"Raitani Engineering Works Pvt. Ltd. Wins Service Tax Appeal: Misclassification of Construction Services Leads to Overturned Tax Demand".

Service Tax Appeal No.158 of 2011 was filed by Raitani Engineering Works Pvt. Ltd. against an order passed by the Commissioner of Central Excise, Shillong, which confirmed a service tax demand of Rs.47,48,716/- for the period 2005-06. In the same order, a demand of Service Tax of Rs.14,39,005/- along with interest and penalty was confirmed against National Building Construction Corporation Ltd. (NBCC). Both appeals were taken up together for disposal.

Raitani Engineering Works had undertaken the construction of various buildings for the state of Manipur, funded by the Government out of non-lapsable central pool of resources for the development of North-Eastern states. The main contract was awarded to NBCC, which sub-contracted the entire work to Raitani Engineering Works.

A Show Cause Notice was issued in 2009, which was adjudicated by the Commissioner in 2011, confirming the demand of Service Tax under the category of 'Commercial Or Industrial Construction Services'. The Commissioner extended the benefit of abatement @ 67% to exclude the value of goods in order to arrive at the value of taxable services. The Commissioner also observed that the construction activities were being conducted for local government bodies, and hence, such activity would be considered for commercial purpose.

The Advocate for Raitani Engineering Works argued that the contract was undertaken for social needs, not commercial purposes, and should be classified under 'Works Contract Service'. He also argued that since the contract included supply of goods, it cannot be classified under 'Commercial or Industrial Construction' but under 'Works Contract Service'. He relied on a Supreme Court judgement and a Tribunal's decision to support his arguments.

The Authorized Representative for the Revenue reiterated the findings made by the Commissioner and prayed that the appeals be rejected.

After hearing both sides, it was found that the issue can be decided on the point of classification alone. It was noted that the contract is inclusive of supply of goods. The Commissioner, while acknowledging that the construction service is inclusive of supply of goods, extended the benefits of abatement to exclude the value of goods to arrive at the assessable value for raising demand of service tax.

The Tribunal referred to previous cases and the Supreme Court judgement to conclude that the instant demand of service tax under the category of Commercial or Industrial Construction cannot be sustained and hence, set aside. Both the appeals were thus allowed with consequential relief as per law.

Service Tax Appeal No.158 of 2011 has been filed by M/s. Raitani

Engineering Works Pvt.Ltd. against Order-in-Original No.ST/SHILLONG

NO.01/2011 dated 31.01.2011 passed by the Ld.Commissioner of

Central Excise, Shillong, whereby he has confirmed demand of Service

Tax of Rs.47,48,716/- for the period 2005-06. In the same adjudication

order, demand of Service Tax of Rs.14,39,005/- along with interest and

penalty have been confirmed against M/s. National Building

Construction Corporation Ltd. (NBCC) being Service Tax Appeal No.127

of 2011. Since both the Appeals are arising by the adjudication order

dated 31.01.2011, the same are taken up together for disposal by this

common order.

2. The facts of the case in brief are that M/s. Raitani Engineering

Works Pvt.Ltd. has undertaken the construction of Jiribam Municipal

Corporation building, staff quarter building, Guest House building,

overhead tank and R. wall etc. for meeting social needs of the state of

Manipur and for upliftment of needy people of the state in terms of the

contract awarded by NBCC on behalf of the Ministry of Urban

Employment and Poverty Alleviation, Govt. of India. The fund required

for the said construction was released to NBCC by the Government out

of non-lapsable central pool of resources for the development of North-

Eastern states. The main contract was awarded to NBCC which is nodal

employment agency, which in turn has sub-contracted the entire work

on back-to-back basis by retaining 10% of the total contract value.

3. Show Cause Notice dated 15.10.2009 was issued which was

adjudicated by the Ld.Commissioner vide Order-in-Original dated

31.01.2011 confirming the demand of Service Tax under the category

of ‘Commercila Or Industrial Construction Services’. The

Ld.Commissioner has extended the benefit of abatement @ 67% to

exclude the value of goods in order to arrive at the value of taxable

services in terms of Notification No.1/2006-ST dated 01.03.2006 by

considering the project to be inclusive of supply of goods for use in the

construction project. The Ld. Commissioner also observed that the said

construction of Jiribam Municipal Corporation building, staff quarter

building, Guest House building, over-head tank and R. wall etc. are

being constructed for the local Govt. bodies, and hence, such activity

would be considered for commercial purpose. The Ld. Commissioner

rejected submissions made by both the Appellants that subject

services, if at all taxable, would be liable to be taxed under the

category of ‘Works Contract Service’ which has not been proposed in

the impugned Show Cause Notice.

4. Shri Biswajit Mukherjee, Ld. Advocate, appeared for M/s. Raitani

Engineering Works Pvt.Ltd. whereas Shri J. Chattopadhyay

Ld. Authorized Representative appeared for the Revenue. None

appeared for NBCC.

5. The Ld. Advocate appearing for M/s. Raitani Engineering Works

Pvt.Ltd. submitted that since the contract has been undertaken for

construction of accommodation for Urban employed Youth and Women

Vendors on behalf of the Ministry of Urban Employment & Poverty

Alleviation, Govt. of India, the same cannot be said to be for

commercial purpose and, therefore, the classification under the

category of Commercial or Industrial Construction is not correct.

5.1 He also submitted that since the scope of contract included

supply of goods, the same cannot be classified under the above service

category of Commercial or Industrial Construction but under ‘Works

Contract service’ which classification has not been invoked in the SCN

proceedings. He also referred to the subject contract that the

construction activities undertaken by them is inclusive of supply of

goods on which applicable works contract tax have been paid under

the State Sales Tax law. He relied on the judgement of the Hon’ble

Supreme Court in the case of Commissioner of C. Ex. & Cus., Kerala

vs. Larsen & Toubro Ltd. 2015 (39) S.T.R. 913 (S.C.) to submit that

works contract services cannot be taxed under Commercial

Construction Service.

5.2 He also relied on the Tribunal’s decision in the case of URC

Construction (P) Ltd. vs. CCE, Salem 2017 (50) S.T.R. 147 (Tri-

Chennai) wherein it has been held that when no proposal is made in

the SCN to classify the service under the category of ‘Works Contract

Service’, the demand of service tax cannot be sustained for the period

subsequent to 01.06.2007.

5.3 He also referred to the letter dated 13.03.2008 issued by the

Ld.Joint Secretary, MAHUD department, State Government of Manipur,

addressed to NBCC wherein it has been stated that the market

complexes constructed by the Government out of its budgetary

resources and placed at the disposal of Municipal Bodies for utilization

in the service of local people on recovery of user charges as licence fee

cannot be described as ‘Commercial Construction’. Copy of the said

letter had also been sent to the Directorate General of Service Tax,

Mumbai. On the basis of above, he also contested the demand on the

ground of limitation in the absence of the willful suppression or fraud

with intent to evade payment of service tax. On the same count, he

contested the imposition of penalty.

6. The Ld. Authorized Representative appearing for the Revenue

reiterated the findings made by the Ld. Commissioner in the impugned

order and prayed that the appeals be rejected being devoid of any

merit.

7. Heard both sides and perused the appeal records.

8. We find that the issue can be decided on the point of

classification alone. It is noted that the contract is inclusive of supply

of goods. The Ld. Commissioner while taking note of the fact that the

construction service is inclusive of supply of goods has extended the

benefits of abatement to exclude the value of goods so as to arrive at

the assessable value for raising demand of service tax. We find that

the issue has already been examined in detail by the Tribunal in the

case of URC Construction (P) Ltd. (Supra)has observed as below:-

“4. The primary contention of learned Counsel for the appellant is

that the decision of the Hon’ble Supreme Court in Commissioner of

Central Excise and Customs, Kerala v. Larsen & Toubro Ltd. [2015

(39) S.T.R. 913 (S.C.)] has settled the law to the effect that composite

contracts involving services and goods covered under four categories,

i.e., ‘erection, commissioning and installation’, ‘construction of building

for commerce and industry’, ‘construction of residential complex’ and

‘turnkey projects’, under Section 65(105)(zzzza) are liable to tax only

with effect from 1st June, 2007. It is also contended that, at the

adjudication stage, they had taken the plea that they being providers

of ‘works contract service’ were not liable to tax as providers of

‘commercial or industrial construction service’. This plea was not

accepted by the adjudicating authority who proceeded to confirm the

demand. Their further contention is that even though they are liable to

tax with effect from 1st June, 2007 the show cause notice had not

invoked the taxable entry rendering the determination of tax liability to

be contrary to the provisions of Section 73 of the Finance Act, 1994. It

was submitted by the learned Counsel that further arguments should

be contingent upon a decision on these two issues.

5. Learned Authorised Representative was of the opinion that the

facts of the appellant are distinguishable from the facts relating the

judgment delivered by the Hon’ble Supreme Court in re M/s. Larsen &

Toubro Ltd. According to him, the non-taxability of works contract

service prior to 1st June, 2007 was not contended before the

adjudicating authority, who, therefore, had been denied the

opportunity of ascertaining the nature of contract entered into by the

appellant and the supply of goods as a component of the contract. He,

therefore, submitted that the contracts require re-examination for

which matter would have to be remanded back to the original

authority for scrutiny.

6. On the claim of the appellant before the original authority that

they were providers of ‘works contract service’, which is taxable only

from 1st June, 2007, the finding in the impugned order that - ‘having

failed to establish with documentary evidence that there is a transfer

of property of goods involved in the execution of the contract which

was charged to tax on sale of goods. On this basic criterion, having not

been fulfilled, applicability to tax of Works Contract Service involves a

remote question. Their contention is, therefore, superfluous being

devoid of any substance of law and, therefore, fails before the altar of

law’. was relied upon by the learned Authorised Representative to

reiterate that the adjudicating authority had no means of ascertaining

that these were composite contracts.

7. Having heard both sides on this limited issue, we are of the

opinion that the resolution of this dispute lies within the narrow

compass of taxability as ‘works contract service’. We note the

contention of learned Counsel that the adjudicating authority

had perused the contracts on which the demand was raised in

the show cause notice and rendered a clear finding, including

on the allegation of abatement availed in Notification No.

15/2004-S.T., dated 10th September, 2004 and Notification No.

01/2006, dated 1st March, 2006; the allowance of abatement is

a clear demonstration of ascertainment that supply of goods

did form a part of the contract. Therefore, we have no

hesitation in accepting the said contracts in dispute to be

composite contracts for supply of both goods and services.

8. We note that the findings of the adjudicating authority do accept

that supply of goods were involved in the contracts and that he was

merely sceptical that VAT liability had been discharged on the goods

supplied in the contract; whether VAT liability was discharged on the

goods or not is irrelevant in the light of the decision of the Hon’ble

Supreme Court in re Larsen & Toubro and Ors. We, therefore, have to

merely determine the scope of taxability of ‘works contract service’

rendered before and after 1st June, 2007 under the Finance Act, 1994.

9. The Hon’ble Supreme Court in re Larsen & Toubro & Ors. has

decided thus

‘24. A close look at the Finance Act, 1994 would show that the

five taxable services referred to in the charging Section 65(105)

would refer only to service contracts simpliciter and not to

composite works contracts. This is clear from the very language

of Section 65(105) which defines “taxable service” as “any

service provided”. All the services referred to in the said sub-

clauses are service contracts simpliciter without any other

element in them, such as for example, a service contract which

is a commissioning and installation, or erection, commissioning

and installation contract. Further, under Section 67, as has been

pointed out above, 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.’

10. In view of this specific decision and the admitted claim of the

appellant that they are not providers of ‘commercial or industrial

construction service’ but of ‘works contract service’, no tax is liable on

construction contracts executed prior to 1st June, 2007.

11. Insofar as demand for subsequent period till 30th

September, 2008 is concerned, it is seen that neither of the two

show cause notices adduce to leviability of tax for rendering

‘works contract service’. On the contrary, the submission of the

appellant that they had been providing ‘works contract service’

had been rejected by the adjudicating authority. Therefore,

even as the services rendered by them are taxable for the

period from 1st June, 2007 to 30th September, 2008 the

narrow confines of the show cause notices do not permit

confirmation of demand of tax on any service other than

‘commercial or industrial construction service’. It is already

established in the aforesaid judgment of the Hon’ble Supreme

Court that the entry under Section 65(105)(zzd) is liable to be

invoked only for construction simpliciter. Therefore, there is no

scope for vivisection to isolate the service component of the

contract.

The above views have also been taken by the Tribunal in the

following cases:-

Ajit India Pvt Ltd vs. CST, Mumbai 2018 (19) GSTL 659

(Tri-Mum)

India Guniting Corporation vs. CCT, New Delhi 2021 (52)

GSTL 174 (Tri-Del)

OTIS Elevator Co. (India) Ltd vs. CST, Mumbai 2021 (51)

GSTL 386 (Tri-Mum)

9. Since the issue is no longer res-integra, the instant demand of

service tax under the category of Commercial or Industrial

Construction cannot be sustained and hence, set aside. Since the

appeal is being decided on merits for the reasons stated above, we

refrain from making any observation on the issue of limitation.

Both the appeals are thus allowed with consequential relief as per

law.

(Dictated and pronounced in the open Court.)

Sd/

(P.K. CHOUDHARY)

MEMBER (JUDICIAL)

Sd/

(K. ANPAZHAKAN)

MEMBER (TECHNICAL)