CESTAT Chennai Sets Aside Service Tax Demand on Composite Electrical Contracts

Overview of the Dispute

The matter in Sri Renukadevi Enterprises Vs Commissioner of GST & Central Excise reached the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, by way of an appeal against Order-in-Appeal No. 82/2015 (STA-II) dated 03.03.2015.

The Appellate Authority had earlier:

  • Classified the assessee’s services as “Erection, Commissioning or Installation Service” from 16.06.2005 to 30.05.2007, and as “Works Contract Service” from 01.06.2007 onwards
  • Directed the lower authority to recalculate the service tax
  • Upheld the penalty under Section 78 of the Finance Act, 1994, to stand in proportion to the reworked tax liability

The assessee, an electrical contractor, approached the Tribunal challenging both the classification and the consequential service tax demand, interest and penalty.

Factual Background

Nature of Business and Contracts

The assessee was engaged in electrical contracting, including:

  • Installation of various electrical gadgets and fittings
  • Supply and installation of electrical wiring and allied materials

These activities were carried out under contracts awarded by:

  • BSNL
  • CPWD
  • Certain private entities

The assessee was registered for maintenance and repair service, but the Department alleged that the assessee had failed to discharge service tax on other taxable services rendered.

Departmental Proceedings

  1. Scrutiny and Findings
    On examination of records, the Department formed the view that:

    • Service tax had not been paid on services rendered to BSNL for the period 16.06.2005 to 30.09.2006
    • Service tax had not been paid on services rendered to CPWD for the period 16.06.2005 to 31.03.2009

  2. Show Cause Notice (SCN)
    A Show Cause Notice dated 14.07.2009 was issued alleging that:

    • The assessee’s activities fell within “Erection, Commissioning and Installation Service” as per Section 65(39a) of the Finance Act, 1994
    • The assessee had suppressed material facts by:
      • Not declaring the value of charges realized for such services
      • Not reflecting the correct taxable value in ST-3 returns
    • The extended period of limitation was invoked on grounds of suppression with intent to evade tax

    The SCN proposed a service tax demand of Rs. 33,78,029/-, computed on the basis of gross turnover as per the profit and loss account, along with interest and a penalty under Section 78.

  3. Adjudication

    • The Adjudicating Authority confirmed the entire service tax demand with applicable interest.
    • A penalty equivalent to the tax amount was imposed under Section 78.
    • Service tax of Rs. 1,59,701/- already paid was appropriated towards the demand.

  4. First Appeal

    • The assessee filed an appeal before the Commissioner of Service Tax (Appeals-II), Chennai.
    • The Appellate Authority:
      • Affirmed classification under “Erection, Commissioning or Installation Service” up to 30.05.2007
      • Reclassified the same activities as “Works Contract Service” from 01.06.2007
      • Directed re-quantification of demand, while maintaining the penalty under Section 78 (to be adjusted proportionately)

The assessee thereafter appealed to CESTAT, Chennai.

Arguments on Behalf of the Assessee

Stand on Taxability and Composite Nature of Contracts

The assessee’s counsel contended:

  • The contracts in dispute were composite works contracts, involving:
    • Supply of materials like wires, conduit pipes, earthing materials
    • Labour for installation and wiring
  • These contracts involved transfer of property in goods and were subject to VAT/sales tax, on which:
    • The assessee was duly registered under State VAT/Sales Tax laws
    • The assessee was paying works contract tax / VAT

The assessee specifically asserted that the turnover under dispute represented composite electrification and related works in Government buildings for BSNL and CPWD, not pure service contracts.

Period Prior to 01.06.2007

The assessee argued: