Works contract classification and composition scheme compliance upheld where payment and return disclosures showed valid exercise of option.

A composite hotel construction contract involving both materials and services was treated as a works contract because the agreement and debit notes showed transfer of property in goods alongside construction activity. The Tribunal also held that the works contract composition benefit was available even without a separate written option in a prescribed format, as payment at the composition rate and disclosure in the returns amounted to sufficient compliance. On that basis, the demand based on alleged misclassification and short payment was not sustainable, and the related interest and penalty also fell.

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Issues: (i) Whether the construction contract for a hotel was correctly classified as works contract service. (ii) Whether the assessee was entitled to the benefit of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 despite no separate written option, and whether the related demand could be sustained.

Issue (i): Whether the construction contract for a hotel was correctly classified as works contract service.

Analysis: The agreement and debit notes showed a composite arrangement involving construction and supply of materials, with transfer of property in goods alongside services. The contract satisfied the essential characteristics of a works contract under the statutory definition, and the Tribunal relied on the settled distinction between a works contract and a service simpliciter. The nature of the project did not justify reclassification merely as commercial construction for the purpose of the dispute.

Conclusion: The classification as works contract service was upheld in favour of the assessee.

Issue (ii): Whether the assessee was entitled to the benefit of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 despite no separate written option, and whether the related demand could be sustained.

Analysis: The Tribunal held that the absence of a prescribed statutory format for exercising the option meant that payment of service tax at the composition rate, reflected in the returns and supported by the records, constituted sufficient compliance. It also found substantive compliance with the requirements regarding declared value, and accepted the explanation that the debit-note values had either not been received or had been duly accounted for under the applicable tax regime. On that basis, the demand raised on alleged misclassification and related short payment was not sustainable.

Conclusion: The assessee was entitled to the composition benefit and the demand was rejected.

Final Conclusion: The revenue's challenge failed because the contract was treated as a works contract and the composition-rate payment was accepted as valid compliance, leaving no sustainable basis for the demand, interest, or penalty.

Ratio Decidendi: In the absence of a prescribed mode or format for exercising an option under the works contract composition scheme, payment of service tax at the composition rate and disclosure in the returns can amount to sufficient exercise of that option, provided the contract is substantively a works contract.

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