2018 (2) TMI 1054 - AT - Service Tax

Works contract service - appellants are engaged in supply and erection of raw water piping and pumping system for M/s Raj West Power Limited and Common Effluent Treatment Plant and RO System for ELDCO SIDCUL Industrial Park at Sitarganj in Rajasthan - Revenue entertained a view that the appellants are liable to service tax under works contract service and for the same, gross value which includes the materials supplied also should have been considered by the appellant - case of appellant is that they had separate contracts one for supply of materials and another for execution of work either for erecting piping and pumping of raw water supply or for effluent treatment for two clients. Held that - It is clear that the appellant had shown two contracts both dated 20/08/2007 in respect of Barmer Project. One is claimed to be supply contract and another is claimed to be erection contract. There is a coordination agreement dated 30/08/2007 - The said coordination agreement readwith the supply/erection contracts leads to an apparent conclusion that the intended purpose of both the parties is the supply and erection of raw water piping and pumping system. While examining the two contracts now contested in the present appeals, we note except for substitution of the word contractor for supplier the warranty or defects liability condition mentioned in Clause 34 of both the agreements are identical. It clearly establishes that as the supplier and contractor is one and the same the warranty and defect liability is to be on the appellant without any distinction for supply contract or erection contract. The defect liability clause in labour contract also talks about defect in material , bad materials . Materials are supplied in terms of supply contract which also carries same terms. This alongwith the scope of coordination agreement clearly reveals that the scope of composite works contract is clear and should be read together for the purpose of service tax. Composition scheme for works contract - concessional rate of duty - Held that - If the erection contract is only a service contract there is no question of availing composition scheme available to works contract service. In fact, the appellants later switched over to payment of service tax with full rate without composition. This clearly reveals that action of the appellant is with full knowledge of the legal implication of the course of action for discharging service tax by them. Extended period of limitation - Held that - the appellant is fully aware of the legal implications of service tax liability on composite works contract. Their act of first paying composition rate on what is claimed to be a service contract and later switching over to full rate of payment without composition clearly reveals the knowledge and deliberate intend of the appellant - extended period rightly invoked. Appeal dismissed - decided against appellant.

Summary

Issues: Valuation of contract for service tax purpose, separate contracts for supply of materials and execution of work, application of Works Contract (Composition Scheme for Payment of Service Tax) Amendment Rule, 2009, demand on limitation, imposition of penalties.

Valuation of Contract for Service Tax Purpose:
The main issue in this case revolved around the valuation of the contract executed by the appellants for the purpose of discharging service tax. The Revenue contended that the appellants should consider the gross value, including the materials supplied, under works contract service. The Original Authority held that the appellants had executed a composite works contract, and the gross value should include the value of materials used in the contract. The appellants argued that they had separate contracts for supply of materials and execution of work, but the coordination agreement and terms of the contracts indicated a composite nature. The Tribunal examined the contract documents and concluded that the contracts were composite in nature, leading to the determination of service tax liability based on the gross value received by the appellants.

Application of Works Contract (Composition Scheme for Payment of Service Tax) Amendment Rule, 2009:
The appellants contested the application of the Works Contract (Composition Scheme for Payment of Service Tax) Amendment Rule, 2009, specifically mentioning that the law was amended w.e.f. 07/07/2009 to provide for the inclusion of the value of materials in certain contracts. They argued that this provision would not apply to the work done and invoices raised prior to the effective date of the amendment. However, the Revenue maintained that the value of materials should be included in the service tax liability calculation based on the existing rules.

Demand on Limitation and Imposition of Penalties:
The appellants also contested the demand on limitation and the imposition of penalties. They argued that the show cause notice and the original order did not justify the invocation of suppression or willful misstatement for an extended period of demand or the imposition of penalties. The appellants claimed that they had acted in good faith and should not be penalized. However, the Tribunal found that the appellants were fully aware of the legal implications of the service tax liability on composite works contracts, as evidenced by their actions of initially opting for a composition scheme and later switching to full payment without composition. The Tribunal dismissed the appeals, concluding that the appellants' actions did not demonstrate bonafide intentions, and there was no basis to interfere with the findings on merit or limitation.

This detailed analysis of the judgment provides insights into the key issues involved, the arguments presented by both parties, and the Tribunal's decision based on the examination of the contract documents and legal provisions related to service tax valuation and composition schemes.