Works contract composition scheme: valid exercise date fixes the tax rate, and later enhancement cannot retrospectively alter it.

Under the works contract composition scheme, the tax rate applicable on the date of valid exercise of option governs the contract, and a later enhancement cannot retrospectively alter an already opted-in contract. However, the assessee must validly exercise the option before the enhanced rate takes effect to retain the earlier rate. On the facts, the first discernible exercise of option was on 26 March 2008, after the rate had increased to 4%, so the assessee could not claim the earlier 2% rate. The demand based on the enhanced rate was therefore sustained.

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Issues: (i) whether the enhanced service tax rate under the subsequent notifications could be applied to a works contract assessee after exercise of the option under the composition scheme; (ii) whether the petitioner had exercised the option under the composition scheme before the rate enhancement so as to retain the earlier 2% rate for the entire works contract.

Issue (i): whether the enhanced service tax rate under the subsequent notifications could be applied to a works contract assessee after exercise of the option under the composition scheme

Analysis: The composition scheme framed under Sections 93 and 94 of the Finance Act, 1994 was held to be an optional, beneficial and self-contained method of payment of service tax on works contracts. Once an assessee opts for the scheme, the option remains tied to the entire works contract and cannot be withdrawn till completion. On that footing, a later notification enhancing the rate cannot be used to alter the tax burden of an already continuing works contract, as the later change cannot operate retrospectively against the scheme already opted into.

Conclusion: The subsequent enhancement of rate could not retrospectively disturb an existing works contract under the composition scheme, and the assessee was protected from later rate changes for that contract.

Issue (ii): whether the petitioner had exercised the option under the composition scheme before the rate enhancement so as to retain the earlier 2% rate for the entire works contract

Analysis: The scheme required the option to be exercised before payment of service tax for the concerned works contract, but it prescribed no special mode of exercise. The material on record did not show that the petitioner had exercised the option before 1 March 2008. The Court found that the first discernible exercise of option was the letter dated 26 March 2008, when the rate had already been enhanced to 4%. As the applicable rate is the rate prevailing on the date of valid exercise of option, the petitioner could not insist on continuing at 2% after that date.

Conclusion: The option was effectively exercised only on 26 March 2008, by which time the applicable rate was 4%, and the petitioner was not entitled to continue paying tax at 2%.

Final Conclusion: The writ petition failed on the decisive factual and legal basis that the petitioner's option under the composition scheme was exercised after the rate enhancement, so the demand founded on the 4% rate was sustained.

Ratio Decidendi: Under the works contract composition scheme, the tax rate applicable on the date of valid exercise of option governs the entire contract, and a later rate change cannot retrospectively alter an already opted-in contract; however, an assessee cannot claim the earlier rate if the option itself was exercised after the enhancement.

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