2024 (8) TMI 1631 - AT - Service Tax

Appeal allowed; matter remanded to classify services as work contract per Larsen & Toubro precedent, prior demand invalid for misclassification

M/s Ajay Kumar Versus Commissioner of Central Goods & Service Tax, Ghaziabad

CESTAT allowed the appeal, holding the impugned order unsustainable. The matter was remanded to consider classification in light of the SC decision in ... Recovery of service tax with interest and penalty - non-payment of service tax on the construction of hospital - wilful suppression of facts from the Department with the intent to evade the payment of Service Tax leviable - levy of penalty - HELD THAT:- From the order of the CESTAT remanding the matter back to the original authority it is evident that the matter was remanded to examine the matter with regards to classification of service in light of the decision of Hon’ble Apex Court in case of Larsen and Tubro, [2015 (8) TMI 749 - SUPREME COURT]. The services which are not service simpliciter but also involve the transfer in property of goods associated with those services are “Work Contract Services” and liable to be taxed under that category. Impugned order has completely misdirected itself as it ignores the above decision of Hon’ble Apex Court in arriving at the contrary finding even when directed by CESTAT - it is agreed with the submission made by the appellant that the services provided by them are work contract services and should be subject to service tax under that category only. This tribunal has in catena of decisions referred to by the Appellant has held that the show cause notice lays down the foundation of the proceedings initiated, hence demand could have been made within the parameters specified in the show cause notice. As no demand has been made by the revenue by classifying the services provided by the appellant under the category of work contract services, then the same could not have been determined under the said category. As it is found that the entire demand has been made by classifying the said service for the entire period of dispute under the category of “Commercial Industrial and Construction Service”, without reference to any other provision of Finance Act, 1994, both for the period prior to 01.07.2012 or thereafter, in view of the above decision of the Hon’ble Apex Court there are no merits in the impugned order. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the construction activity in dispute is classifiable as 'Commercial or Industrial Construction Service' or as 'Works Contract Service' for the relevant periods. 2. Whether the adjudicating authority, on remand by the Tribunal, complied with the remand direction to re-examine classification in the light of the Supreme Court decision in Larsen & Toubro. 3. Whether the demand, interest and penalties can be sustained when the show cause notice specified classification under one taxable service but the adjudication confirmed demand under that category without invoking alternative taxable entries (i.e., whether confirmation beyond the scope of the show cause notice is permissible). 4. Whether the extended period of limitation and penalties under Sections 73-78 of the Finance Act, 1994 are invokable given the classification and whether malafide/suppressive conduct was established (limitation/penalty issue kept open but relevant to extended period/penalty sustainment). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: Commercial or Industrial Construction Service vs Works Contract Service Legal framework: Definitions in Section 65(25b) and Section 65(105) sub-clauses (zzq) and (zzzza), and Section 65A procedure for classification of services prior to the negative list regime (pre-1.7.2012). Board D.O.F. No. 334/1/2008-TRU (29-2-2008) circular and principles of determining essential character, single composite service, or multiple supplies applied. Precedent treatment: Supreme Court decision in Commissioner of Central Excise & Customs v. Larsen & Toubro Ltd. & Others (Larsen & Toubro) held that composite works contracts involving transfer of property in goods are not service simpliciter and that works contract services are taxable only with effect from 1st June/July 2007 (as applicable) for specified categories. Tribunal and High Court authorities examined similar disputes and applied Larsen & Toubro to hold composite contracts as works contract services. Tribunal decisions (cited) have accepted that where supply of goods forms part of contract, the contract is composite and may be classifiable as works contract service. Interpretation and reasoning: The Tribunal found the statutory definitions of 'Commercial or Industrial Construction Service' and 'Works Contract Service' to be intertwined, and applied Section 65A(2)(c) when a service equally merits classification under two sub-clauses. Under Section 65A(2)(c), where a service cannot be classified under (a) or (b), it is to be classified under the sub-clause which occurs first among the equally meriting sub-clauses. The adjudicating authority had treated the service as 'Commercial or Industrial Construction Service' despite contracts and abatement claims indicating transfer of goods component. The Tribunal accepted the appellant's contention that the contracts are composite and that Larsen & Toubro mandates treating such composite contracts involving transfer of property in goods as works contract service for the relevant periods. Ratio vs. Obiter: Ratio - Where a contract involves transfer of property in goods as part of execution, it constitutes a composite works contract and should be assessed as 'Works Contract Service' not as service simpliciter under 'Commercial or Industrial Construction Service' for periods governed by Larsen & Toubro. Obiter - Observations on the intertwined nature of the definitions and on authorities distinguishing particular fact patterns serve as explanatory guidance but are not necessary to the central holding. Conclusions: The Tribunal concluded that the services in dispute were works contract services (composite) and not properly taxable solely as commercial or industrial construction; consequently, demands framed exclusively under 'Commercial or Industrial Construction Service' are unsustainable in light of Larsen & Toubro and subsequent Tribunal jurisprudence. Issue 2 - Compliance with remand direction and adequacy of remand adjudication Legal framework: Principle that remand orders must be followed and matter re-examined on points specifically directed by the remitting forum; Section 65A and Larsen & Toubro bearings on classification. Precedent treatment: Tribunal had remanded earlier to enable adjudicating authority to examine classification in light of Larsen & Toubro. Authoritative decisions emphasize that remand requires substantive reconsideration, not mere reiteration of prior findings ignoring remand direction. Interpretation and reasoning: The Tribunal found that the Commissioner, on remand, failed to examine classification as directed; instead the Commissioner recorded findings contrary to the remand scope and misapplied Section 65A by preferring the sub-clause order without proper application of Larsen & Toubro and without adequately analysing transfer of property in goods evidenced by contracts and abatement claims. The Tribunal treated the Commissioner's post-remand reasoning as misdirected, noting that the period at issue was post-1.7.2006 and therefore Larsen & Toubro is directly relevant. Ratio vs. Obiter: Ratio - Failure to properly implement remand directions and to re-examine classification in light of controlling precedent renders the remand adjudication unsustainable. Obiter - Detailed critique of the Commissioner's step-by-step statutory analysis functions as explanatory commentary supporting the ratio. Conclusions: The remand adjudication did not comply with the Tribunal's directions; the Commissioner's treatment was erroneous and the Tribunal set aside the impugned order on that basis. Issue 3 - Validity of confirming demand outside show cause notice classification Legal framework: Principles of natural justice and requirement that adjudication proceed within the parameters of the show cause notice; settled law that a person must be put on notice of the contravention alleged to enable defence. Precedent treatment: Multiple Tribunal and Supreme Court decisions (including recent Supreme Court pronouncement upholding Tribunal) affirm that demand cannot be confirmed on a taxable category not specified in the show cause notice; confirmation beyond the scope of the notice is illegal. Interpretation and reasoning: The Tribunal relied on authorities holding that where the show cause notice specifically framed demand under one category, the revenue cannot confirm demand under a different category not invoked in the notice; the impugned notice and proceedings were confined to 'Commercial or Industrial Construction Service' and did not propose demand under 'Works Contract Service', so confirming demand in a category not proposed is impermissible. The Tribunal found the impugned order failed this principle. Ratio vs. Obiter: Ratio - Adjudication confirming demand under a category not pleaded in the show cause notice is illegal; notice must specify the taxable entry relied upon. Obiter - Discussion of specific cases illustrating the principle. Conclusions: The demand confirmed under 'Commercial or Industrial Construction Service' could not be sustained where the true characterization was works contract service and the show cause notice did not invoke alternate entries; consequent setting aside of demand follows. Issue 4 - Extended period, interest and penalties under Sections 73-78 Legal framework: Provisions for demand, extended limitation (proviso to Section 73(1)), interest under Section 75 and penalties under Sections 76-78 of the Finance Act, 1994. Legal standard for invoking extended period requires willful suppression or fraud; classification and scope of demand affect applicability. Precedent treatment: Authorities hold extended limitation and penalty require culpability (suppression/malice) and that interpretational disputes of law may negate malafide; courts have declined extended period where issue is purely interpretational and no suppression established. Interpretation and reasoning: The Tribunal decided the appeal on classification and show cause notice grounds and expressly refrained from adjudicating the limitation and penalty issues. It noted that because the demand was unsustainable on classification and notice grounds, it need not address extended period, interest or penalties. The record shows revenue alleged willful suppression but the Tribunal did not make a finding endorsing such culpability given reversal on primary grounds. Ratio vs. Obiter: Obiter - Observations that extended period and penalties were not addressed because the primary classification ground disposed of appeal; no definitive ratio as to applicability of Sections 73-78 in this factual matrix is laid down. Conclusions: Since the Tribunal allowed the appeal on classification and notice grounds, it did not uphold the extended period, interest and penalties; those issues remain undecided and were not necessary to the decision.