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 the said decision.

While dealing with the measure of tax, the Apex Court in Gannon Dunkerly (1992) had provided a list of exclusions from the cost of valuation of goods and as to what would constitute the service elements.

The bench reckoned that the said service elements found a statutory recognition under Rule 2A of the Service Tax Rules, w.e.f. 01.06.2007.

“Therefore, as per the law laid down by this Court in the case of ‘works contract service’ an assessee is liable to pay the service tax on the service element/value of the service rendered and the sales tax/tax on the element of goods transferred pursuant to the contract,” said the court.

Perusing Rule 2A, as it exists today, the court observed, “Post 01.07.2012 as per Rule 2A value of service portion in the execution of a works contract shall be determined taking into consideration the value of service portion in the execution of a works contract equivalent to the gross amount charged for the works contract less the value of property of goods transferred in the execution of the said works contract.”

“Therefore, as such the things which were already there as per the decision of this Court in the case of Gannon Dunkerly and Co. (supra) and Rule 2A earlier has been made explicitly clear,” the court added.

However, the court took note that as per Rule 3(1) of the Composition Scheme, issued vide notification 32/2007 – ST, dated 22.04.2007, “notwithstanding anything contained in Section 67 of the Act and Rule 2A of the Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge the service tax at the rate specified in Section 67 of the Act, by paying an amount equivalent to 2% of the gross amount charged for the works contract.”

Further, Explanation to Rule 3 of the Composition Scheme specifically provides that the gross amount charged for the works contract shall not include the VAT or sales tax, as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.

The bench also observed that post 01.07.2012, Rule 2A of Service Tax Rules specifically provides that the taxable service shall not take CENVAT Credit of duty or cess paid on inputs used in or in relation to the said works contract, under the provisions of the CENVAT Credit Rules, 2004.

The respondent contended before the Supreme Court that as Rule 2A and the Composition Scheme uses 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. It averred that Rule 2A is not compulsory and the Composition Scheme is optional.

Rejecting the submissions of the respondent, the court said that the same would render Rule 2A and the Composition Scheme otiose.

The court remarked that as per the Scheme of the Finance Act, the determination of value of the service portion in the execution of the works contract is to be made as per Rule 2A, however an option is provided to the assessee to avail the benefit of the Composition Scheme.

“Therefore, either the assessee has to go for Composition Scheme or go for Determination of Value as per Rule 2A and the assessee has to pay service tax on the service element and can claim CENVAT Credit on the said amount only”, the court said.

The bench thus allowed the appeal and set aside the decision of the CESTAT.

“In view of the above the impugned judgment and order passed by the CESTAT taking the contrary view is unsustainable by which it is held that the assessee is entitled to take the total contract value which includes both goods and services and remit service tax on the entire value as ‘works contract’ and the assessee is also entitled to avail the CENVAT Credit on the same,” said the court.

While observing that since the respondent-assessee had not opted for the Composition Scheme, its service tax liability needs to be computed in terms of Rule 2A of Service Tax Rules, the court remitted the matter back to CESTAT for re-computation of the demands in terms of Rule 2A.

Case Title: CC and CE and ST, Noida vs M/s Interarch Building Products Pvt Ltd  

Citation : 2023 LiveLaw (SC) 393

Counsel for the Appellant: Mr. N. Venkataraman, ASG Mr. Mukesh Kumar Maroria, AOR

Counsel for the Respondent: Mr. V. Raghuraman, Sr. Adv. Mr. Ranjan Kumar Pandey, AOR Mr. Shailesh Sheth, Adv. Mr. Sandeep Bisht, Adv. Mr. Divyam Garg, Adv. Mr. Yati Ranjan, Adv. Mr. Raghavendra Cr, Adv.

Service Tax (Determination of Value) Rules, 2006: Rule 2A; Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007: Rule 3(1)- 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 Rules, or as per the 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 set aside the judgement and order passed by the 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.

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