2025 (11) TMI 124 - AT - Service Tax

Service-tax on works contracts for educational institutions exempt until 01.07.2012; taxable thereafter; remand for reassessment

CESTAT: For services rendered to educational institutions, service-tax on works contracts is unsustainable for the period up to 01.07.2012 and those ... Exemption from service tax - construction of educational institutions - 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 - gross value for computation of tax - extension of cum tax benefit - time limitation - imposition of penalties. Whether the service under works contract is exempt for construction of educational institutions and 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 case of SRM Engineering Construction Ltd. Vs. Commr of ST Chennai II [2018 (2) TMI 321 - CESTAT CHENNAI], Tribunal, Chennai has held that mere occurrence of incidental activities of Renting of space for scientific or technical service or Manpower Supply cannot be said that the building is not primarily used for educational service and service tax demand under the category Works Contract was set aside. The Tribunal in the case of Banna Ram Choudhary Vs. CCE Jaipur [2017 (9) TMI 86 - CESTAT NEW DELHI] held that construction of building for use by educational institution will not attract service tax as the buildings is not primarily used for commerce or industry. Hence as per the above said decisions, demand of service tax on the buildings constructed by the appellant for Karunya Educational Institution is clearly unsustainable - there are no hesitation in holding that the demand of service tax on the Appellant under works contract service, is clearly unsustainable for the period up-to 30.06.2012 - the confirmation of demand on the works contract of construction services rendered by the appellant with respect to educational institutions for the period up-to 01.07.2012 cannot sustain and is liable to be set aside. 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. The issue up-to 01.07.2012 is answered in favour of Appellant and after 01.07.2012 in favour of the Respondent/Department. Whether the gross value for computation of tax is rightly done? - HELD THAT:- The Respondent has not deducted the value of materials provided by the Appellant from the gross value for computation of Tax for the years 2009-2010 and 2013-14 - According to the Appellant, the issue whether the cost of the materials supplied by the Service Recipient is to be included in the cost to arrive at the gross amount charged is decided by the Hon'ble Apex Court in the case of Commissioner of Service Tax Bhayana Builders Private Limited [2018 (2) TMI 1325 - SUPREME COURT]. The Hon'ble Apex Court has held that goods/materials supplied at free of cost by the service recipient which in turn is used for providing taxable service for construction of building need not be included in the gross amount as no price is charged by the service provider - Therefore, cost of the materials supplied by Karunya need not be added for determining the tax liability under Works Contract Services provided. The Appellant has given their workings based on decision in the case of Bayana Builders [2018 (2) TMI 1325 - SUPREME COURT] and as per the Appellant’s own calculations, this will result in excess payment. It is unable to verify this aspect as sufficient material is not placed helre. It is already held that Service Tax is not payable for the period up-to 1.7.2012, and the liability will arise thereafter. Therefore, this issue is remanded back to the LAA for the limited purpose of calculating the actual tax payable for the period 1.7.2012, to 31.3.2014 and the case is remitted back to the original Authority to complete this exercise after following the principles of natural justice and the entire exercise should be completed within 3 months of issue of this order. The Appellant is directed to furnish the details of the material used by them for the period disputed by them or in the event of the failure to do so, the LAA is directed to resort to best judgement and pass suitable orders for the period 1.7.2012 to 31.3.2014 following the principles of natural justice. Whether cum tax benefit can be extended in this case? - HELD THAT:- The 'Cum-tax benefit' refers to a method of determining the actual service tax liability when a service provider has not separately specified the tax component in the price charged to a customer. Since service tax was an indirect tax, it was legally the consumer's responsibility, and the total amount collected from the customer was presumed to be inclusive of the service tax. Section 67(2) provides that where the gross amount charged by the service provider for the taxable services provided or to be provided is inclusive of service tax payable, the value of taxable service in such case shall be the amount as with the addition of service tax payable, is equal to the gross amount charged, i.e., value shall be considered as inclusive of service tax. It is found that there is no evidence on record to prove that the Appellant has billed and collected Service Tax from their customers - this question is answered in favour of the Appellant - this issue also remitted to the LAA for allowing the Cum-Tax benefit and re-compute the tax by treating the value as inclusive of Tax. Whether the demand is barred by limitation and imposition of penalties is justified? - HELD THAT:- Section 73(1) of the Finance Act, 1994, provides a normal limitation of one year (eighteen months for later part of the demand after 2012) for recovery of unpaid service tax. The proviso extends this to five years where non-payment is “by reason of fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade.” - In Cosmic Dye Chemical v. CCE [1994 (9) TMI 86 - SUPREME COURT], the Supreme Court explained that “suppression” means a deliberate concealment of facts; mere omission or negligence is not enough. Where an assessee fails to obtain registration and conceals its taxable activity, the conduct constitutes suppression. Once suppression with intent to evade is established, penalty under Section 78 becomes mandatory. The extended period of limitation under the proviso to Section 73(1) has been rightly invoked - Since suppression and intent are proved, penalty under Section 78 is legally sustainable. The penalty imposed under Section 77 is also upheld. Appeal disposed off. 1. ISSUES PRESENTED AND CONSIDERED i. Whether construction services rendered to educational/charitable institutions qualify as 'works contract service' exigible to service tax up to 01.07.2012 (dependent on whether construction is 'primarily for the purposes of commerce or industry') and thereafter under the revised definition from 01.07.2012. ii. Whether the gross value for computation of service tax was correctly determined, specifically whether value of materials supplied by the service recipient must be included. iii. Whether 'cum-tax' valuation (treating receipts as inclusive of service tax) can be applied to reduce tax liability where invoices do not separately state tax. iv. Whether the demand was time-barred and whether invocation of the proviso to Section 73(1) (extended period) and imposition of penalties under Sections 78 and 77 are justified by suppression or intent to evade. 2. ISSUE-WISE DETAILED ANALYSIS Issue i - Taxability of construction to educational/charitable institutions (pre- and post-01.07.2012) Legal framework: Prior to 01.07.2012, 'works contract service' for service-tax levy required, inter alia, construction of a new building or civil structure 'primarily for the purposes of commerce or industry' (Explanation to Section 65(105)(zzzza)). With effect from 01.07.2012 the statutory definition in Section 65B(54) was broadened to cover contracts for construction, erection, completion, fitting out, repair, etc., without hinging on 'primarily for commerce or industry'. Precedent treatment: Tribunal and High Court authorities have held that mere collection of fees or incidental commercial activities does not convert an educational/charitable institution into one 'primarily for commerce or industry'; where predominant object is educational/charitable, works are non-commercial and not exigible under the pre-01.07.2012 definition. Earlier Board guidance (Circular No.80/10/2004) was to the same effect. Interpretation and reasoning: The Tribunal applied the plain meaning of 'primarily' (principally/of first importance) and tested the institutional character by predominant object, use of surplus, reinvestment, intention and surrounding evidence (balance-sheet, constitution, distribution of surplus). The burden to establish classification under WCS rests on revenue; it must prove construction was primarily for commerce or industry. The Tribunal found the department failed to discharge that burden for the period up to 01.07.2012 and also misapplied onus by requiring the appellant to prove absence of profit motive. Post 01.07.2012 the amended statutory definition removes the 'primarily' limitation, making such constructions exigible unless specific exemption applies. Ratio vs. Obiter: Ratio - revenue must prove primary commercial/industrial purpose to invoke pre-01.07.2012 WCS; mere fee collection or incidental commercial activity insufficient. Obiter - illustrative tests for determination of 'predominant object' (list of factors) serve as guidance but are not exhaustive. Conclusion: Demand of service tax under WCS is unsustainable for periods up to 01.07.2012 and is set aside. For the period after 01.07.2012 the amended definition renders the services exigible and the department's demand on that count stands subject to valuation/limitation findings below. Issue ii - Valuation: inclusion/exclusion of materials supplied by recipient and determination of taxable value Legal framework: Rule 2A of Service (Determination of Value) Rules, 2006 and composition scheme under Works Contract (Composition Scheme) Rules, 2007 (Rule 3) govern valuation; Section 67(2) relevant for cum-tax computation. Apex Court authority holds materials supplied free of cost by the recipient and not charged by the service provider need not be included in the gross amount charged for taxable service. Precedent treatment: Recent Supreme Court and Tribunal decisions (Bhayana Builders and subsequent cases) establish that value of materials supplied free by recipient should not be added to provider's gross receipt for service-tax computation. Interpretation and reasoning: The Tribunal applied settled precedents to hold that materials supplied by the recipient (cement, steel) need not be added to taxable value. The Adjudicating Authority's approach of treating material value as NIL or taking gross receipts without deduction was a misdirection; where account details are missing LAA must undertake best-judgment assessment under Section 72 and not arbitrarily record NIL. Given findings on non-taxability up to 01.07.2012, the valuation exercise is remitted to compute tax for 01.07.2012-31.03.2014 in accordance with precedent and allowing the appellant opportunity to produce material details; failing that, LAA to apply best judgment consistent with natural justice within prescribed time. Ratio vs. Obiter: Ratio - materials supplied free by recipient need not be included; LAA must use best-judgment assessment (not arbitrary) when records are absent and afford hearing. Obiter - illustrative percentage ranges noted from intervening years are evidentiary and informative but not determinative without material. Conclusion: Valuation error is established; materials supplied by the recipient should not be included and the matter is remitted to recalculate liability for post-01.07.2012 period under natural justice and settled law within fixed time limits. Issue iii - Availability of 'cum-tax' benefit Legal framework: Section 67(2) prescribes valuation where gross amount charged is inclusive of service tax; relevant case law reconciles when receipts may be treated as inclusive of tax to compute tax backward from gross receipts. Precedent treatment: Tribunal and High Court decisions have allowed cum-tax treatment where no separate tax component was shown and other evidentiary indicators exist; other decisions deny benefit where invoices or records demonstrate tax was not collected or specific billing practice indicated. Interpretation and reasoning: The Tribunal found no documentary evidence that invoices stated amounts as inclusive of service tax, but held that when a taxpayer genuinely believed activity was non-taxable (supported by Board circular) and did not charge tax, it would be unjust to refuse cum-tax adjustment. Applying relevant precedents (P. Sugumar, BSNL, etc.), the Tribunal concluded cum-tax benefit should be allowed and remitted computation to LAA to recalculate on inclusive basis. Ratio vs. Obiter: Ratio - where service provider has not separately stated or collected service tax and records indicate receipts exclusive of tax, cum-tax valuation may be applied; LAA must reassess accordingly. Obiter - critique of prior Adjudicating Authority reliance on inapplicable precedents when taxpayer contested taxability. Conclusion: Cum-tax benefit is allowable in the facts of this case; the LAA is directed to recompute tax liability treating receipts as inclusive of tax and afford opportunity to the appellant. Issue iv - Limitation, extended period under proviso to Section 73(1) and penalties under Sections 78/77 Legal framework: Section 73(1) provides normal limitation, with proviso extending assessment/recovery to five years where non-payment arises from fraud, collusion, wilful misstatement, suppression of facts or intent to evade. Case law (Cosmic Dye Chemical and others) clarifies that 'suppression' requires deliberate concealment; ignorance of law ordinarily inapplicable. Precedent treatment: Authorities hold that failure to obtain registration, not filing returns, concealment of taxable activity over multiple years and continuing to carry on taxable operations can amount to wilful suppression and justify extended period and mandatory penalty under Section 78. Interpretation and reasoning: The Tribunal examined undisputed facts - prolonged taxable activity, absence of registration, failure to file returns, non-payment until departmental investigation - and held such conduct evidences deliberate suppression/intent to evade; plea of ignorance rejected. Accordingly the proviso to Section 73(1) was properly invoked and penalty under Section 78 (mandatory when suppression established) and penalty under Section 77 rightly imposed. Ratio vs. Obiter: Ratio - prolonged failure to register/file returns and concealment of taxable receipts constitutes suppression/intent to evade justifying extended limitation and mandatory penalty under Section 78. Obiter - comparison to cases where disclosure was made or registration existed emphasizes fact-specific nature of findings. Conclusion: Invocation of extended period of limitation and imposition of penalties under Sections 78 and 77 are sustained on the facts. Cross-references and final disposition Interrelation: Issues of taxability (Issue i) affect quantum (Issue ii) and cum-tax treatment (Issue iii); limitation and penalty (Issue iv) are independent factual determinations that survived even where pre-01.07.2012 tax demand was set aside. The Tribunal set aside liability up to 01.07.2012, upheld post-01.07.2012 exigibility, allowed cum-tax benefit, directed remand for valuation-recalculation for 01.07.2012-31.03.2014 under natural justice, and sustained invocation of extended period and penalties.