The Supreme Court examined the matter of whether an assessee, who was liable for paying service tax on works contract service, possessed the legal right to disregard Rule 2A of the Service Tax (Determination of Value) Rules, 2006, as well as the Composition Scheme.
The services rendered by the Respondent were classified as "works contract service" as defined by the Finance Act, 1994.
It was established that an assessee is liable for sales tax on the goods element and service tax on the service/value of service rendered in a works contract. It was opined that Rule 2A of the Service Tax (Determination of Value) Rules, 2006 recognized these service elements as part of the valuation of works contract services.
The Apex Court held that the Respondent was not entitled to consider the total contract value, including goods and services, for remitting service tax and availing of CENVAT Credit. The service tax had to be paid according to Rule 2A of the Service Tax (Determination of Value) Rules, 2006. However, since the assessee did not opt for the Composition Scheme, the matter was remanded to the CESTAT for re-computation of the demands based on Rule 2A. The issue of an extended period of limitation was also to be decided by the CESTAT.
Brief Facts:
The Respondent was engaged in the manufacturing, supply, and erection of prefabricated/pre-engineered steel buildings and parts thereof, falling under specific headings/subheadings of the Central Excise Tariff Act, 1985. The Respondent had centralized registration for Service Tax with the Service Tax Department and availed of CENVAT Credit for central excise duty paid on goods manufactured and capital goods and service tax paid on input services.
Based on intelligence indicating misclassification of services, improper CENVAT Credit utilization, and underpayment of Service Tax, the Department contended that the Respondent's services constituted works contracts chargeable under the Finance Act, 1994 (hereinafter referred to as “Act 1994”). The Department issued a Show Cause Notice alleging inadmissible CENVAT Credit utilization and short payment of Service Tax, demanding various amounts and penalties.
The Adjudicating Authority confirmed the disallowed CENVAT Credit and short-paid amounts in order. Further Show Cause Notices were issued for subsequent periods.
Challenging the Order-in-Original before the Tribunal, the Respondent raised several grounds, and thereafter, the Tribunal allowed the appeal, setting aside the Order-in-Original, stating that the composition scheme was optional, and the provisions of Rule 2A were subject to Section 67 of the Act, 1994.
Hence, the Revenue filed the present appeal, seeking to overturn the judgment and order that set aside the Order-in-Original.
Contentions of the Appellants:
It was contended that the Central Board of Excise and Customs issued clarifications regarding the amendments brought about by the Finance Act, 2007, through a letter. Further, that a works contract involved the supply of goods and services together. A composite works contract was divided into the transfer of property into goods subject to sales tax/VAT and the service portion subject to service tax.
Contentions of the Respondents:
It was contended that the composition scheme is optional according to Rule 3(1) of the Composition Rules. The provisions of Rule 2A of the Valuation Rules are subject to the provisions of Section 67 of the Finance Act, 1994. Once compliance with Section 67 of the Finance Act, 1994 has been achieved, there is no need to consider the applicability of Rule 2A of the Valuation Rules or forcibly apply the Composition Scheme on the assessee.
It was argued that in this case, the assessee would be eligible for full CENVAT Credit on inputs, input services, and capital goods under the CENVAT Credit Rules, 2004. Alternatively, the assessee could opt for abatements specified in the relevant notification or pay service tax under the head 'works contract services' either under Rule 2A of the Valuation Rules or under the Composition Rules. It was further argued that the words used in Rule 2A, "subject to Section 67," indicated that the valuation done under Section 67 is superior, and the rules are subject to the Act.
It was submitted that the Composition Rules are completely optional, and the assessee can choose to follow Section 67. It is clarified that taking CENVAT duty on inputs is prohibited only if one opts for the Composition Rules, but not if tax is paid at normal prevailing rates on the full gross value of the contract under Section 67.
Observations of the Court:
The main question before the Court was whether an assessee liable to pay service tax for works contract service had the legal right to disregard Rule 2A of the Service Tax (Determination of Value) Rules, 2006 and the Composition Scheme. The services provided by the Respondent were considered as 'works contract service' according to the Finance Act, 1994. It was established that an assessee is liable for sales tax on the goods element and service tax on the service/value of service rendered in a works contract. It was opined that Rule 2A of the Service Tax (Determination of Value) Rules, 2006 recognized these service elements as part of the valuation of works contract services.
The next question was whether the assessee could still consider the total contract value, including goods and services, under Section 67 of the Finance Act, 1994, and remit service tax accordingly. It was expounded that post July 1, 2012, Rule 2A explicitly mentioned the exclusion of the value of property or goods transferred in the execution of the works contract. However, the Composition Scheme allowed an assessee to pay service tax at a rate of 2% of the gross amount charged for the works contract, excluding VAT or sales tax on the transfer of goods. Rule 2A, after July 1, 2012, prohibited the assessee from claiming CENVAT Credit on duty or cess paid on inputs used in the works contract.
The valuation of works contract services had to be made as per Rule 2A or the Composition Scheme. The assessee had to pay service tax on the service element and could claim CENVAT Credit only on that amount.
The Court held that the Respondent was not entitled to consider the total contract value, including goods and services, for remitting service tax and availing of CENVAT Credit. The service tax had to be paid according to Rule 2A of the Service Tax (Determination of Value) Rules, 2006. However, since the assessee did not opt for the Composition Scheme, the matter was remanded to the CESTAT for re-computation of the demands based on Rule 2A. The issue of an extended period of limitation was also to be decided by the CESTAT.
The decision of the Court:
The Supreme Court quashed the impugned order and judgement of the CESTAT. The matter was remitted to the CESTAT to decide the issue of limitation and re-compute the demands.
Case Title: CC, CE & ST, Noida Vs. M/s. Interarch Building Products Pvt. Ltd.
Case No.: Civil Appeal No. 11330 of 2018
Citation: 2023 Latest Caselaw 430 SC
Coram: Hon'ble Mr. Justice M.R. Shah and Hon’ble Mr. Justice Krishna Murari
Advocates for Petitioner: Advs. Mr. N. Venkataraman, Mr. Mukesh Kumar Maroria,
Advocates for Respondent: Advs. Mr. V. Raghuraman, Mr. Ranjan Kumar Pandey, Mr. Shailesh Sheth, Mr. Sandeep Bisht, Mr. Divyam Garg, Mr. Yati Ranjan, Mr. Raghavendra Cr
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