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Issues: (i) Whether the construction of a shopping mall was classifiable as commercial or industrial construction service or as works contract service, and from which date service tax could be levied; (ii) whether the value of free-supply materials was includible in the gross amount for service tax under the composition scheme; (iii) whether the extended period of limitation and consequential penalty were invokable.
Issue (i): Whether the construction of a shopping mall was classifiable as commercial or industrial construction service or as works contract service, and from which date service tax could be levied.
Analysis: The contract was a composite indivisible works contract involving supply of materials, labour, supervision and allied elements. Such contracts could not be vivisected and taxed as service contracts simpliciter for the period prior to 01.06.2007. The statutory regime for works contract service came into force only from 01.06.2007, and the levy could operate only from that date for such composite contracts.
Conclusion: The activity was taxable as works contract service only from 01.06.2007, and no service tax could be sustained for the prior period under commercial or industrial construction service.
Issue (ii): Whether the value of free-supply materials was includible in the gross amount for service tax under the composition scheme.
Analysis: The composition scheme initially used the expression gross amount charged, and the later explanation making free supplies includible took effect only from 07.07.2009. For contracts commenced before that date, the value of free supplies could not be added to the taxable value for composition levy. The appellant was otherwise eligible for the composition scheme, subject to redetermination of liability on the correct legal basis.
Conclusion: The value of free-supply steel was not includible for the period in question, and the demand on that count was set aside.
Issue (iii): Whether the extended period of limitation and consequential penalty were invokable.
Analysis: The appellant did not obtain timely registration, did not file returns and did not seek clarification despite undertaking the work and receiving consideration. These facts amounted to suppression with intent to evade duty, justifying invocation of the extended period and supporting penalty under section 78.
Conclusion: The extended period was rightly invoked and penalty under section 78 was sustainable, while penalty under section 76 was set aside in view of the section 78 penalty.
Final Conclusion: The matter required remand for redetermination of service tax liability and penalty on the basis of works contract composition rules, with partial relief to the appellant on taxability of the pre-07.07.2009 free-supply component and on penalty under section 76.
Ratio Decidendi: A composite indivisible works contract is taxable under the works contract regime only from 01.06.2007, and free supplies are not includible in the composition value for contracts commenced before the operative date of the relevant explanation.
Works contract taxation begins from the statutory date; free supplies were excluded, but suppression sustained extended limitation and penalty.
A composite indivisible works contract for shopping mall construction could be taxed only under the works contract regime from 01.06.2007, so service tax was not sustainable for the earlier period under commercial or industrial construction service. Under the composition scheme, the value of free-supply materials was not includible for contracts commenced before 07.07.2009, so the demand on that component was set aside. Failure to obtain registration, file returns, or seek clarification amounted to suppression with intent to evade, justifying the extended limitation period and penalty under section 78, while the section 76 penalty was set aside. The matter was remanded for redetermination on the correct basis.
Composite indivisible works contract - Free supply materials - gross value for charging service tax - Extended period of limitation - Apportionment of goods and services - Prospective operation of statutory explanation - failure to assess due service tax and pay the same and non-filing of ST-3 returns for the service - Whether activity of construction of shopping mall by the appellant is classifiable under “Civil and Industrial Construction Service or under Works Contract Service”? - HELD THAT:- There was no charging section specifically for levying service tax only on works contract, and measure of tax with service element derived from gross amount charged for the works contract less value of property in goods transferred in execution of works contract. Therefore, composite contracts which cannot be vivisected have to be dealt with under Works Contract service which is liable to be taxed w.e.f. 01.06.2007 and not prior to that, as there was no such scheme to levy service tax before enactment of Finance Act, 2007 which specifically made such contracts liable to service tax. We hold that indivisible composite contract awarded to the appellant in this case, is leviable to service tax under works contract service only w.e.f 01.06.2007. For the prior period, it will not be leviable to service tax as held by the lower authorities under civil or industrial construction service. Accordingly, we hold that the demand of service tax against the appellant is sustainable only for the period with effect from 01.06.2007. As regards Rule 3(2), we find that the appellant had wrongly taken Cenvat credit of Rs.2,866/- in August 2007 which they on their own, paid in 2011 and thus, it can be taken as non availment of Cenvat Credit by the appellant. As the appellant satisfies both the rules, we hold that they are eligible to pay service tax under Works Contract (Composition Scheme For Payment of Service Tax) Rules, 2007. Regarding free supply materials, we find that CBIC vide Circular No. No.150/1/2012-ST dated 08.02.2012 has clarified that the meaning of the expression, “Gross Amount” appearing in Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 is qualified by the explanation inserted in the said Rule w.e.f. 07.07.2009. Since, explanation is clarificatory and prospective in nature, inclusion of value of free of cost supplies of goods and services in or in relation to the execution of Works Contract in the gross amount for the purpose of payment of service tax on Works Contract in the Composition Scheme, is a legal requirement only w.e.f. 07.07.2009 when the explanation became part of Rule 3(1). It therefore clarifies that where execution of Works Contract has commenced prior to 07.07.2009, or where any payment (except payment through credit or debit) has been made towards a Works Contract prior to 07.07.2009, then in those cases, gross amount for the purpose of payment of service tax does not include the value of free of costs supplies. In view of the above, of service tax on free supply steel valued at Rs. 2,56,67,261/- is not legally correct and therefore, the same is set aside. As regards invocation of extended period of limitation, we find that this issue has been discussed in detail by both the lower authorities. The appellant was awarded a Contract for construction of mall in July 2006 and the work began in October-2006. They neither approached the department for clarification whether their activity is liable to service tax nor did they obtain registration and filed ST-3 returns. They took registration in July, 2007 when department, initiated investigation against them on the basis of credible intelligence. We therefore, agree with the lower authorities that the appellant has suppressed his turn over from the department with intent to evade payment of service tax and therefore, proviso to Section 73(1) has correctly been invocated for demanding the service tax for the larger period. For the same reasons, we also uphold penalty on the appellant under Section 78 of the Finance Act, 1994. Thus, we deem it fit to remit the matter to the Adjudicating Authority to redetermine service tax liability on the appellant by extending the benefit of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. He shall also redetermine penalty amount on the appellant under Section 78 of the Finance Act,1994. We uphold penalty of Rs.5,000/- under Section 77(2) of the Finance Act, 1994 for failure to file ST-3 returns in time and also for delayed payment of service tax. We however, set aside penalty on the appellant under Section 76 of the Finance Act, 1994 as penalty under Section 78 is held imposable. Appeal is disposed of by remand in above terms.