Service Tax on Construction Services | Commercial Use Determination Under Finance Act : CESTAT Chandigarh

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chandigarh has clarified the taxability of construction services provided to warehousing corporations, holding that service tax liability under Section 65(105)(zzq) of the Finance Act, 1994 arises when the constructed facility has potential commercial use, regardless of its primary agricultural purpose. This decision establishes that the taxable event is determined by the nature of the service recipient's operations rather than the immediate use of the constructed structure.

Background & Facts

The Dispute

The appellant, M/s V R Construction Co., provided construction services to the Haryana State Warehousing Corporation (HSWC) for building godowns between 2009-2014. The Revenue Department alleged that these services fell under the taxable category of commercial or industrial construction services under Section 65(105)(zzq) of the Finance Act, 1994, and issued a show cause notice demanding service tax of ₹1,02,64,500 for the period 2009-2014.

Procedural History

The case progressed through the following stages:

• 23.04.2015: Show cause notice issued by the Commissioner of Central Excise & Service Tax, Panchkula
• 30.11.2016: Order-in-Original No. 85-ST-COMMR-PKL-2016-17 confirmed a reduced demand of ₹15,75,070 along with penalties under Section 78 and Section 77 of the Finance Act, 1994
• 2017: Appeal filed before CESTAT Chandigarh (Service Tax Appeal No. 60071 of 2017)

The Parties' Positions

The appellant contended that:

• The constructed godowns were used exclusively for agricultural storage, a non-commercial purpose
• Certificates from HSWC and HAFED confirmed the non-commercial nature of the structures
• The taxable event was not clearly established in the show cause notice

The Revenue argued that:

• HSWC's operations included commercial activities such as renting storage space to private parties
• The PEG Scheme of the Government of India permitted commercial use of godowns for import/export storage
• No exemption was available for the period prior to 01.07.2012 under Notification No.25/2012-ST

The Legal Issue

The central question before the Tribunal was whether construction services provided to a warehousing corporation qualify as commercial or industrial construction services under Section 65(105)(zzq) of the Finance Act, 1994, when:

1. The primary use of the constructed facility is agricultural storage, but
2. The service recipient has the capacity to engage in commercial activities with the same facility.

Arguments Presented

For the Appellant

The appellant relied on:

• Certificates from HSWC and HAFED stating the godowns were not used for commercial purposes
• The precedent in Suresh Kumar Gupta v. Commissioner of Central Excise (Final Order No. A/60201/2025) to argue that the service was non-taxable
• The absence of a clear taxable event in the show cause notice

For the Respondent

The Revenue contended that:

• HSWC's operations included commercial activities such as renting storage space to private parties
• The PEG Scheme explicitly allowed commercial use of godowns for import/export storage
• The appellant had suppressed material facts, justifying the invocation of the extended period of limitation
• The exemption under Notification No.25/2012-ST was not applicable for the period prior to 01.07.2012

The Court's Analysis

The Tribunal conducted a detailed examination of the nature of services provided by HSWC and the taxable event under the Finance Act, 1994. Key aspects of the analysis included:

1. Commercial Nature of HSWC's Operations: The Tribunal noted that HSWC was not merely storing agricultural produce but also engaged in:

   • Storage of seeds, manures, fertilizers, and agricultural implements
   • Renting godown space to private parties for commercial purposes
   • Charging for various services linked to warehouse storage

   "We find that HSWC is not only storing the post agriculture produce in the warehouse but also is involved in storage of other items like seeds, manures, fertilizers, agricultural implements & notified commodities; HSWC is also free to lend the godown to parties other than Central Warehousing Corporation or Food Corporation of India."

2. Taxable Event Determination: The Tribunal held that the taxable event is determined by the capacity for commercial use rather than the immediate or primary use of the constructed facility. This interpretation aligns with the purposive approach to statutory construction, focusing on the substance of the transaction over its form.

3. Precedent Application: The Tribunal distinguished the case of Suresh Kumar Gupta (supra) on factual grounds, noting that the precedent involved a different set of circumstances where commercial use was not established. Conversely, the Tribunal relied on its earlier decision in Gurmail Singh v. Commissioner of Central Excise (Final Order No. 61597/2025) to support its finding that abatement under Notification No.01/2006 was correctly applied.

4. Limitation Period: The Tribunal declined to interfere with the Commissioner's finding on limitation, observing that:

   • The appellant had not raised the issue of limitation in the grounds of appeal or during hearings
   • The Revenue had established suppression of material facts, justifying the extended period of limitation under Section 73(1) of the Finance Act, 1994

5. Penalty Imposition: The Tribunal upheld the penalties imposed under Section 78 (equal to the tax demanded) and Section 77 (₹10,000) of the Finance Act, 1994, finding no grounds to interfere with the Commissioner's discretion.

The Verdict

The CESTAT Chandigarh dismissed the appeal, upholding the Commissioner's order. The Tribunal held that:

1. The appellant was liable to pay service tax for the period up to 30.06.2012 under Section 65(105)(zzq) of the Finance Act, 1994
2. The taxable event was established by the commercial nature of HSWC's operations, even if the primary use of the godowns was agricultural
3. The penalties imposed under Section 78 and Section 77 were justified

What This Means For Similar Cases

Commercial Use Potential Triggers Tax Liability

This judgment establishes that service tax liability for construction services is not determined solely by the immediate or primary use of the constructed facility. Practitioners must now:

• Assess the commercial potential of the service recipient's operations, even if the primary use appears non-commercial
• Gather evidence on the nature of services provided by the recipient, including any secondary commercial activities
• Be prepared to argue that taxable event is triggered by the capacity for commercial use, not just actual use

Documentary Evidence Is Crucial

The Tribunal's reliance on the PEG Scheme and HSWC's operational documents underscores the importance of:

• Government schemes and notifications that may permit commercial use of constructed facilities
• Service recipient's operational documents, such as rental agreements or service contracts, which may reveal commercial activities
• Certificates from service recipients must be scrutinized for accuracy and completeness, as they may not fully capture the commercial nature of operations

Limitation Period Defenses Require Early Attention

The Tribunal's refusal to consider the limitation period issue highlights the need for:

• Explicitly raising limitation defenses in the grounds of appeal
• Addressing limitation during hearings, even if the primary focus is on the merits of the case
• Documenting all disclosures to the Revenue to counter allegations of suppression of facts