CESTAT Chennai Rules Out Service Tax on Construction of Educational Institutions up to 1 July 2012

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, in Commissioner of GST & Central Excise Vs R.R. Thulasi Builders (I) Pvt. Ltd., once again examined the taxability of works contract services provided for construction of educational institutions for the period prior to 1 July 2012.

The core controversy was narrow but crucial: whether construction services provided to Periyar Maniammai University and Periyar Teacher Training Institute were liable to service tax, and specifically, whether these institutions should be treated on par with other private educational institutions for this purpose.

Ultimately, the Tribunal dismissed the Revenue’s appeal and upheld the dropping of service tax demand on construction activities relating to these two institutions, holding that service tax could not be levied on works contract services for construction of educational institutions during the relevant period.

Background of the Dispute

Nature of Services and Period Involved

  • The assessee, R.R. Thulasi Builders (I) Pvt. Ltd., was registered for Works Contract Service and regularly discharged service tax on taxable contracts.
  • For the period 1 October 2008 to 30 June 2012, the assessee did not pay service tax on construction services provided to various educational institutions, including:
    • Periyar Maniammai University
    • Periyar Teacher Training Institute
    • Other educational institutions (both private and Government)

Assessee’s Stand Before the Department

In response to departmental enquiry, the assessee argued:

  • Construction services provided to educational institutions were exempt based on Circular No. 80/10/2004-ST dated 17.09.2004.
  • Many recipient institutions were public charitable trusts registered under Section 12A of the Income Tax Act 1961.
  • The assessee was already discharging service tax on educational institutions from 1 July 2012 onwards and had furnished complete records and details for the period from 01.10.2008 to 30.06.2012.
  • ST-3 returns had been filed, though the value of services provided to educational institutions was not included therein as taxable.

Show Cause Notice and Original Adjudication

Demand Raised by the Department

On scrutiny of the records, the Department noted that:

  • The value of services rendered to educational institutions had not been reflected in ST-3 returns for 01.10.2008 to 30.06.2012.
  • Applicable service tax had not been paid on such services.

Accordingly, a Show Cause Notice dated 22.04.2014 (SCN Sl. No. 40/2014-ST (Commissioner)) proposed to:

  1. Invoke the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994.
  2. Demand a total amount of Rs. 21,25,06,946/- comprising:
    • Service Tax: Rs. 20,63,17,423/-
    • Primary Education Cess: Rs. 41,26,348/-
    • Secondary & Higher Education Cess: Rs. 20,63,174/-
  3. Levy interest under Section 75 of the Finance Act, 1994.
  4. Impose penalties under Sections 76, 77(2) and 78 of the Finance Act, 1994.

Findings of the Adjudicating Authority

After adjudication, the original authority:

  • Drew a distinction between:
    • Private educational institutions; and
    • Government educational institutions
  • Held that:
    • Construction services rendered to private educational institutions, even when run by charitable trusts, were taxable.
    • Construction for Government educational institutions was not taxable.
  • Consequently:
    • Confirmed service tax demand of Rs. 19,76,70,368/- under works contract service.
    • Dropped service tax demand of Rs. 1,48,36,578/- relating to construction services rendered to Government educational institutions, specifically including Periyar Maniammai University and Periyar Teacher Training Institute (treated as Government institutions in the order).

The Revenue challenged this partial relief, limited to the dropped portion concerning these two institutions.

Parallel Appeal by the Assessee and Earlier CESTAT Decision

Assessee’s Earlier Appeal

Before the present Revenue appeal, the assessee had already filed an appeal before CESTAT against the same adjudication order, contesting: