2026 (1) TMI 583 - AT - Service Tax

Construction and related works by charitable organization for hostels, hospital and agriculture not subject to service tax; penalty set aside

Dominant issue: whether construction and related works by a charitable/religious organization attract service tax. Reasoning: educational and health ... Liability for payment of Service Tax - religious and charitable organizations - activity carried, solely for non-commercial educational, charitable or health purposes - benefit of under Section 80 of the Finance Act - cum tax benefit under Section 67(2) - works in the capacity of contractor for construction/laying of new roads and certain other construction related works - eligibility for the benefit of composition scheme by virtue of Notification No.32/2007-ST - HELD THAT:- As far as, construction of girls hostel at the Sree Venkateswara Institute of Medical Sciences, Tirupati (SVIMS) are concerned, the hostels are provided at free of cost and without any intend to carry any business. The hostel are constructed for the benefit of the students in the Shree Venkateswara Institute of Medical Sciences, Tirupati (SVIMS). As per CBEC Circular F.No. 13/21/2006 – CX.4 dated 01.11.2006. It has been clarified that educational institutions are not commercial concerns and no Service Tax can be levied on it. It is a settled legal position that for the construction activity other than ‘Commercial or Industrial Construction Service’ is not leviable. In the present case, since, the construction or making the girls hostel of the medical college, thus, the activities outside the levy of Service tax. Construction related to second floor over SV Ayurvedic Hospital for TTD. The hospital building is not constructed for any commercial purpose, and no consultant fee is charged from the patients. In the case of Shapoorji pallonji & Co Ltd. [2018 (5) TMI 487 - CESTAT MUMBAI], wherein, held that construction of a building for use as hospital by a charitable organization cannot be considered as a ‘Commercial’ activity. Therefore, Health institution which is not for commercial purpose would not be taxable. Therefore, the demand regarding construction of second floor over SV Ayurvedic Hospital for TTD also not sustainable. As far as SMC Cottage Improvement Work undertaken by the appellant for TTD. These cottages are provided to various devotees visiting Tirumala Tirupati for the darshan, charges are collected only for maintenance expenses. Thus, these cottages are constructed for non-commercial purpose, therefore, construction of cottages are not taxable as per above mention circular. In view of the above no any tax liability regarding SMC Cottage Improvement Work. Therefore, demand under ‘works contract service’ is not sustainable. There is another demand in the activity under taken by the appellant for agriculture purposes under ‘Site Formation and Clearance, excavation and earth moving and demolition’ as defined under Section 65(97a) of the Finance Act, 1994. As per the Section 65(97a) of the Finance Act, 1994, services, in relation to agriculture purposes clearly excluded from levy of Service Tax. Therefore, the activities undertaken by the appellant for the agriculture purposes is excluded from levy of the Service Tax also. Since, the demand is not sustainable on merit, the imposition of penalty will also not sustain. Thus, there is no need to consider the matter on any other grounds. Appeal allowed. Issues: (i) Whether the demands of service tax confirmed on construction of girls hostel at SVIMS, construction of 2nd floor of SV Ayurvedic Hospital and SMC cottage improvement works for Tirumala Tirupati Devasthanams (TTD) are leviable under Works Contract Service or Commercial/Industrial Construction Service; (ii) Whether the demand confirmed under 'Site Formation and Clearance, excavation and earthmoving and demolition' for land development for agricultural purposes is leviable and whether confirming a different service category than that stated in the Show Cause Notice is sustainable; (iii) Whether penalties under Sections 76 and 78 of the Finance Act, 1994 can be sustained where the demand itself is not sustainable and where a bona fide interpretation was taken by the assessee.Issue (i): Whether construction works for SVIMS hostel, SV Ayurvedic Hospital second floor, and SMC cottage improvement for TTD are taxable services under Works Contract Service or Commercial/Industrial Construction Service.Analysis: The Tribunal examined whether the constructions were for commerce or industry or were for institutions established solely for educational, charitable, religious or health purposes. It considered applicable circulars and precedents recognizing that constructions for non-commercial educational, charitable and health institutions, used or intended to be used not for profit, fall outside the levy of service tax. The Tribunal also noted facts such as nominal or no charges for use of the hostels, cottages and hospital services, and absence of commercial intent or profit-making use.Conclusion: The construction demands for the SVIMS girls hostel, the second floor of SV Ayurvedic Hospital, and SMC cottage improvement are not leviable. This conclusion is in favour of the assessee.Issue (ii): Whether demand for land development/excavation works for agricultural purposes is leviable as 'Site Formation and Clearance, excavation and earthmoving and demolition' and whether confirming a different service category than in the Show Cause Notice is permissible.Analysis: The Tribunal analysed the definition of site formation and related exclusion for services provided in relation to agriculture, irrigation and watershed development under Section 65(97a) of the Finance Act, 1994. It also addressed the procedural principle that confirming a demand under a service category different from that specified in the Show Cause Notice breaches principles of natural justice, relying on consistent precedents. The factual scope of the appellant's work (land improvement for agricultural purpose, removal of overburden) falls within the excluded agricultural activities.Conclusion: The demand for land development/excavation for agricultural purposes is excluded from levy and the confirmation of a different service category beyond the Show Cause Notice is unsustainable. This conclusion is in favour of the assessee.Issue (iii): Whether penalties under Sections 76 and 78 of the Finance Act, 1994 are sustainable given the Tribunal's findings on levy and the appellant's bona fide interpretation.Analysis: The Tribunal held that where the underlying demand is not sustainable on merits and where the appellant acted under a bona fide interpretation that the activities were not taxable, penalties cannot be sustained. It noted the settled legal position that penalties are not imposable when there is a bona fide interpretation of law and the demand fails on merits.Conclusion: Penalties confirmed by the Adjudicating Authority cannot be sustained. This conclusion is in favour of the assessee.Final Conclusion: The Tribunal set aside the impugned order in its entirety, holding that the confirmed tax demands and penalties were unsustainable because the constructions and agricultural land-development activities fell outside the levy of service tax and because the change in service-category confirmation exceeded the scope of the Show Cause Notice, resulting in the appeal being allowed.Ratio Decidendi: Construction services provided to institutions established solely for educational, charitable, religious or health purposes and services in relation to agricultural land development are excluded from service tax levy; confirmation of a demand under a service category not specified in the Show Cause Notice violates principles of natural justice.