Works contract service tax demand limited to composition basis; extended limitation failed for lack of suppression
In a composite construction classification dispute, the extended limitation period for service tax was held unsustainable because the appellant had disclosed the nature of services, paid tax under the then-prevailing classification with abatement, and there was no proved suppression, fraud, or wilful misstatement. The demand for the extended period was therefore set aside. For the normal period, once the activity was treated as works contract service, tax had to be quantified on the composition basis rather than on the full gross amount, with credit for tax already paid. The normal-period demand survived only to the extent of the differential amount, and penalties were not sustainable.
Issues: (i) Whether the invocation of the extended period for demanding service tax was sustainable. (ii) Whether the service tax demand had to be quantified on the basis of the Works Contract Composition Scheme, and whether the differential demand for the normal period was sustainable.
Issue (i): Whether the invocation of the extended period for demanding service tax was sustainable.
Analysis: The dispute concerned classification of composite construction activity, a subject that remained unsettled until the law was clarified by the Supreme Court. The appellant had disclosed the nature of the services, paid tax under the then-prevailing classification with abatement, and reflected the relevant particulars in returns and records. On these facts, no positive act of suppression, fraud, or wilful misstatement was established to justify the extended limitation period.
Conclusion: The invocation of the extended period was not sustainable and the demand for the extended period was liable to be set aside.
Issue (ii): Whether the service tax demand had to be quantified on the basis of the Works Contract Composition Scheme, and whether the differential demand for the normal period was sustainable.
Analysis: Once the activity was treated as works contract service, the levy could not be sustained on the entire gross amount by denying the benefit of the composition mechanism merely because a separate option had not been formally obtained. The quantification had to be made on the composition basis, and after giving credit for tax already paid, only a small differential remained for the normal period. Penalties could not survive where the extended period itself failed and the dispute was essentially interpretational.
Conclusion: The demand for the normal period was sustainable only to the extent of the differential amount worked out on the composition basis, while the excess demand and penalties were not sustainable.
Final Conclusion: The appeal succeeded in part. The extended-period demand and penalties were set aside, while the service tax liability for the normal period was restricted to the differential amount computed on the composition basis.
Ratio Decidendi: In a classification dispute involving composite construction activity, the extended period cannot be invoked absent proof of suppression or wilful misstatement, and once the activity is treated as works contract service, quantification must reflect the applicable composition mechanism rather than taxing the gross amount in full.
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