2012 (11) TMI 404 - SC - Service Tax

Supreme Court upholds Circular on Composition Scheme, denies reclassification request

M/s. NAGARJUNA Construction CO. LTD. Versus GOVERNMENT OF INDIA & ANR.

The Supreme Court upheld the validity of Circular No. 98/1/2008-ST, stating it was in conformity with Rule 3(3) of the 2007 Rules. The appellant's request ... Works contract service - denial of option to pay service tax under the Composition Scheme for old contracts - Validity of the Circular No. 98/1/2008-ST, dated 4.1.2008 - Held that:- Impugned Circular has only explained the contents of Rule 3 (3) of the 2007 Rules so as to provide guidelines to the Revenue Officers. On perusal of Rule 3 (3) of the 2007 Rules it is very clear that the assessee who wants to avail of the benefit under Rule 3 of the 2007 Rules must opt to pay service tax in respect of a works contract before payment of service tax in respect of the works contract and the option so exercised is to be applied to the entire works contract and the assessee is not permitted to change the option till the said works contract is completed. In the instant case it is an admitted fact that the assessee had already paid service tax on the basis of classification of works contract which was in force prior to 1st July, 2007. In the circumstances, it cannot be said that the appellant had exercised a particular option with regard to the mode of payment of tax after 1st July, 2007 with regard to reclassified works contract. Thus in agreement with the submissions made by the respondents that not availing of CENVAT credit is absolutely irrelevant in the instant case. We do not accept the submission of the learned counsel appearing for the appellant that the Impugned Circular is discriminatory in nature. The Impugned Circular is not contrary to the Act or the statutory rules made thereunder and the Impugned Circular only provides guidelines as to how the provisions of Rule 3 (3) of the 2007 Rules are to be interpreted. Even if the Impugned Circular is set aside, the provisions of Rule 3 (3) of the 2007 Rules would remain and that would not benefit the appellant. Thus the High Court did not commit any error while upholding the Impugned Circular and, therefore, appeal dismissed - against assessee. Issues Involved:1. Validity of Circular No. 98/1/2008-ST.2. Applicability of the Works Contracts (Composition Scheme for Payment of Service Tax) Rules, 2007.3. Classification and reclassification of services under the Finance Act, 1994.4. Discrimination between assessees who paid service tax prior to 1.6.2007 and those who did not.5. Interpretation of Rule 3(3) of the 2007 Rules.6. Whether a circular can override statutory provisions.Detailed Analysis:1. Validity of Circular No. 98/1/2008-ST:The High Court upheld the validity of Circular No. 98/1/2008-ST, stating it was in conformity with Rule 3(3) of the 2007 Rules. The Supreme Court agreed, noting that the Circular merely reiterated the eligibility criteria specified in Rule 3(3) and provided guidelines to Revenue Officers. The Impugned Circular was not found to be contrary to the Act or the statutory rules.2. Applicability of the Works Contracts (Composition Scheme for Payment of Service Tax) Rules, 2007:The appellant argued that they should be allowed to opt for the Composition Scheme under the 2007 Rules, which allowed payment of service tax at a reduced rate. However, the High Court and Supreme Court held that the appellant could not change the classification of ongoing contracts entered into before 1.6.2007 for the purpose of availing the Composition Scheme. The appellant had already paid service tax under the old provisions and could not reclassify the services post-1.6.2007.3. Classification and Reclassification of Services:The Supreme Court noted that Section 65A of the Finance Act, 1994, provides guidelines for the classification of taxable services. The appellant had paid service tax under specific categories prior to 1.6.2007 but sought to reclassify these under the newly introduced Clause (zzzza) post-1.6.2007. The Court held that reclassification was not permissible as the appellant had already paid service tax under the earlier classification.4. Discrimination Between Assessees:The appellant contended that upholding the High Court's decision would result in discrimination between assessees who paid tax prior to 1.6.2007 and those who did not. The Supreme Court rejected this argument, stating that those who paid tax under the old provisions and those who opted for the Composition Scheme under the 2007 Rules belonged to different classes. Thus, there was no discrimination.5. Interpretation of Rule 3(3) of the 2007 Rules:Rule 3(3) of the 2007 Rules requires that the option to pay service tax under the Composition Scheme must be exercised before payment of service tax in respect of a works contract. The appellant had not exercised this option before paying service tax under the old provisions. The Supreme Court held that the Impugned Circular correctly interpreted Rule 3(3) and that the appellant could not change the method of payment post-1.6.2007.6. Whether a Circular Can Override Statutory Provisions:The appellant argued that the Impugned Circular was contrary to statutory provisions and could not override them. The Supreme Court held that the Circular did not override statutory provisions but merely provided guidelines for interpreting Rule 3(3) of the 2007 Rules. The Circular was found to be explanatory in nature and not contrary to the Act or the rules.Conclusion:The Supreme Court dismissed the appeal, upholding the validity of Circular No. 98/1/2008-ST and the High Court's judgment. The Court found that the Circular was in conformity with Rule 3(3) of the 2007 Rules and did not result in discrimination between different classes of assessees. The appellant's arguments regarding reclassification and the interpretation of Rule 3(3) were rejected. The appeal was dismissed with no order as to costs.