In 'Works Contract', Assessee Liable To Pay Service Tax On Service Element & Sales Tax On Goods Transferred : Supreme Court

The Supreme Court has ruled that the value of the service portion in the execution of the works contract has to be determined as per Rule 2A of Service Tax (Determination of Value) Rules, 2006, or as per the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 (Composition Scheme), if adopted by the assessee, and that the assessee has to pay service tax on the service element and can claim CENVAT Credit only on the said amount.The bench of Justices M. R. Shah and Krishna Murari set aside the judgement and order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), where it had held that the assessee was entitled to take the total contract value- which included both goods and services- and remit service tax on the entire value as ‘works contract’ and that the assessee was also entitled to avail the CENVAT Credit on the whole amount. The top court upheld the order of the Adjudicating Authority that the respondent-assessee was not entitled to avail CENVAT Credit on Central Excise duty paid on inputs (building material) used in or in relation to the said works contract.The bench dismissed the contention of the assessee that since Rule 2A and the Composition Scheme use the words - “subject to the provisions of Section 67”, the assessee had an option to pay the service tax on the entire contract value i.e., on the gross amount charged by the service provider.While rejecting the plea that Rule 2A was not compulsory and the Composition Scheme was optional, and that the assessee can opt for Section 67 of the Finance Act, the court remarked that the said interpretation would render Rule 2A and the Composition Scheme otiose.Section 67 of the Finance Act, 1994 provides that the value of a taxable service shall, in a case where the service is provided for a consideration in money, be the gross amount charged by the service provider for such service.The respondent/ assessee, M/s Interarch Building Products Pvt Ltd, is engaged in the business of manufacture, supply and erection at the site of prefabricated/ pre-engineered steel buildings and its parts.The goods manufactured by the respondent-assessee were cleared from the place of manufacture on payment of central excise duty on which CENVAT Credit was availed by it. The respondent paid service tax on the gross amount of the contract under the category "commercial or industrial constructions services" under Section 65(105)(zzq) of the Finance Act.The Revenue Department was of the view that the respondent had wrongly classified the services rendered by it, and had availed inadmissible CENVAT Credit and short paid the Service Tax in cash.The Department opined that the services rendered by the respondent amounted to Works Contract which were chargeable to tax under sub clause [zzzza] of Section 65(105] of the Finance Act. The Department, therefore, issued a Show Cause Notice alleging that the respondent had availed CENVAT Credit on Central Excise duty paid on inputs, i.e., the building material, which was inadmissible.As per the Revenue, it was mandatory for the respondent to either follow Rule 2A of the Service Tax Rules, or adopt the Composition Scheme, neither of which allowed availment of CENVAT Credit on input. Therefore, the CENVAT Credit availed on input had resulted in short payment of Service Tax.The Adjudicating Authority thus passed an order rejecting the availability of the CENVAT Credit amount availed by the respondent, and directed recovery of the short-paid Service Tax under Section 73A of the Finance Act.In an appeal, the CESTAT set aside the order passed by the Adjudicating Authority. The CESTAT concluded that the Composition Scheme is optional and it was not mandatory for the respondent-assessee to adopt Rule 3 of the Composition Scheme for discharge of its Service Tax liability. It further held that Rule 2A of the Service Tax Rules, 2006, were subject to provisions of Section 67 of the Finance Act. The Tribunal concluded that where the value cannot be determined as provided under Section 67(1), (2) and (3) of the Act, then only the value is to be determined as provided under the Rules.In the appeal filed by the Revenue Department before the Supreme Court against the order of the Tribunal, the top court reckoned that the services rendered by the respondent were ‘works contract service’ as per Section 64(54) read with Section 65(105)(zzzza) of the Finance Act.The bench observed that with respect to the works contract, an assessee is liable to sales tax on the goods element and service tax on availment of service/value of the service rendered. It further observed that as per the decision in Gannon Dunkerly and Co. vs State of Rajasthan, 1992(3) SCALE 173, the value of the goods involved in the execution of a works contract will have to be determined by taking into account the value of the entire works contract and deducting from it the charges towards labour and other services, which were enumerated by the top court ...

In 'Works Contract', Assessee Liable To Pay Service Tax On Service Element & Sales Tax On Goods Transferred : Supreme Court

Parina Katyal

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