Construction services with materials and service correctly classified under Works Contract Service despite partial payment

The CESTAT Chennai held that construction services involving both materials and service rendition are correctly classifiable under Works Contract Service. The appellant had paid service tax on 33% of consideration but was liable for the full amount under WCS classification. The extended period demand was set aside as the classification issue was interpretational and no suppression was established. Only the normal period demand (April-June 2012) was upheld. The department's denial of composition scheme benefit was rejected, following precedent that permission is not mandatory. After applying composition scheme and crediting already paid amounts, appellant was liable for differential service tax of Rs.5,759 with interest for normal period only. Penalties were set aside. Appeal allowed in part.

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Issues Involved:
1. Classification of service under Works Contract Service (WCS) for the disputed period.
2. Quantification of service tax demand.
3. Invocation of the extended period for demand.

Comprehensive Issue-Wise Analysis:

Issue 1: Classification of Service under WCS
The appellant, a proprietary concern, provided construction services and discharged service tax under Construction of Complex Service (CCS) by claiming 67% abatement as per Notification No.1/2006-ST. The department reclassified the services under WCS, arguing that the constructions were composite in nature involving transfer of property in goods. The appellant did not dispute this reclassification, acknowledging that composite contracts involving transfer of property in goods should be classified under WCS as per the Supreme Court's decision in CCE Vs L & T Ltd. 2015 (39) STR 913 SC. Thus, the classification under WCS was accepted as correct.

Issue 2: Quantification of Service Tax Demand
The appellant argued that the department's quantification of service tax was erroneous as it did not account for the value of materials, demanding tax on the entire value received. The department's method excluded only the land value, leading to an incorrect demand on both service and goods value. The appellant contended that the benefit of either Rule 2A of the Service Tax (Determination of Value) Rules, 2006, or the composition scheme should be extended to avoid taxing the transfer of property in goods, which is constitutionally impermissible. The Tribunal agreed, citing cases like Bridge & Roof Co. (I) Ltd. Vs CCE and ABL Infrastructure Pvt. Ltd. Vs CCE, which held that the composition scheme's benefits should be extended even if not initially opted for. The Tribunal concluded that the quantification should be done under the composition scheme, resulting in a differential service tax liability of Rs.5,759 for the normal period.

Issue 3: Invocation of Extended Period
The appellant challenged the extended period's invocation, arguing that the classification issue was under significant confusion until the Supreme Court's decision in the L & T case. The appellant had classified services under CCS based on a bona fide belief and had disclosed all necessary details in their ST-3 returns. The Tribunal found no evidence of fraud, suppression of facts, or willful misstatement by the appellant. The department's reclassification was based on the appellant's disclosed figures, and there was no positive act of suppression. Thus, the demand for the extended period was deemed unsustainable and was set aside.

Conclusion:
The Tribunal modified the impugned order, confirming the service tax for the normal period while setting aside the demand for the extended period. The quantification of service tax was directed to be done under the composition scheme, and the penalties were entirely set aside. The appeal was partly allowed with consequential reliefs as applicable.

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