Service Tax On Construction Services Payable On Actual Receipts, Not Accruals: CESTAT Kolkata

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, has remanded a ₹11,98,511 service tax demand against Britannia Engineering Ltd., holding that liability for the relevant period must be calculated on actual receipts rather than accruals.

The dispute covers financial years 2006-07 to 2008-09, spanning the introduction of Works Contract Service as a separate taxable category from June 1, 2007.

“Service tax is to be discharged on the receipt of the amount,” a bench of Judicial Member R. Muralidhar and Technical Member K. Anpazhakan observed.

The dispute arose after an audit alleged that Britannia Engineering had failed to pay service tax on services classified as Commercial or Industrial Construction Service.

The audit allowed 67% abatement towards materials used in the work and calculated tax on the remaining 33% of the value. A show cause notice demanded ₹11,98,511. The adjudicating authority confirmed the demand, and the Commissioner (Appeals) dismissed the company's appeal.

Before the tribunal, Britannia Engineering argued that its activities fell under Works Contract Service and had been wrongly classified as Commercial or Industrial Construction Service. It contended that Works Contract Service was not taxable for services rendered before June 1, 2007. It also argued that several contracts had been completed before the corresponding payments were received during the period under consideration.

The company separately challenged the demand on limitation grounds, arguing that the show cause notice issued on March 31, 2010, was time-barred for most of the period. The tribunal did not expressly decide this objection.

The Revenue maintained that the company had provided Commercial or Industrial Construction Services under contracts for the state government and other entities. It defended the demand, pointing out that the audit had allowed 67% abatement for materials used in providing the services.

The tribunal found little merit in the company's classification challenge, noting that the audit had accounted for both goods and services supplied under the contracts and allowed abatement towards materials.

However, it accepted the company's argument that service tax for the relevant period was payable on actual receipts rather than accruals. It observed that amounts received for services rendered before the applicable provisions for Commercial or Industrial Construction Service came into force would not be liable to service tax.

The tribunal remanded the matter for the adjudicating authority to examine when the contracts were entered into and completed, when payments were received during 2006-07 to 2008-09, and whether any receipts related to services rendered before the relevant provisions came into force.

The authority was directed to follow the principles of natural justice and complete the proceedings within four months of receiving the order. The company must cooperate and provide the relevant documentary evidence.

The appeal was accordingly disposed of by way of remand.

For Appellant: Ronaldo Das and Harsh Gadodia, Advocates

For Respondent: P. Halder, Authorised Representative