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Issues: (i) Whether the sub-contractor's earthwork and site-formation activities qualified as works contract service eligible for exemption under Serial No. 29(h) of Notification No. 25/2012-ST dated 20.06.2012; (ii) Whether the extended period of limitation could be invoked for the service-tax demand.
Issue (i): Whether the sub-contractor's earthwork and site-formation activities qualified as works contract service eligible for exemption under Serial No. 29(h) of Notification No. 25/2012-ST dated 20.06.2012.
Analysis: Serial No. 29(h) exempts works contract services supplied by a sub-contractor to a contractor supplying exempt works contract services. The main contractor's work relating to construction of dams and canals for the State Government was undisputedly exempt; the sole question was whether the appellant supplied works contract service. Under Section 65B(54) of the Finance Act, 1994, the relevant requirement is that property in goods involved in executing the contract is leviable to tax as a sale of goods, not that goods must be separately supplied, billed, or actually subjected to VAT. The contract was composite, requiring the appellant to provide machinery, labour, fuel, lubricants, spares and other materials for excavation and earthwork. Goods used and consumed in execution may pass in an altered form by accretion and constitute a deemed sale. Non-payment of VAT because of an available exemption, and subsequent reimbursement of VAT deducted by the main contractor, did not alter the works-contract character of the activity.
Conclusion: The activities were works contract services and qualified for exemption under Serial No. 29(h) of Notification No. 25/2012-ST dated 20.06.2012, in favour of the assessee.
Issue (ii): Whether the extended period of limitation could be invoked for the service-tax demand.
Analysis: The dispute involved interpretation of exemptions applicable to Government dam and canal works, the nature of works contract service, and the VAT treatment of goods used in execution. The appellant could reasonably hold a bona fide belief that no service tax was payable. The managing director's statement concerning absence of transfer of goods reflected an interpretation of the arrangement and was not cogent evidence of deliberate suppression or intent to evade tax. The finding that the managing director lacked complicity or active planning to evade tax also undermined the allegation of intentional suppression by the company. No independent positive evidence established suppression with intent to evade.
Conclusion: The extended period was not invocable; the demand was time-barred, in favour of the assessee.
Final Conclusion: The service-tax demand failed both because the subcontracted activity was exempt works contract service and because the extended limitation period was unavailable; consequential penalties could not survive.
Ratio Decidendi: A composite subcontract requiring use of goods in execution is a works contract where property in those goods passes in any form by accretion, and non-payment of VAT under an exemption does not negate its character as a deemed sale; a bona fide interpretative dispute without positive evidence of intent to evade precludes invocation of the extended limitation period.
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