2022 (12) TMI 523 - HC - Service Tax

Constitutional Validity of N/N. 7 of 2008 dated 01.09.2008 enhancing the rate of service tax from 2% to 4% - levy of additional burden of service tax upon the contracts for which the option under Notification No. 32 of 2007, dated 22nd May, 2007 as already been exercised by the appellant - applicability of composition scheme. Does the scheme contemplate a mode of exercising option and what would be the correct meaning that has to be assigned to the words shall exercise option in respect of the works contract prior to payment of service tax ? HELD THAT - In T. Azhakesan Versus State Tax Officer and Others 2021 (10) TMI 123 - MADRAS HIGH COURT , the Division Bench of the High Court of Madras considered a similar issue, but, arising under the provision of the Tamil Nadu Value Added Tax Act, 2006. The said Act also contained a similar provision stating that the option should be exercised by the dealer prior to payment of tax. Similarly, under the said Act, there was no prescribed form for exercising such option. In GE T and N India Limited Versus Commissioner of Central Excise and Service Tax, Large Tax Payer Unit, Chennai 2019 (12) TMI 858 - MADRAS HIGH COURT , identical issue was considered and the Division Bench approved the view taken by the tribunal in the case of Vaishno Associates Versus CCE ST, Jaipur 2018 (3) TMI 417 - CESTAT NEW DELHI wherein the court considered the composition scheme and pointed out that no format has been prescribed for making/exercising an option nor has it been specified as to whom the option must be addressed, the fact of the paying service at composition rate in the return filed by the service provider is enough indication to show that they have opted for payment under the works contract composition scheme. The payment of tax under the composition scheme upon notification of the scheme vide a notification no. 32 of 2007 dated 26.05.2007 by filing the return and paying tax at the compounded rate of 2% is sufficient compliance of exercise of option under the scheme and therefore the subject contracts for which tax had been remitted by the appellant at the rate of 2% is permissible and acceptable under law. Extended period of limitation - HELD THAT - The disputed period can be divided into two the first of which being from March 2008 to March 2012. For this period, the show cause notice for the periods from March 2008 to March 2011 have all been issued after a long delay as the show cause notices were issued on 17.04.2013. The said show cause notice also covered the period from April 2011 to September 2011 and October 2011 to March 2011 but for such period the show cause notice was within the time permitted. The question would be whether extended period of limitation could have been invoked in the facts and circumstances of this case and courts have held that such extended period of limitation can be invoked only when that there is a deliberate intention to evade payment of tax and it does not empower the department to invoke the extended period on the sole ground of omission - the department invoking the extended period of limitation, for the period indicated above, is thoroughly flawed and illegal. Penalty u/s 78 of FA - HELD THAT - The learned advocate submits that the court may consider the case and direct that the penalty should not be levied under Section 78 of the Act. We are not able to accede such a prayer as it is beyond the scope of the prayer sought for in the writ petition nor such contention appears to have been raised in the writ petition. However, we give liberty to the appellant to raise all contentions both on law and facts in the event there is proposal to levy penalty for the aforementioned period. The appellant has exercised the option prior to 01.03.2008 and therefore would be entitled to the compounded rate of tax at 2% for the relevant period and this cannot extend to the period from April 2012 to March 2013 which the appellant has conceded to pay tax at the enhanced rate along with the interest - Appeal allowed.

Issues Involved:
1. Retrospective effect of notifications altering service tax rates.
2. Applicability of enhanced service tax rates to existing contracts.
3. Doctrine of Promissory Estoppel.
4. Invocation of the extended period of limitation for issuing show cause notices.

Detailed Analysis:

1. Retrospective Effect of Notifications:
The primary issue was whether the notifications dated 01.03.2008 and 17.03.2012, which enhanced the service tax rates, could be applied retrospectively to contracts where the option under the Composition Scheme had already been exercised. The court held that the competent authority had jurisdiction to amend the rate of tax, but such amendments would be applicable prospectively and should not affect pending works contracts. The court emphasized that sub-rule (3) of Rule 3 of the Composition Scheme, which states that the option should be exercised prior to the payment of service tax and remain applicable for the entire contract, implies that the rate applicable at the time of exercising the option should continue for the entire duration of the contract.

2. Applicability of Enhanced Service Tax Rates:
The court examined whether the enhanced service tax rates could be applied to contracts for which the option under the Composition Scheme had already been exercised. It was noted that the appellant had paid service tax at 2% before the notification dated 01.03.2008, and this payment constituted the exercise of the option under the scheme. The court rejected the department's argument that the option should be exercised in a specific manner, noting that no statutory form or prescribed mode for exercising the option existed. The court concluded that the payment of tax at the rate of 2% and the filing of returns indicating the availment of the Composition Scheme were sufficient to constitute the exercise of the option.

3. Doctrine of Promissory Estoppel:
The appellant argued that any change in the rate of tax based on subsequent notifications was impermissible and hit by the Doctrine of Promissory Estoppel. The court agreed, stating that once the service provider exercised the option under the Composition Scheme, the rates of service tax at the time of the option would continue for the entire works contract period. The court emphasized that the substantive part of Rule 3(1) of the scheme provides an option to discharge service tax liability at a specific rate, and this option, once exercised, should not be altered by subsequent notifications.

4. Extended Period of Limitation:
The court considered whether the extended period of limitation could be invoked for issuing show cause notices alleging short payment of service tax. It was noted that the show cause notices for the period from March 2008 to March 2011 were issued after a significant delay, and the extended period of limitation could only be invoked in cases of deliberate intention to evade payment of tax. The court found that the appellant had disclosed the availment of the Composition Scheme in their returns, which were accepted by the assessing officer without any objections. Therefore, the invocation of the extended period of limitation was deemed flawed and illegal. For the period from April 2012 to March 2013, the appellant conceded to pay the differential amount of service tax at the enhanced rate along with interest.

Conclusion:
The appeal was allowed, and the portion of the order passed by the learned Single Bench that held the appellant liable to pay service tax at the enhanced rates was set aside. It was held that the appellant had exercised the option under the Composition Scheme prior to 01.03.2008 and was entitled to the compounded rate of tax at 2% for the relevant period. The appellant agreed to pay the enhanced rates for the period from April 2012 to March 2013 along with interest.

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