Works contract composition option can be exercised through returns and payment; later rate enhancement cannot apply retrospectively.

Timely disclosure in returns and payment at the compounded rate can amount to valid exercise of an option under a works contract composition scheme where no prescribed form or separate procedure exists; insistence on a written declaration would defeat the scheme. The assessee was therefore entitled to the compounded rate for the covered period. A later notification enhancing the tax rate could not be applied retrospectively to a contract already covered by the exercised option, and the department could not invoke the extended limitation period where the returns disclosed the scheme and the payment pattern, showing no suppression of material facts. Liability for the later period at the enhanced rate with interest remained unaffected.

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Issues: (i) Whether exercise of option under the works contract composition scheme could be inferred from filing of returns and payment of tax at the compounded rate, in the absence of any prescribed form or procedure. (ii) Whether the enhanced rate of tax introduced by later notifications could be applied to contracts already covered by an exercised option, and whether the extended period of limitation was available on the facts.

Issue (i): Whether exercise of option under the works contract composition scheme could be inferred from filing of returns and payment of tax at the compounded rate, in the absence of any prescribed form or procedure.

Analysis: Rule 3(1) conferred the substantive option to discharge service tax liability at the compounded rate, while Rule 3(3) required the option to be exercised before payment of tax and to continue for the entire contract. The scheme prescribed no statutory form or separate mode for exercising the option. The assessee had disclosed the scheme in the returns, declared payment at 2%, and the department had accepted those returns without objection. In that setting, the option was capable of being exercised by conduct, and insisting upon a separate written declaration would defeat the scheme. The rule had to be read harmoniously as a whole, and the act of filing returns and paying tax at the compounded rate constituted sufficient compliance.

Conclusion: The option was validly exercised before the relevant cut-off and the assessee was entitled to the compounded rate of 2% for the covered period.

Issue (ii): Whether the enhanced rate of tax introduced by later notifications could be applied to contracts already covered by an exercised option, and whether the extended period of limitation was available on the facts.

Analysis: Once the option under the composition scheme had been exercised and the contract was already in progress, subsequent enhancement of the rate could not be fastened on the pending works contract. The record also showed that the returns disclosed the composition scheme and the tax payment pattern, so there was no suppression of material facts. The show cause notices for the earlier period were issued after delay and the department relied only on the existing records, which did not justify invocation of the extended period. For the later period, the assessee conceded liability at the enhanced rate with interest.

Conclusion: The later enhanced rate did not govern the already covered period, and invocation of the extended period for the earlier period was unsustainable.

Final Conclusion: The appeal succeeded to the extent of recognising the assessee's entitlement to the compounded rate for the relevant prior period, while preserving liability for the later conceded period at the enhanced rate with interest.

Ratio Decidendi: Where a composition scheme prescribes no specific mode for exercising the option, timely disclosure in returns coupled with payment at the prescribed compounded rate is sufficient exercise of the option, and later enhancement of the rate cannot be applied retrospectively to a pending contract absent statutory authority.

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