Supreme Court clarifies Service Tax on composite contracts

The Supreme Court clarified that Service Tax on composite contracts involving supply of goods/materials during civil construction execution could only be levied from 1 June 2007 onwards. The Tribunal held that demands confirmed under a category not specified in the Show Cause Notice were illegal. The Tribunal also ruled that the Composition Scheme did not require a written submission before payment of Service Tax and that the denial of the Scheme benefit for not including free-of-cost material value was incorrect. The impugned order was set aside, except for a small amount already paid, and the appeal was allowed in part.

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Issues Involved:
1. Levy of Service Tax on composite contracts involving supply of goods/materials during execution of civil constructions prior to 1 June 2007.
2. Confirmation of demand for payment of Service Tax under a category not specified in the Show Cause Notice.
3. Applicability of the Composition Scheme post 1 June 2007.
4. Inclusion of the value of free-of-cost material in the total assessable value under the Composition Scheme.

Issue-wise Detailed Analysis:

First Issue:
The primary question was whether Service Tax could be levied before 1 June 2007 on composite contracts involving the supply of goods/materials during civil construction execution. The Supreme Court in Larsen & Toubro clarified that composite works contracts could only be taxed from 1 June 2007 onwards, under Section 65(105)(zzzza) of the Finance Act, 1994. The Commissioner erred in treating the services provided by the Appellant before 1 June 2007 as taxable under "Commercial or Industrial Construction Service" or "Construction of Complex Service." Thus, the levy of Service Tax for services provided prior to 1 June 2007 under these categories cannot be sustained.

Second Issue:
The Appellant contended that the impugned order could not confirm a demand under a category not proposed in the Show Cause Notice. The Tribunal agreed, citing precedents that a demand made under a particular category cannot be sustained under a different category. The Commissioner confirmed demands under "Works Contract Service" for periods post 1 June 2007, although the Show Cause Notice had proposed demands under "Commercial or Industrial Construction Service" or "Construction of Complex Service." This was deemed illegal.

Third Issue:
Regarding the applicability of the Composition Scheme, the Tribunal noted that Rule 3 of the Composition Scheme did not require the option to be submitted in writing to the Department before payment of Service Tax. The Appellant had exercised the option by reflecting the rate of tax in the ST-3 returns. The Tribunal rejected the Department's argument that the Composition Scheme is akin to an exemption notification, which should be strictly interpreted in favor of the Revenue. Thus, the denial of the Composition Scheme benefit to the Appellant for not submitting a written option was incorrect.

Fourth Issue:
The Commissioner denied the Composition Scheme benefit because the Appellant did not include the value of free-of-cost material in the total assessable value. This was contrary to the Supreme Court's decision in Bhayana Builders, which held that the value of free-of-cost material supplied by the service recipient should not be included in the assessable value for Service Tax purposes. The Tribunal thus found the Commissioner's denial of the Composition Scheme benefit on this ground to be unsustainable.

Conclusion:
The Tribunal set aside the impugned order except for the demand of Rs. 5562/- on renting of immovable property, which the Appellant had already deposited with interest. The appeal was allowed to the extent indicated.

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