Original works contracts attract service tax only on 40% of the total contract value.

The Appellant, a works contractor registered under the composition scheme, executed original works contracts during FY 2016–17.

It declared contract receipts of approximately ₹80,23,534 and paid total service tax of ₹3,62,521 on the basis that service tax was chargeable on 40% of the contract value under Rule 2A(ii)(A) of the Service Tax (Determination of Value) Rules, 2006, with liability divided between the service provider and service recipient under the reverse-charge mechanism.

A Show Cause Notice dated 20 October 2021 was issued principally on the basis of a perceived difference between the Appellant’s Income Tax Return, Form 26AS and ST-3 returns.

The adjudicating authority dropped a demand of ₹7,82,294 but confirmed ₹4,21,236 by applying the 70% valuation prescribed for certain works contracts.

The Commissioner (Appeals) upheld the order, including invocation of the extended period and penalty under Section 78 of the Finance Act, 1994.

1. Whether the Appellant’s original works contract services were taxable on 40% of the total contract value under Rule 2A(ii)(A), rather than on 70% of the value under Rule 2A(ii)(B)?

2. Whether the demand was sustainable when the Show Cause Notice was based primarily on differences between the Income Tax Return, Form 26AS and ST-3 returns, without examination of the Appellant’s books of account and underlying records?

3. Whether the extended period of limitation and penalty under Section 78 of the Finance Act, 1994 were invocable?

The Tribunal applied Rule 2A(ii)(A) of the Service Tax (Determination of Value) Rules, 2006, under which service tax for works contracts involving execution of original works is payable on 40% of the total amount charged.

It also considered the service-tax rate applicable from 1 June 2016 and Notification No. 30/2012-ST, under which the service provider was liable for 50% of the tax and the balance was payable by the service recipient under reverse charge.

Section 73(1) of the Finance Act, 1994 governed limitation for recovery of service tax, while Section 78 governed penalty for suppression or wilful misstatement.

The Tribunal relied on Kunjarvel Poundass v. Assistant Commissioner of GST and Central Excise, (2023) 10 Centax 57 (Mad.), for the principle that the department could not deny the 40% valuation applicable to original works contracts.

It further relied on M/s Vinyl Tech v. Commissioner, CGST and Central Excise, Final Order No. 70132/2026, and Teena Gupta v. Commissioner of Central Excise & Service Tax, (2025) 27 Centax 79 (Tri.-Del.), for the principles that a demand cannot be founded solely on a difference between tax returns without examining books and that extended limitation requires proof of suppression or intent to evade, not mere non-payment or self-assessment.

The Tribunal found that the work order dated 12 January 2017 related to execution of original works.

Accordingly, Rule 2A(ii)(A) applied and the taxable value was restricted to 40% of the contract value; the adjudicating authority had erred in applying the 70% valuation under Rule 2A(ii)(B).

The Appellant had already paid service tax calculated on the applicable basis, including the tax attributable to free materials, and had discharged its portion of the liability under the reverse-charge framework.

The Tribunal further held that the demand was founded substantially on the difference between the Income Tax Return, Form 26AS and ST-3 return.

The timing difference concerning the March 2017 invoice sufficiently explained the discrepancy, since the related TDS appeared in Form 26AS for the subsequent financial year.

The department had not demonstrated in the Show Cause Notice that it examined the Appellant’s books of account or other primary records to determine the actual consideration received.

A demand based solely on return data, without verification of the books and supporting documents, was therefore unsustainable.

In the absence of evidence of suppression, wilful misstatement or intent to evade tax, the extended period and penalty under Section 78 were also not justified.

It held that the services constituted execution of original works taxable on 40% of the contract value under Rule 2A(ii)(A), and that the demand based primarily on return discrepancies without examination of the books of account was legally unsustainable.

The impugned Order-in-Appeal dated 22 November 2023 was set aside, the appeal was allowed, and consequential relief was granted in accordance with law.