Supreme Court overturns CESTAT decision; assessee liable for service tax u/r 2A. Case remitted for re-computation.

The SC allowed the appeal, overturning the CESTAT's decision favoring the respondent. It ruled that the assessee must pay service tax based on Rule 2A of the Service Tax (Determination of Value) Rules, 2006, and avail CENVAT Credit accordingly. The demand for January 2007 to May 2007 was deemed unsustainable. The case was remitted to the CESTAT for re-computation of demands and to address the limitation issue within three months. No costs were ordered.

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Issues Involved:
1. Classification of Services and Availment of CENVAT Credit
2. Applicability of Rule 2A and Composition Scheme
3. Valuation of Taxable Services under Section 67 of the Finance Act, 1994
4. Extended Period of Limitation

Summary:

1. Classification of Services and Availment of CENVAT Credit:
The respondent-assessee was engaged in manufacturing and construction services, availing CENVAT Credit on excise duty, capital goods, and input services. The Department alleged that the services should be classified under "Works Contract Service" instead of "Commercial or Industrial Construction Services" and issued a Show Cause Notice for inadmissible CENVAT Credit of Rs. 112,60,92,760/- on building material during June 2007 to March 2012. The Tribunal allowed the appeal by the respondent, setting aside the Order-in-Original, which disallowed the CENVAT Credit.

2. Applicability of Rule 2A and Composition Scheme:
The Revenue contended that the services rendered by the respondent amounted to Works Contract, chargeable under Section 65(105)(zzzza) of the Finance Act, 1994, and that the respondent should either follow Rule 2A of the Service Tax (Determination of Value) Rules, 2006, or adopt the Composition Scheme, which do not allow the availment of CENVAT Credit on inputs. The Tribunal held that the composition scheme is optional and Rule 2A is subject to Section 67 of the Act, 1994, thereby allowing CENVAT Credit on inputs.

3. Valuation of Taxable Services under Section 67 of the Finance Act, 1994:
The Supreme Court held that services rendered by the respondent are classified as 'works contract service' under the Finance Act, 1994, effective from 01.06.2007. The valuation of taxable services should be as per Rule 2A, which excludes VAT or sales tax on the transfer of property in goods. The Court ruled that the assessee cannot take the total contract value, including both goods and services, for service tax and avail CENVAT Credit on the entire amount, as it would render Rule 2A and the Composition Scheme otiose.

4. Extended Period of Limitation:
The Supreme Court noted that the issue of the extended period of limitation was not decided by the CESTAT. The Court remitted the matter back to the CESTAT to decide on the limitation issue and re-compute the demands in terms of Rule 2A.

Conclusion:
The Supreme Court allowed the appeal, quashing the CESTAT's judgment that favored the respondent. It held that the assessee must pay service tax on the value of services as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006, and avail CENVAT Credit accordingly. The demand for the period January 2007 to May 2007 was deemed unsustainable. The matter was remitted back to the CESTAT for re-computation of demands and to decide the issue of limitation within three months. No costs were ordered.

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