2026 (1) TMI 852 - AT - Service Tax

Indivisible composite contract classified as Works Contract Service; liability only from 01.06.2007, free materials excluded pre-07.07.2009, some penalties upheld

Dominant issue: classification of an indivisible composite contract as Works Contract Service versus Civil/Industrial Construction Service - reasoning: no ... Composite indivisible works contract - Free supply materials - gross value for charging service tax - Extended period of limitation - Apportionment of goods and services - Prospective operation of statutory explanation - failure to assess due service tax and pay the same and non-filing of ST-3 returns for the service - Whether activity of construction of shopping mall by the appellant is classifiable under “Civil and Industrial Construction Service or under Works Contract Service”? - HELD THAT:- There was no charging section specifically for levying service tax only on works contract, and measure of tax with service element derived from gross amount charged for the works contract less value of property in goods transferred in execution of works contract. Therefore, composite contracts which cannot be vivisected have to be dealt with under Works Contract service which is liable to be taxed w.e.f. 01.06.2007 and not prior to that, as there was no such scheme to levy service tax before enactment of Finance Act, 2007 which specifically made such contracts liable to service tax. We hold that indivisible composite contract awarded to the appellant in this case, is leviable to service tax under works contract service only w.e.f 01.06.2007. For the prior period, it will not be leviable to service tax as held by the lower authorities under civil or industrial construction service. Accordingly, we hold that the demand of service tax against the appellant is sustainable only for the period with effect from 01.06.2007. As regards Rule 3(2), we find that the appellant had wrongly taken Cenvat credit of Rs.2,866/- in August 2007 which they on their own, paid in 2011 and thus, it can be taken as non availment of Cenvat Credit by the appellant. As the appellant satisfies both the rules, we hold that they are eligible to pay service tax under Works Contract (Composition Scheme For Payment of Service Tax) Rules, 2007. Regarding free supply materials, we find that CBIC vide Circular No. No.150/1/2012-ST dated 08.02.2012 has clarified that the meaning of the expression, “Gross Amount” appearing in Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 is qualified by the explanation inserted in the said Rule w.e.f. 07.07.2009. Since, explanation is clarificatory and prospective in nature, inclusion of value of free of cost supplies of goods and services in or in relation to the execution of Works Contract in the gross amount for the purpose of payment of service tax on Works Contract in the Composition Scheme, is a legal requirement only w.e.f. 07.07.2009 when the explanation became part of Rule 3(1). It therefore clarifies that where execution of Works Contract has commenced prior to 07.07.2009, or where any payment (except payment through credit or debit) has been made towards a Works Contract prior to 07.07.2009, then in those cases, gross amount for the purpose of payment of service tax does not include the value of free of costs supplies. In view of the above, of service tax on free supply steel valued at Rs. 2,56,67,261/- is not legally correct and therefore, the same is set aside. As regards invocation of extended period of limitation, we find that this issue has been discussed in detail by both the lower authorities. The appellant was awarded a Contract for construction of mall in July 2006 and the work began in October-2006. They neither approached the department for clarification whether their activity is liable to service tax nor did they obtain registration and filed ST-3 returns. They took registration in July, 2007 when department, initiated investigation against them on the basis of credible intelligence. We therefore, agree with the lower authorities that the appellant has suppressed his turn over from the department with intent to evade payment of service tax and therefore, proviso to Section 73(1) has correctly been invocated for demanding the service tax for the larger period. For the same reasons, we also uphold penalty on the appellant under Section 78 of the Finance Act, 1994. Thus, we deem it fit to remit the matter to the Adjudicating Authority to redetermine service tax liability on the appellant by extending the benefit of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. He shall also redetermine penalty amount on the appellant under Section 78 of the Finance Act,1994. We uphold penalty of Rs.5,000/- under Section 77(2) of the Finance Act, 1994 for failure to file ST-3 returns in time and also for delayed payment of service tax. We however, set aside penalty on the appellant under Section 76 of the Finance Act, 1994 as penalty under Section 78 is held imposable. Appeal is disposed of by remand in above terms. Issues: (i) Whether the construction contract is classifiable as Civil and Industrial Construction Service or as Works Contract Service; (ii) Whether value of materials supplied free by the service recipient is includible in the gross amount for charging service tax; (iii) Whether the proviso to Section 73(1) (extended period) and mandatory penalty under Section 78 are invokable.Issue (i): Whether the construction contract is classifiable as Civil and Industrial Construction Service or as Works Contract Service.Analysis: The contract awarded was a composite indivisible works contract including supply of materials (steel supplied free by recipient) and service components (labour, supervision etc.). Pre-01.06.2007 charging provisions did not create a separate levy on works contracts; statutory scheme and judicial authorities recognize works contracts as a distinct species to be taxed under Works Contract Service with valuation rules and composition option effective from 01.06.2007. Relevant scheme includes Rule 2A and the Works Contract composition rules introduced thereafter.Conclusion: The contract is leviable as Works Contract Service only with effect from 01.06.2007; it is not taxable as Civil and Industrial Construction Service for the pre-01.06.2007 period. This conclusion is in favour of the assessee for the pre-01.06.2007 period.Issue (ii): Whether value of materials supplied free by the service recipient is includible in the gross amount for charging service tax.Analysis: Rule 3(1) of the Works Contract (Composition Scheme) Rules, 2007 as amended (explanation substituted w.e.f. 07.07.2009) requires inclusion of value of goods used in execution of works contract in gross amount charged; CBIC clarification and the substituted explanation operate prospectively from 07.07.2009. Where execution commenced or payments were made before 07.07.2009, inclusion of free supplies is not legally mandated by that explanation for those earlier contracts.Conclusion: Value of free supply steel is not includible in the gross amount for the purpose of composition-based service tax for the present contract that commenced prior to 07.07.2009. This conclusion is in favour of the assessee.Issue (iii): Whether the proviso to Section 73(1) (extended period) and mandatory penalty under Section 78 are invokable.Analysis: The appellant commenced work in October 2006, did not obtain service-tax registration or file ST-3 returns initially and obtained registration after departmental intelligence. The tribunal found suppression of turnover to evade tax assessment for the earlier period, justifying invocation of the proviso to Section 73(1) and imposition of penalty under Section 78; separate penalty under Section 77(2) for failure to file returns was also considered.Conclusion: Proviso to Section 73(1) is invokable and penalty under Section 78 is imposable; penalty under Section 77(2) for delayed filing is upheld while penalty under Section 76 is set aside. These conclusions are against the assessee on the extended-period and penalty aspects.Final Conclusion: The demand for service tax is sustainable only from 01.06.2007 onward; value of free supply materials is not includible for the present contract for computation under the composition scheme (given commencement before 07.07.2009); extended period and penalty under Section 78 are sustainable. The matter is remitted to the adjudicating authority for redetermination of service tax liability and penalty consistent with these conclusions.Ratio Decidendi: A composite indivisible works contract is taxable as Works Contract Service only from the date the statutory scheme for works contracts came into effect (w.e.f. 01.06.2007), and statutory explanation requiring inclusion of free supplies in gross amount applies prospectively from its insertion (w.e.f. 07.07.2009).