Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/017

06 November 2009

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Introduction: -

A lot of controversy is being faced in the matter of leviability of service tax on repair and maintenance of roads. The construction of roads itself is exempted from payment of service tax, so can the maintenance or repair of the roads be said to be taxable. The Board vide Circular No. 110/4/2009-ST dated 23.02.09 have clarified that maintenance, management or repair of roads are taxable services attracting service tax. Thereafter, the Government vide Notification No. 24/2009-ST, dated 27.07.09 have granted exemption to taxable service provided in relation to management, maintenance or repair of roads. However, what about the leviability of service tax on formations or improvement of roads before 27.07.09.

In the case under study, the appellant was contending that the service provided by him fell under the category of works contract under which it was exempted but the Revenue was contending that the activity undertaken by the appellant fell under management, maintenance or repair service and was liable to tax.

Relevant Legal Provisions: -

Rule 65 (64) of the Finance Act, 1944: - Meaning of ‘management, maintenance or repair service’

“management, maintenance or repair” means any service provided by—

(i) any person under a contract or an agreement; or

(ii) a manufacturer or any person authorised by him, in relation to,—

(a) management of properties, whether immovable or not;

(b) maintenance or repair of properties, whether immovable or not; or

(c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle;’;]

Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this clause,—

(a) “goods” includes computer software;

(b) “properties” includes information technology software;

Rule 65 (105) (zzzza) of the Finance Act, 1944: - Meaning of Works Contract

(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation.—For the purposes of this sub-clause, “works contract” means a contract wherein,—

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,—

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;

Govindaswamy Balraj v/s Commissioner of Central Excise

[Appeal No. ST/285/09 in ST/479/09 before CESTAT, Bangalore]

Brief Facts of the Case: -

Ø The appellant was engaged in the activity of formation or improvement/ re-asphalting of the existing roads for National Highway Authority, Public Works Department, KIADB (Karnataka Industrial Area Development Board), KUIDFC (Karnataka Urban Infrastructure Development Finance Corporation), KRDCL (Karnataka Road Development Corporation Ltd.,) etc

Ø The appellant got themselves registered under the Karnataka VAT Act for performing the said activity. The Commercial Tax Department treated the activity of the appellant as works contract and tax was deducted at source.

Ø Department contended that the activity of the appellant fell under the category of “Management Maintenance or Repair services” and therefore, service tax was leviable on the same under the said category.

Ø Adjudicating Authority held in against the assessee and confirmed the demand of service tax.

Ø Appellant has reached the Tribunal against the order confirming demand. The present is an application for waiver of pre-deposit and grant of stay.

Question for Consideration: -

The question for consideration was-

“Whether the activity of formation or improvement/ re-asphalting of the existing roads is liable for service tax under the Category of “Management Maintenance or Repair services” or under the “Works Contract”?

Appellant’s Contentions: -

- Appellant-assessee contended that improvement/ re-asphalting of roads will not fall under the category of “Management Maintenance or Repair services”. It was submitted that this activity is covered under the Works Contract. It has come under the service tax net from 1-6-2007. The works contract in respect of roads is excluded from the purview of the service tax net.

- Reliance was placed on the judgment given in the cases of Karnataka Land Army Corpn Ltd., Vs CST Bangalore [2009-TIOL-1114- CESTAT-Bang] and Dr Lai Path Lab Pvt. Ltd., Vs CCE Ludhiana [2006 (004) STR 0526].

- Attention was drawn to the definition of ‘Management, maintenance or repair service’ to contend that the activity undertaken by the appellant did not fall under the said category.

- Further, it was contended that all the contracts which are entered by the appellants for the improvement/ re-asphalting are works contracts as per the registration granted by Karnataka VAT Act.

Respondent’s Contentions: -

- Respondent-revenue contended that activity of improvement/ re-asphalting of roads was squarely covered by the definition of Management, maintenances/ repairs. It was submitted that the Adjudicating Authority had given a detailed finding to hold that these activities would fall under management, maintenance or repair services.

- It is submitted that prior to 01.06.07, the said service was coverable under management, maintenance or repair services.

Order of the Tribunal: -

v The Tribunal found that the appellant had registered themselves with the Commercial Tax Department, for the works contract executed by them for the purpose of rendering services of improvement/ re-asphalting of the roads.

v It was seen that their activity had been assessed by the Commercial Tax Department as such and the tax was deducted at source.

v Thus, the Tribunal was of the view that these activities would get covered under the works contract, then the activity rendered prior to 01.06.2007 will not be taxable under the management, maintenance or repair services.

v The Tribunal further found that from 01.06.2007 even if the activity gets covered under the works contract, there is specific exclusion for works contracts in respect of roads.

v The Tribunal held that the appellant had made out a prima facie case for the waiver of the pre-deposit of the amount involved in respect of works contract as regards the improvement and repair of the roads.

Decision of the Tribunal: -

Pre-deposit was waived and stay granted.

Comments & Conclusion: -

The Tribunal was of the view that the activity of re- asphalting/formation or improvement of roads undertaken by the appellant would fall under the purview of works contract and not management, maintenance or repair service. The order of the Tribunal was in favour of the appellant-assessee. However, this is a prima facie view given at the stage of waiver of pre-deposit and grant of stay. The final decision is yet to be passed.

Thus, it was said earlier also that the construction of road does not fall under repair and maintenance of road but the Board was of this view that the construction of new road will fall under Commercial construction activity or works contract and is not leviable to tax as it is specifically excluded. But the repair of old road does not fall under it and falls under Repair and maintenance services. It is chargeable to tax and Board has come out with the specific circular also. Everyone pleaded that it is not logical also that new road is not chargeable to tax and repair of old roads will be taxed. But the board does not agree and came out with circular that what will constitute the construction of new road and what will mean repair of road. But later on the Hon’ble Finance Minister granted exemption to repair or maintenance of road. Now the tribunal has held that the repair of road will also fall under works contract and no service tax is payable before or after the introduction of levy of tax under works contract. At last, the litigation has come to an end. But hold on, it is stay order only and final decision has yet to come. It is rightly said “Litigation goes on and it never ends………”

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PJ/CASE STUDY/2009-10/017
06 November 2009

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