Supreme Court: In an appeal filed by the revenue against the judgment and order passed by the Customs, Excise and Service Tax Appellate Tribunal (‘CESTAT’), wherein, the Tribunal while allowing the appeal preferred by the assesee, observed that the composition scheme is optional and the provisions of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 (‘Rules, 2006’) are subject to provisions of Section 67 of the of the Finance Act, 1994, thus, the assesee was entitled to CENVAT credit on input, the division bench of MR Shah* and Krishna Murari, JJ. has set aside the impugned judgment and order and has held that the assessee is not entitled to take the total contract value which includes both goods and services and remit service tax on the value as works contract service and, in the process, also entitled to avail the CENVAT credit on the entire amount.
Further, it observed and held that the assessee has to pay the service tax on the value of services as per Rule 2A of the Rules, 2006 and thereafter to avail the CENVAT Credit accordingly. However, it also observed and held that demand for the period January 2007 to May 2007 is unsustainable.
Background:
In the case at hand, the respondent/ assessee was engaged in the business of manufacture, supply and erection at the site of pre-engineered steel buildings and parts thereof, classifiable under the relevant headings/sub-headings of the First Schedule to the Central Excise Tariff Act, 1985. The assessee had centralised registration for service tax with the Service Tax Department for services under “commercial or industrial construction service” and “construction services” right from the commencement of production. The goods manufactured were cleared from the place of manufacture on payment of central excise duty on which CENVAT credit was made by the assessee.
Based on specific intelligence that the assessee had wrongly classified the services rendered by them, availed inadmissible CENVAT credit and short paid the service tax in cash. The Department viewed that the services rendered by the assessee amounted to works contract which were chargeable to tax under sub clause [zzzza] of Section 65(105) of the Finance Act, 1994. Therefore, according to the Revenue on classifiable service under ‘works contract service’ the assessee availed CENVAT credit on central excise duty paid on inputs.
Therefore, the Department issued a show cause notice alleging inter alia the assessee had utilised CENVAT Credit on building material during June 2007 to March, 2012 which was inadmissible. It was alleged that the said amount had been recovered as service tax from the customer under Section 73(1) of the Act, 1994. It appeared to the Revenue that services should have been classified under “Works Contract Service” in place of “Commercial or Industrial Construction Services”.
The Commissioner held that the services rendered by the assessee were classifiable as ‘works contract service’ and rejected the availability of CENVAT Credit amount and directed recovery under Section 73A of the Act, 1994. Thereafter, the Tribunal held that there is no question on applicability of Rule 2A nor there was any question of forcibly applying the option of composition scheme. Thus, the Tribunal held that in both these circumstances, the assesee was entitled to CENVAT Credit on inputs. Therefore, Revenue filed the present appeal.
Issue: Whether an assessee who is liable to pay service tax under “works contract service” has the legal right not to follow Rule 2A of the Rules, 2006 nor the composition scheme on the ground that in terms of Section 67 of the Finance Act, 1994 an 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 service” , and in the process also entitled to avail the CENVAT Credit?
Analysis:
The Court noted that such services rendered by the assessee can be said to be “works contract service” asper the Finance Act, 1994 w.e.f. 01-06-2007 as per Section 64(54) read with Section 65(105) (zzzza)
After placing reliance on CCE & Customs v. Larsen & Toubro Ltd., (2016) 1 SCC 170 , the Court reiterated that 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.
The Court noted that prior to 01-07-2012 Rule 2A determines the value of taxable service in relation to services involved in the execution of a works contract. It shall be determined by the service provider in the manner provided under Rule 2A(1)(i) i.e., value of works contract service determined shall be equivalent to the gross amount charged for the works contract.
Further, 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.
The Court noted that post 01-07-2012, Rule 2A specifically provides that the taxable service shall not take CENVAT Credit of duty or cess paid on inputs used in or in relation to said works contract, under the provisions of CENVAT Credit Rules, 2004.
Concerning the assessee’s submission that as in Rule 2A and even in the composition scheme the word used are subject to the provisions of Section 67 of Finance Act, the assessee had an option to pay the service tax on the entire contract value i.e. on gross amount charged by the service provider and that Rule 2A is not compulsory and the composition scheme is optional. The Court said that the aforesaid has no substance, as if this is assessee is accepted, then Rule 2A and the composition scheme shall become otiose.
The Court said that with respect to the “works contract service” and/or the composition works contract the valuation has to be made as per Rule 2A of the Valuation Rules, 2006. Even as per the Composition Scheme an assessee has an option to discharge the service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in Section 66 of the Finance Act by paying equivalent to 2% of the gross amount charged for the works contract.
The Court noted that Rule 3(1) Service of the Rules, 2006 provides notwithstanding anything contained in Section 67 of the Finance Act and Rule 2A of the Rules, 2006. Therefore, as per the Scheme of the Act the determination of value of service portion in the execution of the works contract is to be made as per Rule 2A, however with an option to the assessee to avail the benefit of 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.
Thus, the Court set aside the Tribunal’s order. However, it said that the service tax needs to be paid in terms of Rule 2A of Rules, 2006. Further, the Court remitted the matter to CESTAT for re-computation of the demands in terms of Rule 2A as the assessee has not opted for composition scheme, and as the extended period of limitation has not been decided by CESTAT.
[CCE v. Interarch Building Products (P) Ltd., 2023 SCC OnLine SC 548 decided on 02-05-2023]
*Judgment by: Justice MR Shah
