2020 (8) TMI 295 - AT - Service Tax

Interpretation of statute - Method of computation of tax liability - Works Contract Service - disputed period is 16.06.2005 to 31.03.2009 - abatement under N/N. 18/2005-ST read with subsequent Notification no. 1/2006-ST - demand alongwith interest and penalty - HELD THAT - When the impugned order was passed, the law was not settled as regards classification of service, particularly in the case of composite contract involving supply of both labour and material. Even different benches of this Tribunal were having difference of opinion with regard to taxability of works contract under the Finance Act prior to 01.06.2007 when Section 65 (105) (zzzza) was introduced in the Finance Act providing for bifurcation of a composite contract and taxing of the service element - The law was finally settled in August, 2015 by Hon‟ble Supreme Court in the case of COMMISSIONER, CENTRAL EXCISE CUSTOMS VERSUS M/S LARSEN TOUBRO LTD. AND OTHERS 2015 (8) TMI 749 - SUPREME COURT whereby it was held that in the cases of composite contract involving labour and materials, the same are not taxable under the existing category of services prior to 01.06.2007. It was further held that the service in such cases is classifiable only under the heads Works Contract Service‟ and tax leviable w.e.f. 01.06.2007 (and not prior to this date). Benefit of abatement - HELD THAT - The appellant shall be entitled to deduction of material component actually supplied by them in execution of the works contract, which is verifiable from their sales tax record/ assessment order. As regards construction of club, it is held that the same is exempt from service tax being non-commercial in nature. Levy of penalty - HELD THAT - The issue involved is of interpretation in nature and there was lot of confusion prevailing with respect to taxability of works contract, and law was settled finally in August, 2015. Therefore, the penalty under Section 76 and 78 are not sustainable and are liable to be set aside. Accordingly, the same is set aside. The appellant is not entitled to composition scheme as they have not opted for the same; secondly, they are disputing the addition of material components supplied free by the principal as required under the composition scheme; the details and actual cost of the material thus supplied needs to be arrived at. Further, composition scheme is optional at the option of the assessee - Service Tax liability shall be recomputed for the period from 01.06.2007 under Rule 2A of Service Tax (Determination of Value) Rules. No Service Tax is chargeable for the period prior to 01.06.2007 under the head Works Contract Service‟. However, if the appellant has collected service tax from the principal and deposited the same, they shall not be entitled for refund for the period prior to 01.06.2007 - appeal allowed by way of remand.

Summary

Issues:
1. Dispute over the method of computation of tax liability for a construction company providing "Works Contract Service" from 16.06.2005 to 31.03.2009.

Analysis:
1. The appellant, engaged in civil construction and supply of materials, faced a tax dispute regarding the calculation of tax liability for the period in question. The appellant had taken service tax registration under "Construction of Complex Service" but was alleged to have not paid service tax correctly. The Revenue issued a show cause notice invoking an extended period of limitation, proposing a demand for service tax, interest, and penalties under various sections of the Act.

2. The impugned order confirmed a substantial amount as tax liability, penalties, and interest. The appellant, being aggrieved, appealed to the Tribunal, claiming that the tax demand was excessive. The appellant argued that the abatement for Construction of Complex services was wrongly denied, and tax was demanded on the full value without considering the free supply of materials by some clients. The appellant contended that as per legal precedents, the value of free supply materials should not be included in the taxable value.

3. The Tribunal noted the unsettled legal landscape before 01.06.2007 regarding the taxability of composite contracts involving both labor and material. The law was clarified in 2015 by the Supreme Court, stating that such contracts are taxable under "Works Contract Service" from 01.06.2007. The Tribunal also addressed the issue of abatement, emphasizing that the appellant could not claim a flat rate of 67% abatement when materials were supplied by the principal, except for specific projects.

4. The Tribunal found that penalties under Section 76 and 78 were not sustainable due to the interpretational nature of the issue and the confusion prevailing before the legal clarification in 2015. The penalties were set aside. The appellant's entitlement to the composition scheme was also questioned, and the Tribunal directed a recomputation of the service tax liability from 01.06.2007, with specific directions on abatement and penalties.

5. Ultimately, the Tribunal allowed the appeal by remanding the case to the Adjudicating Authority for recalculating the tax liability, clarifying the period of tax applicability, and providing guidelines on abatement and penalties. The decision aimed to ensure a fair assessment based on the legal provisions and precedents cited during the proceedings.