contract gets excluded from the purview of CICS/WCS or otherwise and it was noted by the Tribunal that in view of Board Circular dt.27.07.2005 the admitted fact was that the contract was purely for construction of road and therefore, it was held that it will be eligible for exemption. In the present appeal, the contract is for construction of road between M/s BRPL staff quarters and BRPL refinery, however, it is not clear whether it is for exclusive use of BRPL employees or public at large. If the road is shown in the contract for construction of any complex, then it would be considered as very much part of the construction as a part of complex, itself as an integrated development of the complex and therefore, not eligible for exclusion. This aspect can be examined only after going through the detailed contract, maps, etc. Liability of sub-contractor or contractor to pay tax - HELD THAT:- There are no details available whether they were paying service tax or were otherwise exempted. Moreover, even if they were exempted from service tax or were paying service tax it was in their independent capacity, whereas, sub-contractor was providing service to the contractor and therefore, there are no infirmity in holding that a sub-contractor is required to discharge his service tax liability, if any, independently of the fact whether the principle contractor has also discharged the service tax on the same activity, relying on the judgment of CST, New Delhi Vs Melange Developers Private Limited [2019 (6) TMI 518 - CESTAT NEW DELHI-LB]. Taxability - supply and placement/laying of Ready Mix Concrete (RMC) - HELD THAT:- It is found that it is not a simple case of delivering RMC mix at a designated place but it also required to be laid and levelled by them using their own RMC. Therefore, it cannot be considered as a case of simple sale merely because they have discharged VAT on the same. It is a case of providing service i.e., WCS of laying cement flooring. Extended period of limitation - penalty u/s 78 - HELD THAT:- It is found that while the demand is clearly on the basis of C&AG report and also the statement given by the appellants, which only provided certain details, therefore, there is nothing on record to suggest that these information were withheld deliberately with an intent to evade payment of tax. No substantive ground has been adduced by the department about any malafide intent and therefore, we are inclined to accept that there could have been bonafide belief that the nature of works being performed by them were very much covered within the exclusion of WCS and hence, not levibale to service tax, as also the fact about their being entitled for benefit of N/N. 45/2010 was not restricted only to the transmission or distribution company but also to any person providing service to transmission and distribution company. It is also noted that the department has issued the Notification No.45/2010 under section 11C in relation to ambiguity prevailing for the period prior to March, 2010 in respect of construction of sub-station and other works related to distribution and transmission of electricity. This in itself supports the contention of the appellant that there were divergent views relating to transmission and distribution of electricity for which notification under section 11C had to be issued by the Government. Therefore, there is merit in the argument that there is no scope for invoking extended period or for imposition of penalty under section 78. Appeal is allowed partly by way of remand. ISSUES PRESENTED AND CONSIDERED 1. Whether service tax is leviable on works contracts executed prior to 01.06.2007 where material component exists, notwithstanding departmental classification as Commercial or Industrial Construction Service (CICS). 2. Whether particular components of composite contracts - notably construction of dams, canals, intake structures, power houses, outdoor switchyards and allied works - fall outside the definition of Works Contract Service (WCS) and are therefore not leviable to service tax. 3. Whether construction of a road forming part of a larger complex is excluded from service tax as an independent activity or is integrally part of a composite contract and taxable. 4. Whether supply and placement/laying of Ready Mix Concrete (RMC) in the factual matrix constitutes a sale or a taxable service (WCS). 5. Whether a sub-contractor is independently liable to service tax where the principal contractor is exempt or has discharged tax, and whether the composition/abatement benefits extend automatically to a sub-contractor who did not formally opt. 6. Whether invocation of extended period of limitation and imposition of penalty under section 78 is sustainable where demand is based on audit report and where there existed bona fide divergent views/ambiguities (including relief by Notification issued under section 11C). 7. Whether the adjudicating authority's general findings without granular examination of individual contracts suffice for confirming demands, or whether remand for contract-specific factual/quantitative enquiry is required. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Levy prior to 01.06.2007: legal framework - Service tax regime distinguished between CICS and WCS; prior to 01.06.2007 levy could attach where transfer of property in goods was involved but established precedent holds that bona fide works contracts with material component were not leviable as service before WCS classification came into effect. Precedent Treatment - The Court applied controlling precedents that preclude imposition of service tax on works contracts with significant material element for the period before specific classification of WCS. Interpretation and reasoning - The Tribunal found that the impugned demands for periods prior to 01.06.2007 related to essentially works-contracts involving material portions; accordingly, departmental re-classification as CICS could not override the settled principle that such transactions were not taxable as service before the WCS classification came into effect. Ratio vs. Obiter - Ratio: pre-01.06.2007 works contracts with material transfer are not liable to service tax. Conclusion - Demand for period prior to 01.06.2007 set aside. Issue 2 - Exclusion of dams/canals/related hydroelectric works from WCS - Legal framework: the statutory definition of WCS excludes construction of dams, canals, roads, etc.; notification/exclusion and concept of 'dam' and its auxiliary works informs scope. Precedent Treatment - The Tribunal recognized authorities both for excluding certain hydrological structures and auxiliary works from WCS and for requiring careful factual analysis to determine whether a component is genuinely part of an excluded activity. Interpretation and reasoning - The Court emphasized that the adjudicating authority's generic treatment was insufficient. The correct approach is component-wise, contract-specific analysis: where a structure is primarily intended for storing or conveying water (i.e., dam/canal) the auxiliary works (spillway, intake, tunnels, pipelines) should ordinarily be treated as part of the dam/canal and excluded; conversely, standalone works not related to a dam/canal are not so excluded. Ratio vs. Obiter - Ratio: exclusion must be determined by examining the nature, purpose and connectivity of each component to the dam/canal; blanket classification is impermissible. Obiter: descriptive observations on the general understanding of 'dam' and its auxiliary works. Conclusion - Demand in respect of hydroelectric and related works remanded for contract-specific determination whether each component falls within the WCS exclusion. Issue 3 - Road construction as part of composite contract - Legal framework: exclusion of road construction where contract is purely for road works; Board Circular recognizes that standalone road contracts qualify for exclusion. Precedent Treatment - The Court applied precedents distinguishing standalone road contracts (excluded) from roads forming an integrated part of construction of a complex (taxable as part of composite contract). Interpretation and reasoning - Where a road is constructed as an integral component of a larger complex (e.g., internal connectivity of a plant/colony) and the contract expressly treats it as part of the complex, it cannot be carved out as an independent excluded activity. Whether a road is for exclusive internal use or public use must be ascertained from contract, maps and factual matrix. Ratio vs. Obiter - Ratio: taxability depends on contractual intent and factual connectivity; standalone road contracts are excluded, roads as part of composite projects are not. Conclusion - The road demand remanded for examination of contract terms and intended use to determine exclusion vs inclusion within composite contract. Issue 4 - RMC: sale versus service - Legal framework: distinction between supply of goods (sale) and works contract/service where supply coupled with installation/laying is treated as service. Precedent Treatment - The Court relied on authority treating pure sale of RMC as sale but distinguishing cases where supplier also lays/levels using its own plants and men, making it a works-contract/service. Interpretation and reasoning - The factual matrix showed that the appellant not only delivered RMC but also laid and levelled it using its own RMC facilities; thus the transaction was not a simple sale (even though VAT was discharged) but constituted WCS. Ratio vs. Obiter - Ratio: supply combined with performance of laying/installation using supplier's resources qualifies as service/WCS; mere VAT payment does not convert taxable service into a sale for service-tax purposes. Conclusion - Laying of RCC M30 at raw water reservoir constitutes service (WCS) on the facts presented. Issue 5 - Sub-contractor liability and composition/abatement benefits - Legal framework: each person providing service is independently liable; composition/abatement benefits require statutory/notification compliance and formal election where applicable. Precedent Treatment - The Court followed authority that a sub-contractor's liability is independent of tax stance of principal contractor; composition/abatement do not automatically extend without compliance. Interpretation and reasoning - Absence of details whether either party had actually paid or been exempted precluded treating sub-contractor as automatically exempt. Even if a principal contractor is exempt, sub-contractors must discharge their own liability if their activity attracts tax. However, if demand is confirmed within normal period, applicable abatement available during relevant period is admissible irrespective of whether the appellant had formally opted. Ratio vs. Obiter - Ratio: sub-contractors are independently liable; abatement, if applicable and within normal period, remains available notwithstanding procedural lapses in formal election. Conclusion - Sub-contractor liability stands; composition/abatement benefits require case-specific application and, if due, are admissible for demands within normal period. Issue 6 - Limitation, extended period and penalty under section 78 - Legal framework: extended period/penalty attach where there is suppression/intent to evade; notification issued under section 11C evidences pre-existing ambiguity in law. Precedent Treatment - The Court noted authorities supporting protection where bona fide belief or divergent views existed and where demands stem from audit reports and ambiguous legal position. Interpretation and reasoning - The demand arose from C&AG audit and statements; no material was produced showing deliberate withholding of information or malafide intent to evade tax. Existence of a Notification under section 11C addressing ambiguity in treatment of transmission/distribution works supports the position that divergent views existed. On these facts, invocation of extended period and penalty under section 78 was not sustainable. Ratio vs. Obiter - Ratio: extended period and penalty unsustainable where demand is founded on bona fide divergent views and audit-based enquiries absent deliberate suppression; issuance of clarificatory notification under section 11C is relevant to demonstrating ambiguity. Conclusion - Invocation of extended period and imposition of penalty set aside. Issue 7 - Sufficiency of adjudicatory findings and need for remand - Legal framework: adjudication must be grounded on contract-specific and fact-specific findings where exemption/exclusion depends on nature of component works. Precedent Treatment - The Court reiterated that generic findings without examination of detailed scopes of work cannot support sustained demands where exclusions depend on purpose and connectivity of components. Interpretation and reasoning - The adjudicating authority's treatment was generalized without granular examination of individual contracts, maps and work details; the Tribunal held such a non-specific approach insufficient. Each contract must be examined to determine whether components are part of excluded activities (dam/canal/road/sub-station) or standalone taxable services. Ratio vs. Obiter - Ratio: remand is necessary where demands are based on non-specific findings and exclusions depend on contract particulars; adjudication must re-determine leviability after per-contract factual analysis. Conclusion - Except for amounts set aside, matters remanded to adjudicating authority to re-determine demands within normal limitation period and allowing applicable abatement where confirmed.