2009 (3) TMI 423 - AT - Service Tax

Tribunal Overturns Order, Exempts Pre-2007 Service Tax

The Tribunal set aside the impugned order, allowing the appeal with consequential relief. It held that no Service Tax was leviable on works contracts ... Liability of works contract to service tax - interpretation of Notification Explanation - valuation-inclusion of materials supplied by service recipient - scope of value of taxable service under section 67Liability of works contract to service tax - Whether services involved in execution of works contract were liable to service tax for the period 1-10-2005 to 31-3-2006 - HELD THAT: - The Tribunal noted that the statutory category 'Works Contract Service' (services involved in execution of works contract) was introduced with effect from 1-6-2007. The period in dispute is 1-10-2005 to 31-3-2006. Consequently, works contracts could not, as a matter of law, be subjected to service tax prior to 1-6-2007. The appellants' registration under works contract for sales tax purposes and the temporal scope of the statutory levy foreclose liability for the earlier period. The Tribunal therefore found that no service tax was leviable on the works contract activity carried out by the appellant during the stated period and that the impugned order confirming demand on this ground lacked merit. [Paras 4]Impugned order set aside; no service tax leviable on works contract for 1-10-2005 to 31-3-2006 and appeal allowed with consequential relief.Interpretation of Notification Explanation - valuation-inclusion of materials supplied by service recipient - scope of value of taxable service under section 67 - Whether the Explanation to the Notification required inclusion of the value of goods and materials supplied by the service recipient in the gross amount charged for computing service tax - HELD THAT: - The Tribunal examined the Explanation which defines 'gross amount charged' to include the value of goods and materials 'supplied or provided or used by the provider of the construction service'. The appellants contended that the words 'supplied', 'provided' and 'used' must be read as referring to materials of the service provider and not materials supplied by the service recipient, relying on a stay/interim interpretation by the Madras High Court in Larsen & Toubro. The Tribunal observed that insisting on inclusion of materials supplied by the service receiver would be contrary to the valuation mechanism in section 67, which identifies the gross amount charged by the service provider as the value of taxable services and provides for specified exclusions. On this ground also the Tribunal found the impugned demand unsustainable. [Paras 4]Inclusion of value of materials supplied by the service recipient for computing taxable value is not maintainable; the impugned order is without merit on this ground.Final Conclusion: The appeal is allowed. The order of the Commissioner confirming service tax and imposing interest and penalties for the period 1-10-2005 to 31-3-2006 is set aside: works contracts were not liable to service tax prior to 1-6-2007, and the inclusion of materials supplied by the service recipient in valuation is not sustainable under the valuation provisions. Issues Involved:1. Wrongful payment of Service Tax under incorrect categories.2. Applicability of Service Tax on works contracts prior to 1-6-2007.3. Inclusion of the cost of materials supplied by the service recipient in the taxable value.4. Penalties imposed under sections 76 and 77 of the Finance Act, 1994.5. Interest demanded under section 75 of the Finance Act, 1994.Issue-wise Detailed Analysis:1. Wrongful Payment of Service Tax under Incorrect Categories:The appellants argued that they had wrongly paid Service Tax under the categories of 'construction of residential complex' and 'commercial or industrial construction service'. They claimed to be works contractors liable to Sales Tax under the Kerala General Sales Tax Act, 1957, or Kerala Value Added Tax Act, and not under the Service Tax regime. They contended that works contracts were made liable for Service Tax only from 1-6-2007 onwards as per section 65(105)(zzzza). Therefore, they sought a refund of the Service Tax paid for the period prior to 1-6-2007.2. Applicability of Service Tax on Works Contracts Prior to 1-6-2007:The appellants cited several judicial decisions, including *Diebold Systems (P.) Ltd. v. CST* and *Daelim Industrial Co. Ltd. v. CCE*, to support their claim that works contracts involving supply of goods and materials, and erection, installation, and commissioning services, were only liable for Service Tax from 1-6-2007. The Tribunal agreed, noting that the definition of works contract was introduced in the Service Tax net from 1-6-2007, and thus, no Service Tax was leviable on works contracts for the period from 1-10-2005 to 31-3-2006.3. Inclusion of the Cost of Materials Supplied by the Service Recipient:The show-cause notice issued to the appellants argued that the cost of materials supplied by the service recipient should be included in the taxable value. The appellants contended that the relevant Notifications (No. 15/2004-ST and No. 18/2005-ST) did not provide for such inclusions. They relied on the decision of the Madras High Court in *Larsen & Toubro Ltd. v. Union of India*, which interpreted the explanation to the Notification to mean that the value of goods supplied by the client should not be included. The Tribunal agreed with this interpretation, stating that including the cost of materials supplied by the service recipient would be contrary to section 67 of the Finance Act, 1994.4. Penalties Imposed under Sections 76 and 77 of the Finance Act, 1994:The appellants argued that penalties under sections 76 and 77 were not sustainable, as they had a bona fide belief that sub-contractors were not required to pay Service Tax when the main contractor had paid it. They cited section 80 of the Finance Act, which provides that no penalties shall be imposed if the assessee proves reasonable cause for failure. The Tribunal found merit in this argument and noted that no reasons were adduced for imposing the penalties.5. Interest Demanded under Section 75 of the Finance Act, 1994:The demand for interest under section 75 was also contested by the appellants. Given the Tribunal's findings that no Service Tax was leviable for the period in question and that the inclusion of the cost of materials supplied by the service recipient was incorrect, the demand for interest was also deemed unsustainable.Conclusion:The Tribunal concluded that the impugned order had no merits and set it aside. The appeal was allowed with consequential relief, emphasizing that no Service Tax was leviable on works contracts for the period prior to 1-6-2007, and the cost of materials supplied by the service recipient should not be included in the taxable value. The penalties and interest demanded were also found to be unsustainable.