Educational Trust's Surplus Alone Cannot Prove Commercial Use Of Building For Service Tax: CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on Wednesday held that an educational institution's income exceeding its expenditure cannot, by itself, establish that its buildings are used primarily for commercial purposes.

Setting aside a ₹3.31 crore service tax demand against Smrithi Constructions, the Tribunal held that the Department had failed to establish that buildings constructed for educational institutions and a hospital were used primarily for commerce or industry.

“In these circumstances, the mere arithmetical fact that income exceeded expenditure cannot, by itself, substitute for the statutory requirement of establishing that the building was used or intended to be used primarily for commerce or industry,” the tribunal observed.

A bench of Technical Member Vasa Seshagiri Rao and Judicial Member Ajayan T.V. was hearing the company's appeal against the demand for construction work undertaken between April 2010 and March 2015.

For the period before July 2012, the Tribunal found that the Department had relied on the income and expenditure figures of an educational trust without establishing that its surplus was distributed as profit or diverted towards commercial activities.

The Tribunal also rejected the assumption that a private hospital was necessarily commercial. It held that the Department had to establish the building's actual purpose and use rather than rely solely on the hospital's status.

For the period from July 2012 to March 2015, the Tribunal found that the contracts involved both labour and materials, making them composite work contracts.

The Department had demanded tax on the entire contract value under a provision covering construction services. However, the show-cause notice had not proposed a demand under the provision governing the service portion of a works contract.

The Tribunal held that the Department could not change the basis of the demand at the appellate stage.

It also ruled that the extended limitation period could not be invoked merely because the company had filed its service tax returns late. Consequently, it set aside the demand, interest, and penalties.

The Tribunal directed that amounts already paid or appropriated be verified against the original challans and dealt with in accordance with law.

For Appellant: Advocate P. Varshini,

For Respondent: M. Selvakumar, Authorised Representative