No Service Tax On Pal Promoters' Construction For Police Housing, Tsunami Rehab: CESTAT Chennai

The Chennai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) on 18 June held that construction services provided to the Tamil Nadu Police Housing Corporation (TNHPCL), Tsunami District Implementation Unit, Pudukkotai (TDIU), and Peoples Development Association (PDA) do not attract service tax, as the projects do not constitute commercial construction activity.

Technical Member M. Ajit Kumar and Judicial Member Ajayan T.V. allowed appeals filed by Pal Promoters Pvt. Ltd. and its Managing Director P. Panneerselvam against service tax demands for the period 2007–2012. The Bench observed:

“...the construction services rendered by the appellant to TNHPCL are not exigible to service tax and the findings in the impugned order in this regard are liable to be set aside.”

The Department alleged that Pal Promoters provided taxable construction services for residential complexes, hospital buildings, police quarters, tsunami rehabilitation houses, and municipal projects. It also invoked liability under renting of immovable property services, leading to a demand exceeding Rs. 1.40 crore along with interest and penalties against the company, and a separate demand against its Managing Director.

Pal Promoters argued that it constructed police quarters for TNHPCL for use by police personnel and not for any commercial purpose. It further submitted that it constructed houses for tsunami-affected families as individual residential units under welfare and rehabilitation schemes, not intended for sale. It also contended that the contracts were composite works contracts involving both supply of goods and services.

After examining the nature of the projects and contractual arrangements, the Tribunal held that the works executed for TNHPCL, TDIU, and PDA were welfare and rehabilitation measures and not commercial ventures. It further held that individual houses constructed for tsunami victims do not qualify as a “residential complex” under the statutory definition. The Bench observed:

“...the appellant is not liable to pay service tax on the construction services rendered to Tamil Nadu Police Housing Corporation (TNHPCL), Tsunami District Implementation Unit, Pudukkotai (TDIU) and Peoples Development Association (PDA), and the demand confirmed and upheld in the impugned orders to that extent are liable to be set aside,”

The Tribunal held that the contracts involved both supply of goods and services, constituting works contracts that cannot be reclassified under other taxable service categories.

On limitation, the Bench held that the Department failed to establish suppression of facts or intent to evade tax and reiterated that mere non-payment of tax does not justify invocation of the extended limitation period.

Accordingly, the CESTAT set aside the service tax demands and penalties and allowed the appeals with consequential relief.

For Appellant: Shri S. Sivalinga Kesavan, Advocate

For Respondent: Ms. O.M. Reena, Authorized Representative