CESTAT Chennai Sets Aside Service Tax Orders Against A.P. Constructions, Orders Fresh Adjudication

On Thursday, 15 October, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) at Chennai, set aside three service tax orders against A.P. Constructions India Pvt. Ltd. and its Managing Director, directing fresh adjudication within 90 days after examining the contractual arrangements, applicable statutory provisions and supporting evidence.

A Bench comprising Judicial Member P. Dinesha and Technical Member M. Ajit Kumar allowed all three appeals by way of remand, holding that the Department must examine the nature of construction contracts, the terms of joint development agreements and the evidence supporting reverse-charge liabilities before confirming the demands. It observed:

“If the Appellant demonstrates that the workers were directly engaged by the appellant, paid wages by it and worked under its supervision and control, such expenditure cannot be converted into manpower supply service merely because it was recorded under 'labour' or 'manpower' expenses. The Revenue must therefore establish the existence of a service provider supplying manpower to the appellant. In the absence of which, the demand under manpower supply service cannot be sustained.”

The first appeal concerned service tax demands for May 2008 to December 2012 arising from residential construction projects. The Department alleged that A.P. Constructions had failed to pay service tax on construction undertaken for flat purchasers and on flats allotted to landowners under joint development agreements.

The other two appeals concerned demands for January 2013 to June 2017 relating to flats allotted to landowners, flats sold from the developer's share and reverse-charge liabilities for goods transport agency (GTA), security, legal and manpower supply services. The show-cause notice proposed demands of approximately Rs. 2.86 crore on the landowners' share, Rs. 2.89 crore on the developer's share and Rs. 1.66 crore towards reverse-charge liabilities.

A.P. Constructions argued that its construction activities involved composite works contracts comprising labour and materials and could not automatically be classified as Construction of Residential Complex Service. It also challenged the reverse-charge demands, contending that ledger entries alone could not establish that independent service providers had rendered taxable services.

The Tribunal held that the Department could not determine the taxability of flats allotted to landowners merely by treating the allotment as consideration for construction services. If the transactions were found taxable, the Department would have to determine their value in accordance with Section 67 of the Finance Act, 1994, and the applicable valuation rules.

It held that the classification of construction activities depended on the actual contractual arrangements, including under the negative-list regime introduced from 1 July 2012, which recognised works contract service as a declared service.

Further, the Bench relied on the principle laid down in Commissioner of Central Excise and Customs v. Larsen & Toubro Ltd. that composite works contracts involving the transfer of property in goods are distinct from contracts for pure services and cannot be taxed under an unrelated category when no specific taxable category covers them.

It also examined the reverse-charge demands separately. For GTA services, it directed the Department to determine whether the transporters met the statutory definition of a goods transport agency, including the requirement concerning a consignment note, and whether the applicable reverse-charge provisions covered the transactions.

For security services, the Department had to verify the service providers' identities and status, the relevant period and taxable value, and whether service tax had already been paid on the same services. The legal-service demand likewise required verification of whether the providers and services fell within the applicable reverse-charge provisions.

On manpower supply services, the Tribunal held that accounting entries describing expenditure as labour or manpower expenses could not, by themselves, establish that an independent agency had supplied manpower to A.P. Constructions.

It also directed the adjudicating authority to reconsider limitation by identifying the applicable normal period and determining whether the evidence established the statutory grounds for invoking the extended period. The authority must reconsider penalties consequentially after determining the tax liability and limitation.

Accordingly, the CESTAT set aside the impugned orders and remanded all three appeals for fresh adjudication within 90 days, directing the authority to re-determine taxability, valuation, limitation, interest and penalties in accordance with law.

Counsel for the Appellant: N. Viswanathan, Advocate

Counsel for the Respondent: G. Krupa, Authorised Representative