Works contract vs Construction services under Service Tax

[ROHIT GOEL]

Dear Sirs,

X & Co. executed a contract for construction of building involving transfer of property in goods. However, while filing their service tax return for FY 2010-11 and FY 2011-12, they filed return under service category of "industrial and commercial construction" and availed 67% abatement and paid tax on the balance.

Thereafter, case was opened for adjudication by invoking extended period of limitation within 5 years on the grounds that assessee had concealed material facts which only came to light upon departmental audit. The AO held that the assessee's services were actually of the nature of works contract and he was not eligible for abatement of 67%. Instead, value of service was determined by Valuation rules which restrict value of service in a works contract at 40% of the contract value.

My question is:

a) When there was transfer of property in goods involved, are the actions of the AO correct in light of law prevailing during FY 2010-11 and FY 2011-12?

b) Whether extended period of limitation could be invoked here as facts regarding payment of tax under construction category instead of works contract were present on record in the service tax returns and as such there was no suprresion of facts as alleged?

c) Since Valuation rules prescribe 2 options of either 40% taxable value or Service value=consideration-Value of goods as per VAT, was the assessee entitled to plead that the second option be applied as it is more beneficial to assessee?

AI Summary

Works contract classification alters service tax valuation and permits extended limitation when construction abatement is wrongly claimed.
Classification as a works contract or a construction service determines entitlement to the 67% abatement and the method for service tax valuation; valuation may be by a presumptive percentage or by deducting the VAT-assessed value of goods, and the existence of VAT returns assessed as works contract supports using VAT figures. The department invoked the extended period of limitation alleging suppression of facts where the assessee claimed construction abatement but, in the department's view, provided works contract services; factual proofs such as land ownership, nature of structure, and VAT assessments are material.