Works contract composition scheme rate change cannot apply retrospectively to a contract already covered by a valid option.

Where an assessee had validly opted in advance for payment of service tax under the works contract composition scheme, that option continued for the full duration of the contract and could not be withdrawn midstream. A later enhancement of the rate under Notification No. 07/2008-S.T. could not be applied to a pending works contract after the option had already been exercised, because the change in tax rate operated prospectively and did not disturb the earlier elected scheme. The demand for differential service tax on the revised rate was therefore unsustainable, and the impugned orders were set aside with consequential relief.

---

---

Issues: Whether an assessee who had opted in advance for payment of service tax under the works contract composition scheme could be subjected to the enhanced rate introduced during the currency of the works contract.

Analysis: The assessee had exercised the option under Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and the option, once exercised, continued till completion of the works contract and could not be withdrawn. The enhanced rate introduced by Notification No. 07/2008-S.T. dated 01.03.2008 could not be applied to a pending works contract after the option had already been exercised. The Tribunal followed the principle that a change in tax rate operates prospectively and cannot disturb an ongoing contract governed by the earlier opted scheme.

Conclusion: The demand for differential service tax based on the revised rate was unsustainable. The issue is decided in favour of the assessee.

Final Conclusion: The impugned orders were set aside and the appeals were allowed with consequential relief.

Ratio Decidendi: Where a taxpayer has validly exercised the option to pay service tax under the works contract composition scheme, the applicable rate continues for the entire works contract and a later enhancement of the rate cannot be applied retrospectively to that pending contract.

---