Works contract service composition scheme: option denied where service tax previously paid, composition available only if eligible option exercised

The note addresses eligibility for the composition scheme for works contract services, holding that a provision disqualifies taxpayers who have already paid service tax on a works contract from subsequently opting into composition. The interpretation applies a strict construction of the eligibility provision, concluding that payment of service tax in respect of a works contract excludes entitlement to exercise the option for composition. The composition benefit is therefore available only where an option is validly exercised and the taxpayer meets the specified eligibility conditions, and it applies solely to services falling within the prescribed definition of works contract service.

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Issues: Whether the Circular No.98/1/2008-ST (Reference Code 097.03 dated 04.01.2008) which denies entitlement to opt for the Works Contract composition scheme where service tax had been paid prior to 01.06.2007 is contrary to Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, Section 65(105)(zzzza) of the Finance Act, 1994, or otherwise ultra vires.

Analysis: The court examined the statutory framework: (a) Clause (zzzza) inserted in Section 65(105) w.e.f. 01.06.2007 which defines "works contract" service; (b) Rule 2(c) and Rule 3 of the 2007 Rules establishing a composition scheme and expressly requiring that the option to avail the scheme be exercised prior to payment of service tax and that the option apply to the entire works contract (Rule 3(3)); (c) Section 65A principles for classification of taxable services and Sections 6667 concerning levy and valuation; and (d) rule-making powers under Sections 93 and 94. The impugned circular (Reference Code 097.03) states that a service provider who had paid service tax prior to 01.06.2007 under earlier classifications (eg. clauses (zzd), (zzq), (zzzh)) cannot reclassify the same composite contract as "works contract" post 01.06.2007 to avail the composition scheme. The court analysed Rule 3(3) which precludes exercising the option for the composition scheme where service tax has already been paid in respect of the works contract, and held that the circular merely reiterates the eligibility criterion contained in Rule 3(3) and aligns with the statutory classification principles in Section 65A.

Conclusion: The challenge to the impugned circular fails; the circular is in conformity with Rule 3(3) of the 2007 Rules and relevant provisions of the Finance Act, 1994. The petitioner is not entitled to the composition scheme where service tax had been paid prior to 01.06.2007. The conclusion is in favour of Revenue.

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