2024 (3) TMI 454 - AT - Service Tax

Appellant's failure to file composition scheme option letter results in demand confirmation but limitation bars penalties

CESTAT Kolkata held that appellant failed to file letter indicating option for Composition Scheme under Works Contract Service. Demand for October 2005 to ... Works Contract Scheme - Appellant has failed to file any letter indicating their option to opt for Composition Scheme - time limitation - HELD THAT:- This Bench in the case of M/S HEAVY ENGINEERING CORPORATION LIMITED VERSUS COMMISSIONER OF CGST & EXCISE, RANCHI [2023 (3) TMI 1393 - CESTAT KOLKATA] has held Admittedly, no demand has been made for the period prior to 01.06.2007 under the “Works Contract Service”. Therefore, the demand of service tax from the appellants does not survive prior to 01.06.2007 - Therefore, the demand for the period October 2005 to 31/5/2007 is set aside. The Appellant would be eligible for consequential relief, if any, as per law. Demand for the period 01/06/2007 to March 2010 - Time limitation - HELD THAT:- The Appellant has been paying the Service Tax under the category of “Works Contract” under Composition Scheme and reflecting the same in the ST-3 Returns. The Department did not raise any query about the same till the present Show Cause Notice was issued on 08/2/2010 - Admittedly, the Appellant’s main business is to supply the Fire Equipment and erect and Commissioning the same in the premises. Therefore factually it gets proved that they were providing Works Contract Service only. If the Appellant is not paying VAT on the same, it is for the VAT Authority to take proper action against them. This cannot be the basis for confirmation of the demand by the Service Tax Authorities. Therefore, the confirmed demand on account of “Works Contract”, wherein the benefit of composition was not given, is also required to be set aside on account of limitation. No penalties are to be imposed. In case, any excess Service Tax has been paid by the Appellant, the same is required to be refunded as per statutory provisions. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the supply, erection and commissioning of fire safety equipment constituted 'Works Contract Service' or was exigible as 'Erection, Installation and Commissioning Service' for periods prior to 01.06.2007. 2. Whether demands for service tax for the period prior to 01.06.2007 (extended period) are sustainable when the activity is correctly classified as Works Contract Service. 3. Whether the appellant was entitled to composition scheme rates for Works Contract Service for the period 01.06.2007 to March 2010 despite absence of a formal written option, where returns (ST-3) filed by the appellant recorded payment under Works Contract composition. 4. Whether non-payment/receipt of VAT shown against invoices is a valid ground for denying the composition scheme benefit under Works Contract Service for central service tax purposes. 5. Quantification issue: correct rate and basis for computing service tax (including bifurcation of material and service value and applicability of composition rates) for the period 01.06.2007 to March 2010 and treatment of amounts already paid, interest and penalties. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: Works Contract Service vs. Erection/Commissioning Service Legal framework: The classification of combined supply of goods and attendant services (supply plus erection/commissioning) is governed by the scheme that recognizes 'Works Contract Service' where supply with execution/installation forms a single composite contract; separate head of Erection/Installation/Commissioning applies where the service component is distinct and taxable under that category for the relevant period. Precedent Treatment: An earlier decision of the same Bench interpreted comparable scope of works and concluded that where materials are supplied along with execution, the appropriate classification is Works Contract Service; conclusions in higher court authority on the distinction were applied to pre- and post- 01.06.2007 regimes. Interpretation and reasoning: On the facts the commercial activity was the supply of fire equipment together with erection and commissioning under a single consolidated contract. Factual character demonstrates a composite works contract rather than a purely stand-alone erection/commissioning service. Therefore the proper classification is Works Contract Service. Ratio vs. Obiter: Ratio - composite supply of goods with erection under a single contract is Works Contract Service for taxation purposes; the holding as applied to the present facts is authoritative for the decision. Conclusion: The service rendered is Works Contract Service; demands framed as Erection/Commissioning for the pre-01.06.2007 period are not sustainable. Issue 2 - Limitation: Demand for period prior to 01.06.2007 Legal framework: Taxability of Works Contract Service under central service tax came into effect from 01.06.2007; services classified otherwise before that date are not exigible under Works Contract head for earlier periods. Precedent Treatment: The Bench's prior ruling applying the higher court's exposition supports that demands prior to 01.06.2007, when the activity is correctly a works contract, cannot be sustained under Erection/Installation/Commissioning category. Interpretation and reasoning: Since the activity properly falls under Works Contract Service, and that service head was not leviable before 01.06.2007, the confirmed demand for October 2005 to 31.05.2007 is legally untenable and must be set aside. The appellant is entitled to consequential relief as per law. Ratio vs. Obiter: Ratio - where correct classification renders a period non-exigible, extended-period demands for that period must be set aside. Conclusion: Demands for the extended/pre-01.06.2007 period are set aside as not sustainable. Issue 3 - Entitlement to Composition Scheme without formal written option but with return filings Legal framework: Composition scheme for Works Contract Service imposes an option requirement; ordinarily a formal exercise of option is necessary to claim composition treatment. Filing of statutory returns and payment under a particular head are evidentiary indicia of the taxpayer's tax position. Precedent Treatment: A higher court authority has held that benefit of composition cannot be denied merely because the assessee did not file a separate written option where conduct and returns demonstrate the availed regime; the Tribunal has followed this approach in analogous factual matrices. Interpretation and reasoning: The appellant had ST-2 registration amended to include Works Contract Services and filed ST-3 returns showing payment under Works Contract composition rates; the department did not query this treatment until issuance of the show cause. On facts the appellant's filings and payments sufficiently demonstrate exercise of composition option for the relevant period. Ratio vs. Obiter: Ratio - formal absence of a separate letter opting into composition cannot, in presence of consistent returns and payments under composition, operate to deny the scheme; this is a determinative holding applied to the present appeal. Conclusion: The confirmed demand framed ignoring the appellant's composition treatment under Works Contract is unsustainable and must be set aside for the period 01.06.2007 onwards to the extent composition rates apply. Issue 4 - Relevance of VAT non-payment/verification to denial of composition benefit Legal framework: State VAT liability is distinct; entitlement to central composition regime is not contingent on the department's record of VAT payment, although statutory schemes may require compliance with state law where explicitly provided. Precedent Treatment: The Tribunal has held that alleged non-payment of VAT is an issue for VAT authority and cannot form the basis for denying central service tax benefits unless statutory nexus is established. Interpretation and reasoning: The adjudicating authority's reliance on lack of proof of VAT payment to deny Works Contract composition is not a valid ground for denying central tax treatment; duties of VAT enforcement rest with the state authority and cannot be transmuted into a reason for confirming central demands absent statutory linkage. Ratio vs. Obiter: Ratio - inability to demonstrate VAT payment is not a standalone justification for central tax denial; this is a determinative rule for the facts. Conclusion: VAT compliance issues do not justify confirmation of the service tax demand or denial of composition scheme benefits by the service tax authority. Issue 5 - Quantification, rates, offsets, interest and penalties Legal framework: Where composition scheme applies, specified lower rates are to be used for computation; payment already made must be appropriated; shortfalls attract tax and interest; penalties require separate justification and cannot be mechanically imposed where appellant's conduct does not warrant penalty. Precedent Treatment: The Tribunal has remanded quantification issues for calculation consistent with application of composition rates and appropriation of amounts already paid, while disallowing penalties where no culpable suppression is found. Interpretation and reasoning: The Tribunal set aside demands for pre-01.06.2007 period and held that for 01.06.2007-March 2010 the adjudicating authority must recompute tax liability applying composition rates, adjust amounts already paid, determine any short payment with interest, and refund any excess; imposition of penalties is not warranted given factual findings regarding classification, returns and payments. Ratio vs. Obiter: Ratio - remand for correct quantification under composition rates with appropriation of payments and interest where applicable; prohibition on penalty imposition under these facts is a binding outcome for the appeal. Conclusion: Matter remitted for recomputation of tax for 01.06.2007-March 2010 on composition basis; appellant to pay any shortfall with interest; any excess to be refunded; no penalties to be imposed.