CESTAT Bangalore: Penalty Not Sustainable When Service Tax Discharged Prior to Show Cause Notice — Works Contract Services on Government EPC Project
Case Overview
Superintending Engineer Harbour Engineering Department Vs Commissioner of Central Excise (CESTAT Bangalore)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, delivered a significant ruling in the matter of Superintending Engineer Harbour Engineering Department Vs Commissioner of Central Excise, addressing service tax liability on a coastal development and construction project executed by a foreign entity on behalf of the Government of Kerala. While the Tribunal upheld the substantive service tax demand under Works Contract Services, it took a definitive stance in favour of the assessee on the question of penalty, holding that imposition of penalty was unjustified where payment had already been made well before the issuance of the show cause notice.
Background and Factual Matrix
The appellant in this case was the Superintending Engineer, Harbour Engineering Department, South Circle, Thiruvananthapuram, operating under the Government of Kerala. The Department was entrusted with the implementation, coordination, and supervision of Government-funded infrastructure initiatives encompassing rehabilitation activities, coastal protection measures, and construction projects.
At the centre of this dispute was a project titled "Multipurpose Submerged Artificial Surf Reef for Water Sports and Beach Development at Kovalam", which was undertaken by the Department of Tourism, Government of Kerala. For the execution of this project, M/s. ASR Ltd., a company incorporated in New Zealand, was engaged for the construction of an artificial reef at Kovalam. The contract value agreed upon was USD 11,64,500, with statutory taxes and levies stipulated to be payable over and above this base contract value.
The Revenue authorities took the position that the appellant had received Works Contract Services from a foreign service provider and was accordingly liable to discharge service tax on the entire gross amount paid to the foreign company. Based on this premise, a show cause notice was issued.
Adjudicating Authority's Order
The Commissioner of Central Excise and Customs, Thiruvananthapuram, through Order-in-Original No. TVM-EXCUS-000-27-13-14 dated 20.02.2014, confirmed the demand of service tax amounting to ₹76,57,124 for the period from 28.03.2009 to 27.05.2010 under the category of Works Contract Services. The adjudicating authority simultaneously imposed interest on the demand and levied a penalty equivalent to the tax demand. Aggrieved by this order, the appellant preferred an appeal before the CESTAT Bangalore.
Arguments Advanced by the Assessee
The learned counsel appearing on behalf of the appellant put forth multiple contentions challenging the sustainability of the demand and penalty:
- Non-commercial nature of the project: It was argued that the project was undertaken purely for the Government and was devoid of any commercial or profit-oriented character. Accordingly, it was submitted that service tax liability could not arise in respect of such governmental activities.