Composite works contract taxation: optional composition scheme cannot be forced, and VAT-paid goods value cannot be taxed again.

In a composite works contract, the composition scheme could not be compelled on an assessee who had not opted for it, because the scheme was only an option and the assessee was entitled to discharge service tax on the service portion while paying VAT on the goods portion under State law. For the period from 01.07.2012, the goods component already subjected to VAT could not be taxed again as service tax under Rule 2A of the Service Tax (Determination of Value) Rules, 2006, since only the service component was taxable. As the service tax demands failed, the related interest and penalty demands also could not survive.

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Issues: (i) Whether, for the period prior to 01.07.2012, the assessee could be compelled to pay service tax under the works contract composition scheme when it had not opted for that scheme. (ii) Whether, for the period from 01.07.2012, service tax could again be levied on the goods component of a composite works contract where VAT had already been paid on the value split under the State VAT law, and whether the demands of interest and penalty could survive.

Issue (i): Whether, for the period prior to 01.07.2012, the assessee could be compelled to pay service tax under the works contract composition scheme when it had not opted for that scheme.

Analysis: The composition scheme under the works contract service framework was an option available to the person liable to pay service tax. The Department could not impose that option on the assessee when the assessee had chosen to discharge tax on the service portion and pay VAT on the goods portion under the applicable State law. The scheme could not be read as mandatory merely because the contract was composite or because the goods and service elements were not separately invoiced.

Conclusion: The demand for the period prior to 01.07.2012 is unsustainable and is set aside in favour of the assessee.

Issue (ii): Whether, for the period from 01.07.2012, service tax could again be levied on the goods component of a composite works contract where VAT had already been paid on the value split under the State VAT law, and whether the demands of interest and penalty could survive.

Analysis: After 01.07.2012, works contract service was a declared service and valuation was governed by Rule 2A of the Service Tax (Determination of Value) Rules, 2006. Where the State law had already split the composite works contract and VAT had been paid on the goods component, the same component could not be subjected again to service tax by resort to Rule 2A(ii). The reasoning followed the principle that tax is payable only on the service component and that the goods component, already subjected to VAT, cannot be taxed twice. Once the service tax demand failed, the ancillary demands of interest and penalty also could not stand.

Conclusion: The demand for the period from 01.07.2012, together with the interest and penalty, is not sustainable and is set aside in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential relief.

Ratio Decidendi: In a composite works contract, the Department cannot compel an assessee to adopt an optional composition scheme, and where the goods component has already been subjected to VAT under the State law, that component cannot be subjected again to service tax under Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

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