2018 (9) TMI 1450 - AT - Service Tax

Valuation- Composite Works Contract - Benefit of Composition Scheme - It is alleged that by dividing the work contract into two parts and paying service tax applicable for one work contract (composition scheme for payment of service tax) an amount of ₹ 21,01,50,386/- has been evaded by the respondent - case of Revenue is that composite scheme was only available when the value of services alongwith the value of supply of goods is included in the service taxable value of the service. - Erection and commissioning on turnkey basis Held that - The respondent/assessee were awarded contract on EPC basis by various electricity companies such as North Delhi Power Limited, Dakshin Haryana Bijli Vitran Limited etc. and it can be seen from the contract that all the contracts are composite contract for the supply of goods as well as for erection and commissioning on turnkey basis. It has also been the matter of fact that the respondent/assessee has opted to pay the service tax under Rule 3 (i) of Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The composition scheme for payment of the service tax was primarily meant to facilitate the service tax provider that they need not to bother with regard to bifurcation of supply and service element from the composite work contracts rather they were allowed to discharge their service tax liability on the concessional rate - From the perusal of the Rule 3 (i), it is clear that for determination of the value under the composition scheme, the value of all goods used in or in relation to execution of the work contract need to be included in the serviceable value even when the goods might have been supplied under any other contract for execution of the composite work contract. It is a matter of record in this case that all the contracts are composite contracts for both supply of goods and services as both the elements are absolute pre-requisite for completion of any turnkey project. It is also of the matter of fact that the respondent/assessee has opted for the benefit of composite work contract service and has availed the benefit of Rule 3 (i) of Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 - thus, the value of both supply and service need to be added for payment of service tax under composition scheme. Time 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. Matter remanded to the original Adjudicating Authority for purpose to verify the claim of the respondent/assessee in his arguments submitted before this Tribunal that on certain contracts they have paid full rate of service tax rather than concessional rate of service tax under composition scheme - appeal allowed by way of remand.

Issues Involved:
1. Splitting of Composite Work Contracts
2. Applicability of Service Tax under Composition Scheme
3. Inclusion of Goods Value in Service Tax Calculation
4. Adjudicating Authority's Decision and Department's Appeal
5. Legal Precedents and Tribunal's Decision

Issue-wise Detailed Analysis:

1. Splitting of Composite Work Contracts:
The primary issue revolves around the respondent/assessee splitting their composite work contracts into two parts: one for the supply of goods (exempt from service tax) and the other for construction services (taxed at 4.12% under the composite work contract service). The department alleged that this division was a tactic to evade service tax amounting to ?21,01,50,386/-. The contracts given by various electricity departments were deemed composite, and the service tax should include the value of both goods and services.

2. Applicability of Service Tax under Composition Scheme:
The department contended that the respondent/assessee should have paid service tax under Rule 2A of the Service Tax (Determination of Value) Rules, 2006, rather than the Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The adjudicating authority, however, had held that the service tax was correctly paid at 4.12% under the composition scheme, which was challenged by the department.

3. Inclusion of Goods Value in Service Tax Calculation:
The department argued that the respondent/assessee bifurcated the work contract to reduce the taxable value and evade service tax. The purported sale of goods was seen as an eyewash to avoid including the value of goods in the service tax calculation. The department emphasized that the value of all goods used in the execution of the work contract should be included in the service taxable value, as per Rule 3 (i) of the Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

4. Adjudicating Authority's Decision and Department's Appeal:
The Commissioner had set aside the show cause notice, which led to the department's appeal. The department claimed that the adjudicating authority erred in not recognizing the composite nature of the contracts and the necessity to include the value of goods in the service tax calculation under the composition scheme. The tribunal noted that the respondent/assessee had opted for the composition scheme, which was meant to simplify the tax process by allowing a concessional rate without bifurcating supply and service elements.

5. Legal Precedents and Tribunal's Decision:
The tribunal referenced the case of Jindal Water Infrastructure Ltd. vs. CCE & ST, Rohtak, where it was held that the value of goods and services must be combined for service tax under the composite scheme. The tribunal agreed with the department's view that the value of both supply and service elements should be included for service tax purposes under the composition scheme. The tribunal set aside the impugned order and remanded the matter to the original adjudicating authority to verify the respondent/assessee's claims regarding the payment of service tax at the full rate on certain contracts and to re-determine the service tax payable.

Conclusion:
The tribunal concluded that the impugned order lacked merit and remanded the case back to the adjudicating authority for re-evaluation, emphasizing that for composite contracts, the value of both supply and service elements should be combined for service tax purposes under the work contract composition scheme. The appeal was allowed by way of remand.

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