2016 (7) TMI 1271 - HC - Service Tax

Works contract - composition scheme - The stand of the department in the said show cause notice, as discernible therefrom, is that after the enhancement of rate of service tax from 2% to 4% and the petitioner having exercised the option on 26th March, 2008, the payment @ 2% of the service tax on the works contract amounts to evasion of the tax - extended period of limitation - petitioner s claim is that the composite scheme which came into effect from 1st June, 2007 gives an option to the service tax provider under the works contract to pay service tax in relation thereto by paying an amount equivalent to 2% of the gross amount charged for the works contract. Held that - this Court does not find any error both on facts or law that at the time of exercising an option the rate of tax under the said beneficial scheme was 4% and therefore the petitioner cannot continue to deposit the rates under the said beneficial scheme at the rate of 2%. It admits no ambiguity to say that the rate prevalent at the time of exercising an option would continue until the expiration of the work s contract and any variation and/or changes in the rate of tax by subsequent notification the department would not be within its authority to charge more as such changes would not be applicable to the existing work s contract. Petition allowed - decided in favor of petitioner.

Issues Involved:
1. Retrospective effect of notifications dated 1st March 2008 and 17th March 2012.
2. Constitutionality of the notifications under Article 14, 19(i)(g), and 265 of the Constitution of India.
3. Principle of promissory estoppel.
4. Invocation of the extended period of limitation.

Issue-wise Detailed Analysis:

1. Retrospective Effect of Notifications:
The petitioner challenged the order confirming the demand for service tax and penalties, arguing that the notifications enhancing the service tax rate from 2% to 4% (and later to 4.8%) should not apply retrospectively. The petitioner had opted for the Works Contract (Composite Scheme for Payment of Service Tax) Rules, 2007, which allowed for a 2% service tax rate. The court noted that the composite scheme, effective from 1st June 2007, provided an option to pay service tax at 2% of the gross amount charged for the works contract. The petitioner argued that once this option was exercised, the rate should remain static throughout the contract period.

2. Constitutionality Under Article 14, 19(i)(g), and 265:
The petitioner contended that the notifications were unreasonable and unworkable, violating Articles 14 (equality before law), 19(i)(g) (right to practice any profession), and 265 (no tax shall be levied or collected except by authority of law) of the Constitution of India. The court examined the legislative competence to amend the rate of tax and found no lack of competence. The court concluded that the rate changes should apply prospectively and not affect pending works contracts.

3. Principle of Promissory Estoppel:
The petitioner argued that the principle of promissory estoppel should prevent the government from altering the tax rate after the petitioner had already exercised the option under the composite scheme. The court agreed, stating that the rights under the beneficial scheme could not be abridged by later notifications. The court emphasized that the rate at the time of exercising the option should continue for the entire works contract period.

4. Invocation of Extended Period of Limitation:
The department issued show cause notices invoking the extended period of limitation, alleging that the petitioner suppressed the date of exercising the option and continued to pay service tax at the old rate. The court noted that the petitioner had paid service tax at the rate of 2% before the notifications took effect. The court found that the petitioner’s payment constituted the exercise of the option under the composite scheme and that the subsequent rate changes could not be applied retrospectively.

Conclusion:
The court upheld the petitioner’s argument that the rate of service tax at the time of exercising the option should remain applicable throughout the works contract period. The court found that the notifications changing the tax rate could not operate retrospectively and should not affect existing contracts. The writ petition was disposed of with these observations, and no costs were ordered.

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