2025 (12) TMI 1312 - AT - Service Tax

Composite construction contract mixing materials and services held outside 'Residential Complex' service tax; demand quashed, s.77 penalty upheld.

Where construction was executed as an indivisible composite contract involving supply of materials and provision of services, the Tribunal held it could ... Classification of service - Construction of Residential Complex Services or not - construction activities executed as an indivisible/composite contract involving supply of materials and provision of construction service - levy of penalties as well - HELD THAT:- It is found that in the show cause notice, the department itself has admitted that the work done by the Appellant falls under the category of ‘composite contract’ because the same was performed with both the materials and the construction services. Further, it is found that this fact has also been considered by the learned Commissioner in the impugned order and the learned Commissioner has given the benefit of abatement @67% of the gross amount charged and received against the aforesaid projects. This issue is no more res integra and has been settled by the Hon’ble Supreme Court in the case of Commissioner vs. Larsen & Toubro Ltd [2015 (8) TMI 749 - SUPREME COURT] where it was held that 'the value of a taxable service is the gross amount charged by the service provider for such service rendered by him. This would unmistakably show that what is referred to in the charging provision is the taxation of service contracts simpliciter and not composite works contracts, such as are contained on the facts of the present cases. It will also be noticed that no attempt to remove the non-service elements from the composite works contracts has been made by any of the aforesaid Sections by deducting from the gross value of the works contract the value of property in goods transferred in the execution of a works contract.' Further, it is found that the works contract service has been introduced w.e.f. 01.06.2007 and the same was not taxable prior thereto. It is also found that introduction of a new entry for the purpose of levy of tax presupposes that the same was not covered by any of the pre-existing entries. The Appellant are not liable to pay service tax under the category of ‘Construction of Residential Complex Services’ and accordingly, the demand along with interest and penalties under Sections 76 & 78 of the Act set aside. As regards the penalty under Section 77 of the Act imposed upon the Appellant for not getting themselves registered with the department and not filing the ST-3 returns under the ‘works contract services’, it is found that the Appellant are admitting that they are providing works contract services but are not registered with the department and are not filing ST-3 returns under the ‘works contract services’, accordingly, the penalty under Section 77 has rightly been imposed by the learned Commissioner on the Appellant and therefore, the same is upheld. Appeal allowed in part. 1. ISSUES PRESENTED AND CONSIDERED 1) Whether construction activities executed as an indivisible/composite contract involving supply of materials and provision of construction service could be subjected to service tax under the category of 'Construction of Residential Complex Services'. 2) Whether penalty under Section 77 was sustainable for failure to obtain registration and file ST-3 returns, when the assessee admitted it was providing works contract services but remained unregistered and did not file returns under the correct head. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of composite/works contract activity under 'Construction of Residential Complex Services' Legal framework (as discussed by the Court): The demand was raised under Section 65(105)(zzzh) as 'Construction of Residential Complex Services'. The Court treated the activity as a composite/works contract, noting that 'works contract service' is a distinct taxable category introduced w.e.f. 01.06.2007 under Section 65(105)(zzzza). The Court also noted that the department itself allowed abatement @67% on the footing that materials were involved, reinforcing the composite nature of the contracts. Interpretation and reasoning: The Court found, from the show cause notice and the impugned order itself, that the contracts were composite (materials plus construction service). Relying on the ratio applied from the binding Supreme Court ruling in Larsen & Toubro (as reproduced and applied by the Court), the Court accepted that the taxable entries relied upon in Section 65(105) covered service contracts simpliciter and not composite works contracts. The Court further held that the introduction of 'works contract service' w.e.f. 01.06.2007 presupposed such composite contracts were not covered by pre-existing taxable categories, and therefore composite works contracts could not be taxed under 'Construction of Residential Complex Services' either prior to 01.06.2007 or thereafter when the contract remained indivisible/composite. Conclusion: The Court conclusively held that the assessee was not liable to service tax under 'Construction of Residential Complex Services' on the impugned composite contracts. Consequently, the demand of service tax, interest, and penalties under Sections 76 and 78 were set aside. Issue 2: Sustainability of penalty under Section 77 for non-registration and non-filing of returns Legal framework (as discussed by the Court): The Court addressed penalty under Section 77 in the context of statutory obligations to obtain registration and file ST-3 returns (also referred to by the parties as obligations under Sections 69 and 70). Interpretation and reasoning: Even though the substantive service tax demand failed for having been raised under an incorrect taxable category, the Court treated the assessee's admitted position as determinative for Section 77: the assessee accepted it was providing works contract services but had not obtained registration and had not filed ST-3 returns under the works contract services head. On that basis, the Court held the contravention attracting Section 77 stood established. Conclusion: The penalty under Section 77 was upheld as rightly imposed, while the appeal was allowed only to the extent of setting aside the tax demand, interest, and penalties under Sections 76 and 78.