Works Contracts Involving Material Supply Not Taxable As Maintenance Or Repair Service: CESTAT Bangalore

On 3 September, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, held that composite works contracts involving both supply of materials and services cannot be subjected to service tax under the category of Management, Maintenance or Repair Service (MMRS).

A Bench comprising Judicial Member P.A. Augustian and Technical Member R. Bhagya Devi set aside service tax demands against Kerala Public Works Department contractor G. Janardhanan for repair, reconstruction and maintenance works relating to irrigation canals and allowed his appeals. Relying on the Supreme Court's decision in Commissioner v. Larsen & Toubro, it held:

“This would unmistakably show that what is referred to in the charging provision is the taxation of service contracts simpliciter and not composite works contracts, such as are contained on the facts of the present cases.”

Janardhanan was a licensed contractor of the Public Works Department and other departments of the Kerala Government. The Department alleged that he had failed to pay service tax and obtain registration for services rendered during the relevant period. It raised a demand of Rs.2.93 lakh under MMRS in one proceeding and demands of Rs.46,919 under MMRS and Rs.15,175 under Manpower Recruitment and Supply Agency Service in another.

The contractor submitted that the works involved reconstruction and repair of damaged portions of irrigation canals, along with their improvement and maintenance. Since the contracts also involved the supply of goods and materials, he had paid Value Added Tax (VAT) by treating the transactions as works contracts.

Relying on Larsen & Toubro, the Tribunal held that the service tax provisions covered contracts involving services alone and not composite works contracts involving transfer of property in goods.

The Tribunal noted that a certificate issued under the Kerala Value Added Tax Rules, 2005 evidenced payment of VAT. It also relied on Agarwal Engineering Works, where contracts involving both services and supply of materials, on which VAT had been deducted, were held not liable to service tax under MMRS.

It also set aside the demand raised by invoking the extended period of limitation. It noted that the First Appellate Authority had found no deliberate suppression of facts. In view of this finding and the VAT certificate evidencing payment of VAT, the Tribunal held that there was no justification for invoking the extended limitation period. It held:

“Once the First Appellate authority has admitted that there is no deliberate suppression of fact and also considering the certificate issued under Kerala Value Added Tax Rule, 2005 evidencing payment of VAT as paid by the Appellant, there is no justification for invoking extended period of limitation.”

As regards the demand under Manpower Recruitment and Supply Agency Service, the Bench noted that although the activity was taxable, the value received was only Rs.17,334, which was below the threshold for service tax liability. It therefore held the demand unsustainable.

Accordingly, the CESTAT set aside the impugned orders and allowed both appeals with consequential relief.

For the Appellant: Rajesh Kumar T.R., Chartered Accountant

For the Revenue: Vinod Kumar Garhwal, Superintendent (Authorised Representative)