2022 (1) TMI 509 - AT - Service Tax

Valuation - works contract service - whether the valuation mechanism as per Rule 2A of the Service tax (Determination of Value) Rules, 2006 provides for optional methods or not? - HELD THAT - It is seen that the contract provides for separate values for supply of materials and there being transfer of property in goods from the Respondent to the intended beneficiary, the same cannot form part of value for the purposes of Works Contract Service and since the value is clearly determinable in the invoice raised by the Respondent, the same is to be allowed as deduction from the value of the entire contract leading to the conclusion that only the Erection and Commissioning job of the contract would be leviable to Service Tax at full rate, which has been paid by the Respondent and also accepted by the Revenue during the investigation proceedings. In the judgment COMMISSIONER OF CUSTOMS, CENTRAL EXCISE SERVICE TAX, VISAKHAPATNAM - I VERSUS M/S PRAGATI EDIFICE PVT LTD (VICE-VERSA) 2019 (9) TMI 792 - CESTAT HYDERABAD has dealt in great details the option of paying Service Tax under the composition scheme and it cannot be forced on the assessee. Appeal dismissed.

Issues Involved:
1. Classification of services under works contract.
2. Valuation mechanism for works contract services.
3. Option for deduction of value of goods in works contract.
4. Mis-declaration of service classification.
5. Applicability of Service Tax on composite works contracts.

Issue-wise Detailed Analysis:

1. Classification of Services under Works Contract:
The core issue is whether the services provided by the Respondent qualify as works contract services. The investigation revealed that the Respondent was treating the contracts as two separate contracts (one for goods and another for services) and paying Service Tax only on the service component. The department contended that the entire turnkey contract should be subjected to Service Tax under ‘Works Contract Service’ as defined, and the Respondent should follow Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

2. Valuation Mechanism for Works Contract Services:
The learned Commissioner dropped the demand of Service Tax, holding that the SCN did not provide the Respondent the option for deduction of the value of goods as envisaged in the Valuation Rules, and only provided the option of abatement. The Commissioner noted that the Respondent had the option to either consider the entire amount involved in the work order and pay tax after availing abatement or pay tax only on the service components at full rate if clearly discernible in the work orders. The Tribunal upheld this view, emphasizing that the valuation mechanism under Rule 2A provides for optional methods and the Respondent’s approach was permissible.

3. Option for Deduction of Value of Goods in Works Contract:
The Tribunal observed that the contract provided for separate values for the supply of materials and the transfer of property in goods, which should be allowed as a deduction from the value of the entire contract. This led to the conclusion that only the Erection and Commissioning job of the contract would be leviable to Service Tax at the full rate, which the Respondent had paid. The Tribunal found no short payment of Service Tax on the erection job, but rather a dispute on the inclusion of the supply component in the valuation.

4. Mis-declaration of Service Classification:
The Revenue argued that the Respondent mis-declared their classification of services, and the demand should be confirmed. However, the Tribunal found that the Respondent had correctly paid Service Tax on the service component of the contract as defined in the work order, and the SCN’s failure to provide the correct valuation option rendered it unsustainable.

5. Applicability of Service Tax on Composite Works Contracts:
The Tribunal referred to the judgment in Pragati Edifice Pvt. Ltd., which clarified that composite works contracts involving both supply of materials and services should be taxed under works contract service post-1-6-2007. The Tribunal reiterated that prior to this date, there was no charging section or machinery to levy Service Tax on indivisible works contracts. Post-1-6-2007, such contracts could be charged under Section 65(105)(zzzza) of the Finance Act, 1994.

Conclusion:
The Tribunal upheld the learned Commissioner’s order, affirming that the Respondent had correctly paid Service Tax on the service component of the contract and that the SCN’s failure to provide the correct valuation option invalidated the demand. The appeal by the department was dismissed, reinforcing the legal position that the valuation mechanism under Rule 2A provides for optional methods and deductions for the value of goods in works contracts.

← Previous Next →