No Service Tax On Exempt Road, Canal Works Based Solely On TDS Deduction: CESTAT Allahabad

The Allahabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) on 20 February held that mere deduction of TDS and reflection of receipts in Form 26AS cannot determine service tax liability when the underlying activity, i.e., construction of roads and canals for Government authorities, is expressly exempt under the Mega Exemption Notification.

A Bench comprising Judicial Member P.K. Choudhary allowed an appeal by Shailja Construction, noting that the entire demand had been raised mechanically on the basis of Form 26AS entries and TDS under Section 194C of the Income Tax Act, without examining the actual nature of the services rendered.

The Bench stated:

"The work order of HWD Agra Canal, Okhla New Delhi vide WO No.54/SE-III/2014-15/ dated 28.02.2015 for 'Construction of metalled road on left bank of Noida main drain' for Rs.3,31,41,591/- against which the payment is received more than the value of service on which demand is confirmed/uphold the demand of service tax on Rs.3,26,08,162/- in the impugned order, therefore, the demand of service tax on the same for Rs.47,96,616/- is liable to be set aside as services were exempted under Sr. No.13(a) of Mega Exemption Notification No. 25/2012-ST dated 20/06/2012."

Shilja Construction, a partnership firm engaged in road and canal construction for Government departments, had received a show cause notice alleging non-payment of service tax for the financial years 2015-16 and 2016-17 based on third-party data obtained from the Income Tax Department. The Department claimed that the firm had received taxable consideration of over Rs. 6.62 crore, reflected in Form 26AS, on which service tax was payable.

While the adjudicating authority accepted exemption for a portion of the receipts, it confirmed the service tax demand of Rs. 47.96 lakh on the balance amount, reasoning that certain work orders pertained to earlier years and that reconciliation linking the receipts to exempt works was not satisfactorily established. The Commissioner (Appeals) upheld the demand.

Allowing the appeal, the Tribunal noted that it was undisputed that the appellant had provided services relating to the construction and renovation of roads and canals for the Government and local authorities, which are specifically exempt from service tax under Mega Exemption Notification No. 25/2012-ST.

The Tribunal observed that deduction of TDS or reflection of receipts in Form 26AS cannot, by itself, determine service tax liability, particularly when the underlying activity is exempt. It further held that payments received during the disputed period against a work order issued in an earlier financial year could not be subjected to service tax when the service itself was exempt, as taxability depends on the nature of the service and not on the timing of the work order.

The Bench further stated:

"The authorities below have confirmed/upheld the demand merely on the basis of reconciliation of value of service received for the work orders prior to the impugned period but failed to substantiate & without examining whether such services were taxable or exempt, confirmed the demand of service tax for ₹47,96,616/- only on the basis of reconciliation of payment received as per Form 26AS statement."

Accordingly, the Tribunal set aside the service tax demand of Rs. 47.96 lakh along with interest, penalties and late fees and allowed the appeal.

For Appellant: F.C.A., Raj Kumar

For Respondent: Authorized Representative, Chitra Srivastava