2026-VIL-1133-KAR-ST
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SERVICE TAX High Court Cases

Service Tax - Levy on sale of goods component of works contract - Petitioners were engaged in execution of a works contract for lift irrigation works on turnkey basis and in supply and installation of pump sets to Government organisations, and the Department issued show cause notices based solely on income tax Form 26AS demanding service tax on the amounts reflected therein - Petitioners contended that sale of goods was taxed under the service tax law, that VAT/sales tax was paid on the sale value and service tax on the service value - Whether service tax can be levied on sale of goods component as indicated in the impugned orders - HELD - Section 65B(44) excludes from "service" the activity of sale of goods and transactions referred to in Article 366(29A) of the Constitution. Further, under Section 66E(h) only the service portion in the execution of a works contract is a declared service. Rule 2A(i) of the Valuation Rules specifically provides for exclusion of the value of goods transferred, to ensure that the value of goods, which is in the exclusive domain of the State, is not taxed. The scope of works in the works contract fell outside the purview of service tax, and where service was involved, the records, invoices, returns and reconciliation between ST-3 returns, VAT returns and Form 26AS showed payment of service tax, which the authorities had ignored even after remand - Point answered in favour of the Petitioners - Service Tax - Exemption Notification No. 25/2012-ST - Entitlement of works contract for lift irrigation project awarded by a Government company - Petitioner executed works of survey, design and construction of lift irrigation project for a Government company and claimed exemption for services by way of construction of canal, dam or other irrigation works provided to a Government, local authority or governmental authority - Respondent contended that the Government company was not a municipality and that exemption had to be read strictly - Whether the Petitioner is entitled to exemption from service tax - HELD - The definition of governmental authority covers a body established by Government with 90% or more participation or control to carry out any function entrusted to a municipality under Article 243W of the Constitution, and the Notification does not require the body to be a municipality as strictly defined. A lift irrigation project is meant to foster economic and social development of the area and falls within planning for economic development and social justice under Article 243W read with the Twelfth Schedule. An exemption notification, though construed strictly when determining whether the subject falls in it, calls for a wider and liberal construction once the subject falls within the notification, and a liberal interpretation includes lift irrigation as the project fulfils the objective of economic and social development - Point answered in favour of the Petitioner - Service Tax - Extended period of limitation under proviso to Section 73 of the Finance Act, 1994 - Show cause notices were issued for the financial years 2015-16 and 2016-17 invoking the extended period on the allegation of suppression of value of taxable services, based only on Form 26AS - Petitioners denied suppression and contended that claim of exemption was interpretational and that the remand proceedings left only the question of inclusion of value of goods - Whether the demands are barred by limitation under Section 73 of the Finance Act, 1994 - HELD - Suppression must be wilful and postulates a positive act with intent to evade payment of tax, and mere failure to pay or mere omission to give correct information is not suppression where facts are known to both parties, the burden being on the Revenue to prove suppression. Laying claim to an exemption is purely interpretational in nature and cannot be a matter of suppression of facts, fraud, collusion or wilful misstatement with intention to evade payment of tax. The proviso to Section 73 could not have been invoked, and the notice issued beyond thirty months from the date of the relevant returns was barred by time. In the other petition, since the notice was based only on Form 26AS and, after remand, the only question remaining was inclusion of the value of goods on which VAT was paid, which was already answered, the ingredients of suppression did not arise and the extended period could not have been invoked - Point answered in favour of the Petitioners; both writ petitions are allowed, the impugned Orders-in-Original are set aside and the impugned show cause notice is quashed.
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