Earth Excavation For Govt Dam Project Is Works Contract, Eligible For Service Tax Exemption: CESTAT Hyderabad

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad has held that earth excavation and site formation work carried out by a sub-contractor for a government dam project qualified as a works contract service, even though the sub-contractor had not actually paid VAT.

The Division Bench of Judicial Member Angad Prasad and Technical Member A.K. Jyotishi held that Capital Housing Projects Pvt. Ltd. was entitled to exemption from service tax under Serial No. 29(h) of Notification No. 25/2012-ST. The Tribunal consequently set aside the service tax demand and penalties.

Capital Housing Projects was working as a sub-contractor for Transstroy (India) Ltd. It undertook earth excavation, levelling and site formation work in connection with the construction of dams and canals for a project of the Government of Andhra Pradesh. The Department treated these activities as site formation services and initially raised a service tax demand of about ₹2.05 crore.

In the de novo proceedings, after granting certain benefits, the adjudicating authority reduced the demand to about ₹1.77 crore. It, however, rejected the company's claim for exemption as a works contract sub-contractor and also invoked the extended period of limitation.

The Tribunal noted that the work awarded to the company was not merely a labour or service contract. The contract covered machinery, labour, fuel and other materials required for carrying out the excavation work. It was therefore a composite contract involving men, materials and machines.

The Tribunal further clarified that for treating an activity as a works contract, it is not necessary that VAT should have actually been paid. What is relevant is whether the goods or materials used in executing the contract were “leviable to VAT”. The fact that the sub-contractor enjoyed an exemption from payment of VAT would not change the nature of the activity.

The Bench observed:

“We find that ratio from these two judgments is that it is not necessary that the goods are transferred as such but it may be transferred in any other form as long as there is a clear indication that said goods have been actually used for the execution of work. Therefore, we find that distinguishing these case laws by the adjudicating authority on the facts is not correct and the ratio of these case laws is applicable inasmuch as there has been usage of goods in execution of work and these goods were leviable to VAT under the category of works contract.”

The Tribunal therefore held that the site formation and earthwork undertaken by Capital Housing Projects were in the nature of works contract services. Since the main contractor was itself carrying out exempt works contract services relating to dams and canals for the State Government, the sub-contractor was entitled to exemption under Serial No. 29(h) of Notification No. 25/2012-ST.

The Bench also ruled in favour of the company on limitation. It found that the dispute involved interpretation of different tax exemptions and statutory provisions and that the company could have entertained a bona fide belief that service tax was not payable. There was no strong or cogent evidence showing deliberate suppression or intention to evade service tax.

Accordingly, the Tribunal held that the extended period of limitation could not be invoked. Since the show cause notice had been issued beyond the normal limitation period, the entire demand was also time-barred. The impugned order was set aside both on merits and limitation, along with the penalties, and the appeal was allowed.

Appearances: Shri Irshad, CA for the Appellant; Shri V.R. Pavan Kumar and Shri B. Sangameshwar Rao, ARs for the Respondent/Revenue.