2024 (1) TMI 893 - AT - Service Tax

Construction services qualify for Works Contract Service benefits under composite scheme despite service tax disputes

M/s. KVJ Builders & Developers P. Ltd. Versus Commissioner of Central Excise and Customs, Cochin Commissionerate, Cochin

CESTAT Bangalore held that appellant's construction services during 2005-2008 constituted Works Contract Service, qualifying for composite scheme ... Abatement under N/N. 1/2006-ST dt. 01/03/2006 - Construction of Complex Services - period 16/06/2005 to 31/03/2008 - HELD THAT:- It is not in dispute that for the period prior to 01/06/2007, the appellant has rendered construction of complex services, which included both material as well as service components; hence squarely fall under the category of ‘Works Contract Service’. Also, during the course of hearing, the appellant has submitted the VAT returns filed by the appellant during the relevant period under Works Contract Service. In these circumstances, denial of benefit of composite scheme under Works Contract Service w.e.f. 01/06/2007, is bad in law and levy of service tax prior to 01/06/2007. when the services are in the nature of ‘Works Contract Service’ also cannot be sustained in view of the judgment of the Hon’ble Supreme Court in the case of Total Environment Building Systems (P) Ltd. Vs. Deputy Commissioner of Commercial Taxes [2022 (8) TMI 168 - SUPREME COURT]. The impugned order set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED Whether services comprising both labour and materials rendered in relation to construction of residential/commercial complex during the period 16/06/2005 to 31/03/2008 are properly classifiable as 'Works Contract Service' so as to preclude levy of service tax under 'Construction of Complex Service' for the period prior to 01/06/2007. Whether the appellant is entitled to the composite scheme treatment applicable to Works Contract Service after introduction of the Works Contract Service levy w.e.f. 01/06/2007, and whether denial of that composite scheme for on-going contracts or for periods prior to 01/06/2007 is legally sustainable. Whether denial of benefit under Notification No. 01/2006-ST (abatement of 67%) and confirmation of demand, interest and penalty under 'Construction of Complex Services' for the entire disputed period is sustainable in view of binding higher-court precedent. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: Construction service versus Works Contract Service Legal framework: Service tax classification depends on nature of service rendered; 'Works Contract Service' encompasses transactions which include both labour and materials forming an indivisible contract, and specific definitions and levy provisions determine chargeability. Precedent Treatment: The Court applies the binding precedent that holds indivisible works contracts comprising both material and service components fall within the ambit of 'Works Contract Service' and that such characterization controls levy consequences. Interpretation and reasoning: The Tribunal accepted facts showing the services rendered included both labour and materials and noted VAT returns filed by the assessee under works contract during the period, supporting the factual and legal conclusion that the transaction was a works contract. Given that the services 'squarely fall under the category of 'Works Contract Service'', levy under the separate head 'Construction of Complex Services' for periods when works contract characterization prevails cannot be sustained. Ratio vs. Obiter: Ratio - where a contract is indivisible and comprises both service and material components, it constitutes Works Contract Service for fiscal classification; any contrary levy under Construction of Complex Services is impermissible. Obiter - ancillary observations about filings and documentary support are illustrative but not determinative beyond the facts. Conclusions: Services in the facts of the case qualify as Works Contract Service; they are not properly subject to service tax as Construction of Complex Services for the period prior to adoption of specific Works Contract levy rules. Issue 2 - Temporal applicability: levy prior to and after 01/06/2007 and effect on ongoing contracts Legal framework: The Finance Act and subsequent notifications introduced Works Contract Service from 01/06/2007; the question arises whether ongoing contracts or services rendered before that date are taxable under the earlier classification or protected by the works contract characterization. Precedent Treatment: The Tribunal follows the Supreme Court decisions (as reiterated in a later Supreme Court pronouncement) which upheld the classification of indivisible works contracts as not chargeable under the separate category of Construction of Complex Services for periods prior to the specific levy on Works Contract Service and refused to revisit the authoritative prior decision. Interpretation and reasoning: The Court observed that where services rendered prior to 01/06/2007 were in the nature of works contracts (indivisible supply of goods and services), they could not be retroactively taxed under the Construction of Complex Services rubric. For the period after 01/06/2007, the appellant had discharged service tax under the composite Works Contract scheme; denial of composite scheme benefits for ongoing contracts not completed by 01/06/2007 was held to be legally unsustainable in light of binding precedent. Ratio vs. Obiter: Ratio - temporal introduction of a distinct Works Contract levy does not justify denying works contract characterization or composite scheme benefits to contracts that are substantively works contracts; taxing such services under an alternate head for earlier periods is impermissible. Obiter - remarks concerning policy implications of reassessing settled law were explanatory. Conclusions: The Tribunal held that service tax levy prior to 01/06/2007 on transactions that are works contracts cannot be sustained; denial of composite scheme treatment post-01/06/2007 for ongoing works contracts was unjustified. Issue 3 - Entitlement to Notification No. 01/2006-ST abatement and consequences of denial (interest/penalty) Legal framework: Notification granting abatement reduces taxable value for certain construction services where the notification applies; entitlement depends on correct classification of the service and applicable scheme at the relevant time. Precedent Treatment: The Tribunal applied controlling Supreme Court authority that preserves the characterization and reliefs determined in those precedents and cautions against unsettling established decisions that have been consistently followed. Interpretation and reasoning: Because the services were found to be works contracts, the levy under Construction of Complex Services and attendant denial of Notification No. 01/2006-ST could not be sustained. The Tribunal relied on the higher court's refusal to revisit prior authoritative rulings and on the factual record (including VAT returns) demonstrating the works contract nature, concluding that the confirmed demand, interest and penalty premised on the alternative classification must be set aside. Ratio vs. Obiter: Ratio - denial of benefits under a notification premised on an incorrect classification cannot be sustained; consequential demands arising from such denial must be set aside. Obiter - policy comments about stare decisis and the broader need for stability in law are persuasive but not determinative of the tax entitlement in this record. Conclusions: The appellant was wrongly denied benefit of the composite/abatement scheme; demands, interest and penalties based on the alternative classification were quashed and the appeal allowed with consequential relief. Cross-references Issues 1-3 are interlinked: classification as Works Contract Service (Issue 1) determines temporal levy consequences (Issue 2) and entitlement to notification/abatement and the validity of consequential monetary demands (Issue 3). The Tribunal's conclusions on each issue rely on and reinforce one another. Disposition The impugned order confirming demand under Construction of Complex Services and denying composite scheme/notification benefits was set aside and the appeal allowed with consequential relief.