CESTAT Sets Aside ₹1.25-Crore Service-Tax Demands Against HVAC Contractor, Citing VAT-Taxed Goods And J&K Work

In brief

The question

Whether service tax was demandable on the value of goods supplied under the appellant’s composite contracts where the goods component was identifiable and subjected to VAT/CST

The court held

The Tribunal held that the demands were unsustainable on the facts and applicable law.

It also directed

It set aside the demands and penalties and allowed all five appeals with consequential relief.

01Facts

The appellant entered into composite contracts with government bodies and departments for supplying air-conditioning machinery and equipment and providing associated services, including erection, commissioning, installation and civil work.

¶ 1–7, 10–10.3

It contended that the value of goods was separately identifiable, had been subjected to VAT/CST, and that works contract tax had been deducted by customers.

¶ 1–7, 10–10.3

In the first appeal, the Tribunal had remanded the matter for reconsideration of, among other things, the service component, services rendered to the Military Engineering Services (MES), and cum-tax treatment; the adjudicating authority subsequently confirmed the demand.

¶ 1–7, 10–10.3

The appeals were heard together because they involved the same appellant and similar issues.

¶ 1–7, 10–10.3

02Issues

i.Whether service tax was demandable on the value of goods supplied under the appellant’s composite contracts where the goods component was identifiable and subjected to VAT/CST

¶ 10.4–10.7

ii.Whether service tax was payable on the services and work performed for MES, other government bodies, and in Jammu and Kashmir during the periods in question

¶ 10.5–10.7

iii.Whether the extended limitation period and penalties were justified in the circumstances

¶ 10.8–10.9

03Law Applied

Under the Finance Act, 1994, taxable service and its value must be determined under the applicable charging and valuation provisions; the Tribunal’s discussion referred to sections 65(39a), 65(105)(zzzza) and 67, and to the Service Tax (Determination of Value) Rules, 2006.

¶ 10.3

The Tribunal applied Commissioner of Central Excise v. Larsen & Toubro Ltd., 2015 (39) S.T.R. 913 (S.C.), for the principle that works contracts became taxable under the specific works-contract service entry from 1 June 2007 and that, before then, service tax could not be levied on works contracts in the absence of a specific charging provision; it also relied on the distinction between the goods component and the service component.

¶ 10.5

The Tribunal further accepted that goods value actually identified and subjected to sales tax was excludable from the service-tax value, and that the extended period and penalties require circumstances supporting deliberate suppression or intent to evade tax.

¶ 10.5, 10.8–10.9

Provisions in the judgment · 3 · Linked ones open on LawLens

Central Excise Act, 1944 Section 4 Section 11 Section 14

04Reasoning

The Tribunal found that the contracts and Chartered Accountant’s certificate supported the appellant’s claim that the goods component was separately ascertainable and had been subjected to sales tax; accordingly, the department could not substitute a notional allocation for the actual goods value.

¶ 10.4–10.5, 10.7

It also accepted the appellant’s case that the relevant receipts related to work in Jammu and Kashmir, civil works, or services provided to government bodies and departments which, on the facts and periods involved, were not taxable or were exempt. The amount identified by the appellant as receipts for services was stated to have already borne service tax.

¶ 10.6–10.7

Finally, the law on composite and works contracts had been uncertain and was clarified by the Supreme Court in Larsen & Toubro; in that context, and given the nature of the recipients and evidence, the Tribunal found no basis to infer deliberate evasion or suppression warranting extended limitation or penalties.

¶ 10.8–10.9