2019 (9) TMI 1107 - AT - Service Tax

Appeal allowed: Contract deemed Works Contract, incorrect valuation under Rule 5, extended demand period unjustified. Limitation issue not extensively addressed.

The Tribunal allowed the appeal, determining that the contract constituted a Works Contract not subject to Service Tax before 01.06.2007. The valuation ... Works contract service - Site Formation and Clearance, Excavation, Earthmoving and Demolition Service - execution of Works Contract with M/s Power Grid Corporation of India Ltd. for setting up of 400/220 KV Sub-Stations - period May 2006 to September 2007 - extended period of limitation - HELD THAT:- The substantial portion of the payment goes towards Earth work in filling with borrowed Earth. As the contract contemplates various items of works along with the cost of material involved. The appellants placed on record proof of payment of VAT on the subject contract under Kerala VAT which recognises the contract to be Works Contract - Therefore, in view of the Hon’ble Supreme Court’s decision in COMMISSIONER, CENTRAL EXCISE & CUSTOMS VERSUS M/S LARSEN & TOUBRO LTD. AND OTHERS [2015 (8) TMI 749 - SUPREME COURT] the contract is to bee seen as a non-viviceptable contract and therefore, it is not chargeable to Service Tax before 01.06.2007. Thus, the contract being indivisible, no Service Tax can be levied upon the appellants before 01.06.2007. Time limitation - HELD THAT:- As we find that the appellant has a strong case on merits, we are not going into the issue of limitation. Appeal allowed - decided in favor of appellant. Issues Involved:1. Classification of the service under 'Site Formation and Clearance, Excavation, Earthmoving and Demolition Service'.2. Applicability of Service Tax on Works Contract prior to 01.06.2007.3. Validity of valuation under Rule 5 of Service Tax (Determination of Value) Rules, 2006.4. Invocation of the extended period for demand due to non-registration and non-payment of Service Tax.5. Limitation period for raising the demand.Detailed Analysis:1. Classification of the Service:The appellant was engaged in the execution of a Works Contract with M/s Power Grid Corporation of India Ltd. for setting up 400/220 KV Sub-Stations. The Department issued a Show Cause Notice (SCN) demanding Service Tax, classifying the work under 'Site Formation and Clearance, Excavation, Earthmoving and Demolition Service' as per Section 65(zzza) of the Finance Act, 1994, for the period from May 2006 to September 2007. The appellant argued that the contract was a composite Works Contract, as evidenced by the agreement dated 03.04.2006 and the Letter of Award dated 27.03.2006. The major portion of the contract involved filling the Earth with borrowed Earth, and VAT was paid under the Kerala VAT Rules, 2005, treating it as a Works Contract.2. Applicability of Service Tax on Works Contract prior to 01.06.2007:The Tribunal noted that the substantial portion of the payment was for Earth work in filling with borrowed Earth. The Hon'ble Supreme Court in Larsen & Toubro (2015) held that Works Contracts are not chargeable to Service Tax before 01.06.2007. The Tribunal referred to the Supreme Court's decision, which emphasized that composite indivisible Works Contracts could not be taxed as services simpliciter. The Tribunal concluded that the appellant's contract was a Works Contract and not chargeable to Service Tax before 01.06.2007.3. Validity of Valuation under Rule 5 of Service Tax (Determination of Value) Rules, 2006:The Commissioner had confirmed the demand by treating the value of the service in terms of Rule 5 of the Service Tax (Determination of Value) Rules, 2006. However, the Hon'ble Supreme Court in Intercontinental Consultants and Technocrats Pvt. Ltd. (2018) held that Rule 5 was ultra vires of the Constitution. The Tribunal noted that Rule 5 included reimbursable expenses in the gross amount charged, which was beyond the mandate of Section 67 of the Finance Act, 1994. Thus, the valuation made by the Commissioner was incorrect.4. Invocation of the Extended Period for Demand:The Department argued that the extended period was rightly invoked as the appellant did not register and did not pay Service Tax. However, the Tribunal found that the issue was debatable and had only been settled by the Hon'ble Court in 2015. The appellant had reasons to believe that their activity was not taxable, and therefore, mens rea could not be attributed to the interpretation of statutory provisions.5. Limitation Period for Raising the Demand:The Tribunal did not delve deeply into the issue of limitation as it found the appellant had a strong case on merits. The appellant argued that the SCN mistakenly included payments received after April 2007 for services rendered before April 2007. The Tribunal agreed that the tax liability is on the taxable event, i.e., the date of provision of service, and not the date of payment realization.Conclusion:The Tribunal allowed the appeal with consequential relief, holding that the contract was a Works Contract not chargeable to Service Tax before 01.06.2007. The valuation under Rule 5 was found to be incorrect, and the extended period for demand was not justified. The Tribunal did not address the limitation issue in detail due to the strong merits of the appellant's case. The order was pronounced in open court on 25/09/2019.