2018 (9) TMI 1149 - AT - Service Tax

Construction service tax demands under CICS/CCS cannot be sustained for composite works contracts pre-2007

CESTAT Chennai held that construction services involving composite works contracts prior to 1.6.2007 cannot be classified as commercial or industrial ... service tax liability - composite Works Contracts - pure services - issuance of show cause notices alleging short-payment of service tax under Commercial or Industrial Construction Services - maxim 'generalia specialibus non derogant' - Department was of the view that such payment is not proper for the reason that the services cannot be classified as Works Contract Service and also because appellants have not exercised their option for payment of service tax under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. Held that:- The services provided by the appellant in respect of the projects executed by them for the period prior to 1.6.2007 being in the nature of composite works contract cannot be brought within the fold of commercial or industrial construction service or construction of complex service - For the period after 1.6.2007, service tax liability under category of ‘commercial or industrial construction service 'under Section 65(105)(zzzh) ibid, ‘Construction of Complex Service' under Section 65(105)(zzzq) will continue to be attracted only if the activities are in the nature of services' simpliciter. For activities of construction of new building or civil structure or new residential complex etc. involving indivisible composite contract, such services will require to be exigible to service tax liabilities under 'Works Contract Service' as defined under section 65(105)(zzzza) ibid - The show cause notices in all these cases prior to 1.6.2007 and subsequent to that date for the periods in dispute, proposing service tax liability on the impugned services involving composite works contract, under 'Commercial or Industrial Construction Service' or 'Construction of Complex' Service, cannot therefore sustain. In respect of any contract which is a composite contract, service tax cannot be demanded under CICS / CCS for the periods also after 1.6.2007 for the periods in dispute. Demand raised for the reason that appellants did not intimate the department about their intention to opt for payment of service tax under composition scheme under Works Contract Service - Held that:- The Tribunal in the case of Vaishno Associates Vs. Commissioner of Central Excise [2018 (3) TMI 417 - CESTAT NEW DELHI] had occasion to consider this issue and held for sole reason of not filing the intimation opting to pay service under Works Contract Service, the demand cannot sustain. Appeal allowed - decided in favor of appellant. The core legal questions considered in these appeals were:1. Whether the service tax demands raised under the categories of Commercial or Industrial Construction Services (CICS) and Construction of Complex Services (CCS) for composite contracts involving both service and supply of goods were sustainable for the periods prior to and after 1.6.2007.2. Whether composite contracts involving transfer of property in goods and service elements could be classified as pure service contracts under CICS or CCS, or whether they must be classified under Works Contract Service (WCS) after its introduction on 1.6.2007.3. Whether the failure of appellants to intimate the department about opting for payment of service tax under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, could sustain the demand of service tax and penalties.Issue-wise Detailed AnalysisIssue 1: Classification and Taxability of Composite Contracts Prior to and After 1.6.2007Relevant Legal Framework and Precedents: The Finance Act, 1994 introduced service tax on various construction-related services in stages: Commercial or Industrial Construction Service (CICS) from 1.7.2003, Construction of Complex Service (CCS) from 16.6.2005, and Works Contract Service (WCS) from 1.6.2007. Section 65A of the Act governs classification of services, requiring preference to the more specific description. The Supreme Court in Commissioner of Central Excise Vs. Larsen & Toubro Ltd. (2015) clarified that prior to 1.6.2007, service tax could not be levied on composite contracts involving transfer of property in goods, as CICS and CCS covered only pure service contracts simpliciter. The introduction of WCS in 2007 was to address the service component of composite contracts, with statutory mechanisms to exclude the value of goods.Court's Interpretation and Reasoning: The Tribunal emphasized that CICS and CCS definitions remained unchanged after 1.6.2007 and cover only pure service contracts without transfer of property in goods. Composite contracts involving both service and goods supply fall exclusively under WCS. The Tribunal relied extensively on the Larsen & Toubro judgment, which held that service tax on indivisible works contracts prior to 1.6.2007 was constitutionally invalid. Post 1.6.2007, composite contracts continued to be taxable only under WCS and not under CICS or CCS.Key Evidence and Findings: The show cause notices themselves acknowledged the composite nature of the contracts by calculating taxable value at 33% of the gross amount, implicitly recognizing both material and service components. The appellants were engaged in projects involving construction of commercial and residential complexes, which were composite contracts.Application of Law to Facts: Since the contracts were composite, the demands under CICS and CCS for periods prior to and after 1.6.2007 were unsustainable. The Tribunal held that the demands confirmed under these categories were contrary to the Supreme Court's ruling and the statutory framework. The appellants' activities fell within the ambit of WCS, which was the appropriate classification after 1.6.2007.Treatment of Competing Arguments: The Revenue argued that CICS and CCS services continued to be leviable after 1.6.2007 and that these services were not omitted from the Act. They contended that these services applied to composite contracts as well. The Tribunal rejected this, holding that the definitions of CICS and CCS did not change post-1.6.2007 and that WCS was introduced specifically to cover composite contracts. The maxim 'generalia specialibus non derogant' was considered, but the Tribunal emphasized that Section 65A mandates preference to the more specific classification, i.e., WCS for composite contracts.Conclusions: The Tribunal concluded that prior to 1.6.2007, composite contracts were not taxable under CICS or CCS, and post 1.6.2007, such contracts must be classified under WCS. Accordingly, service tax demands under CICS or CCS for composite contracts were set aside for both periods.Issue 2: Effect of Non-Intimation of Option to Pay Service Tax under Composition Scheme for Works Contract ServiceRelevant Legal Framework and Precedents: The Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 require service providers to intimate the department about exercising the option to pay service tax at a lower rate on the gross amount. The Tribunal referred to its earlier decisions in Vaishno Associates and Bridge & Roof Co. Ltd., which held that failure to file such intimation is only a procedural lapse and cannot sustain demands or penalties.Court's Interpretation and Reasoning: The Tribunal followed the precedent that non-intimation of opting for the composition scheme does not invalidate the option or justify service tax demands or penalties. The procedural lapse can be condoned, and the appellant cannot be penalized solely on this ground.Key Evidence and Findings: The appellants had paid service tax under the composition scheme but had not formally intimated the department. The show cause notices raised demands and penalties on this basis.Application of Law to Facts: Applying the precedents, the Tribunal held that the demands and penalties on account of non-intimation could not be sustained.Treatment of Competing Arguments: The Revenue sought to uphold the demands and penalties, but the Tribunal relied on binding precedents to reject this contention.Conclusions: The Tribunal ruled in favor of the appellants on this issue, setting aside demands and penalties arising solely from non-intimation.Significant Holdings'The services provided by the appellant in respect of the projects executed by them for the period prior to 1.6.2007 being in the nature of composite works contract cannot be brought within the fold of commercial or industrial construction service or construction of complex service in the light of the Hon'ble Supreme Court judgment in Larsen & Toubro (supra) upto 1.6.2007.''For the period after 1.6.2007, service tax liability under category of 'commercial or industrial construction service' under Section 65(105)(zzzh) ibid, 'Construction of Complex Service' under Section 65(105)(zzzq) will continue to be attracted only if the activities are in the nature of services simpliciter.''For activities of construction of new building or civil structure or new residential complex etc. involving indivisible composite contract, such services will require to be exigible to service tax liabilities under 'Works Contract Service' as defined under section 65(105)(zzzza) ibid.''The show cause notices in all these cases prior to 1.6.2007 and subsequent to that date for the periods in dispute, proposing service tax liability on the impugned services involving composite works contract, under 'Commercial or Industrial Construction Service' or 'Construction of Complex' Service, cannot therefore sustain.''For this very reason, the proceedings in all these appeals cannot sustain.''For sole reason of not filing the intimation opting to pay service under Works Contract Service, the demand cannot sustain.'Core principles established include:Composite contracts involving transfer of property in goods and service elements are not taxable under CICS or CCS but only under WCS after its introduction on 1.6.2007.Prior to 1.6.2007, service tax could not be levied on composite contracts involving transfer of property in goods.Classification of services must be strictly in accordance with Section 65A, giving preference to the more specific description.Show cause notices must specify the correct category of taxable service; adjudication cannot extend beyond the scope of allegations.Failure to intimate opting for composition scheme under WCS is a procedural lapse and does not justify demands or penalties.Final determinations on each issue were in favor of the appellants, with all demands and penalties under CICS and CCS for composite contracts set aside for both pre and post 1.6.2007 periods, and the non-intimation issue also decided in appellants' favor.