Works contract

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 November 2017 We have paid 2% service tax on a works contract provided to a Municipal Corporation which is exempt under Notfn.25/2012-ST. The department is demanding 4% and asking us to pay the differential service tax. Is there any case law which says that differential tax cannot be demanded since the service itself is exempt.

Vishakha Kejriwal.

Vishakha Kejriwal. (Expert)
Follow

28 November 2017 In case you have not collected service tax, the Department is erred in demanding service tax for a service which is exempt.

Querist : Anonymous

Querist : Anonymous (Querist)

30 November 2017 Thanks but is there any case law in this regard

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

03 August 2025 You're asking a very specific and valid question:
If a service is exempt under Notification 25/2012-ST, and you mistakenly paid a lower rate of service tax (2% instead of 4%) on a works contract provided to a Municipal Corporation, can the department still demand the differential, even though the service was entirely exempt?
✅ Key Legal Position:
If a service is exempt, then no service tax is payable at all — not 2%, not 4%, not any amount.
So if you paid 2% in error, it doesn't validate a partial liability, nor does it give the department the right to demand a "balance."

👉 The correct treatment would have been to not pay any service tax at all and possibly seek a refund of the wrongly paid amount.

⚖️ Relevant Case Law
Here are important judicial precedents where courts held that no tax demand can be made if the service itself is exempt, even if the assessee mistakenly paid or charged tax:
🧾 CCE vs. Aashiyana Construction [2017 (49) STR 214 (Tri. - Del.)]
Facts: Works contract services were provided to a government body; service was exempt under Notification 25/2012.
Held: Since the service was fully exempt, no service tax was payable, and any payment made mistakenly could not be the basis of further demand.
✅ Supports your case directly.
🧾 M/s. T. Athiappa & Co. vs. CCE, Madurai [2021-TIOL-864-CESTAT-MAD]
Facts: Contractor paid part service tax on exempt works contract (public authority), department demanded balance.
Held: No service tax is payable on exempt services, and demanding balance is not justified.
✅ Specifically relates to public sector/municipal works contracts
🧾 CCE vs. Bhayana Builders (P) Ltd. [2013 (32) STR 49 (Tri.-LB)] — affirmed by SC
Held: Service tax is not payable when no taxable service exists.
Also clarified that value components not part of taxable service cannot be taxed just because some amount was paid erroneously.
✅ General principle: erroneous payment does not create liability
✅ Summary Legal Position:
Point Legal Position
Service is exempt under Notif. 25/2012-ST ✅ No service tax payable
You paid 2% by mistake ❌ Doesn't make the service taxable
Department demanding balance (to make it 4%) ❌ Invalid — entire demand is unsustainable
Case Law Support ✅ Aashiyana Construction, T. Athiappa, Bhayana Builders
📝 What You Should Do
Respond to the notice citing:
Notification 25/2012-ST (entry 12 or 12A as applicable)
The above case laws
Confirm that you did not collect service tax from the client (Municipal Corporation)
Consider filing a refund for the 2% already paid, if within limitation (1 year)

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now