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2023 (5) TMI 138 - SC - Service TaxAvailing Cenvat Credit on works contract service - Value to be determined under Rule 2A or under Composition Scheme - Section 67 of the Finance Act, 1994 - entitlement to take the total contract value which includes both goods and services and remit service tax on the entire value as works contract service and in the process also entitled to avail the CENVAT Credit - Tribunal allowed the credit of duty paid on goods also. HELD THAT - It is required to be noted that thereafter the service elements have found a statutory recognition as part of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 w.e.f. 01.06.2007. The applicability of Rule 2A has been dealt with and considered by this Court in extenso in the case of Larsen and Toubro (supra). Therefore, as per the law laid down by this Court in the case of works contract service an assessee is liable to pay the service tax on the service element/value of the service rendered and the sales tax/tax on the element of goods transferred pursuant to the contract. Whether despite Rule 2A of the Service Tax (Determination of Value) Rules, 2006 and the Composite Scheme still the assessee is entitled to take the total contract value which includes both goods and services in terms of Section 67 of the Act, 1994 and remit service tax on the entire value as works contract service and the assessee is also entitled to avail CENVAT Credit? - HELD THAT - Rule 2A applicable prior to 01.07.2012 is reproduced hereinabove. It is to be noted that Rule 2A is the specific provision for determination of value of taxable service in relation to services involved in the execution of a works contact shall be determined by the service provider in the manner provided under Rule 2A(1)(i) i.e. value of works contract service determined shall be equivalent to the gross amount charged for the works contract. As per explanation to Rule 2A gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the works contract. The position is made more clear post 01.07.2012. Post 01.07.2012 as per Rule 2A value of service portion in the execution of a works contract shall be determined taking into consideration the value of service portion in the execution of a works contract equivalent to the gross amount charged for the works contract less the value of property of goods transferred in the execution of the said works contract. However, as per the Composition Scheme vide notification 32/2007 ST dated 22.04.2007 by which works contract (Composition Scheme for payment of Service Tax) Rules, 2007 came to be introduced, as per Rule 3(1) and notwithstanding anything contained in Section 67 of the Act and Rule 2A of the Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge the service tax at the rate specified in Section 67 of the Act, by paying an amount equivalent to 2% of the gross amount charged for the works contract - it is required to be noted that post 01.07.2012 Rule 2A specifically provides that the taxable service shall not take CENVAT Credit of duty or cess paid on inputs used in or in relation to said works contract, under the provisions of CENVAT Credit Rules, 2004. With respect to the works contract service and/or the Composition Works Contract the valuation has to be made as per Rule 2A of the Valuation Rules, 2006. Even as per the Composition Scheme vide Notification 32/2007 dated 22.04.2007 an assessee has an option to discharge the service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in Section 66 of the Act by paying equivalent to 2% of the gross amount charged for the works contract - as per the Scheme of the Act the determination of value of service portion in the execution of the works contract is to be made as per Rule 2A, however with an option to the assessee to avail the benefit of Composition Scheme. Therefore, either the assessee has to go for Composition Scheme or go for Determination of Value as per Rule 2A and the assessee has to pay service tax on the service element and can claim CENVAT Credit on the said amount only. The impugned judgment and order passed by the CESTAT is hereby quashed and set aside and it is held that the assessee is not entitled to take the total contract value which includes both goods and services and remit service tax on the value as works contract service and, in the process, also entitled to avail the CENVAT Credit on the entire amount - now the service tax needs to be computed in terms of Rule 2A of the (Determination of Value) Rules, 2006 and as the assessee has not opted for the composition scheme, the matter is remitted back to the CESTAT for re-computation of the demands in terms of Rule 2A. Appeal allowed in favor of Revenue. However, matter remitted back to the CESTAT for re-computation of value and determination of issue of Extended Period of limitation.
Issues Involved:
1. Classification of Services and Availment of CENVAT Credit 2. Applicability of Rule 2A and Composition Scheme 3. Valuation of Taxable Services under Section 67 of the Finance Act, 1994 4. Extended Period of Limitation Summary: 1. Classification of Services and Availment of CENVAT Credit: The respondent-assessee was engaged in manufacturing and construction services, availing CENVAT Credit on excise duty, capital goods, and input services. The Department alleged that the services should be classified under "Works Contract Service" instead of "Commercial or Industrial Construction Services" and issued a Show Cause Notice for inadmissible CENVAT Credit of Rs. 112,60,92,760/- on building material during June 2007 to March 2012. The Tribunal allowed the appeal by the respondent, setting aside the Order-in-Original, which disallowed the CENVAT Credit. 2. Applicability of Rule 2A and Composition Scheme: The Revenue contended that the services rendered by the respondent amounted to Works Contract, chargeable under Section 65(105)(zzzza) of the Finance Act, 1994, and that the respondent should either follow Rule 2A of the Service Tax (Determination of Value) Rules, 2006, or adopt the Composition Scheme, which do not allow the availment of CENVAT Credit on inputs. The Tribunal held that the composition scheme is optional and Rule 2A is subject to Section 67 of the Act, 1994, thereby allowing CENVAT Credit on inputs. 3. Valuation of Taxable Services under Section 67 of the Finance Act, 1994: The Supreme Court held that services rendered by the respondent are classified as 'works contract service' under the Finance Act, 1994, effective from 01.06.2007. The valuation of taxable services should be as per Rule 2A, which excludes VAT or sales tax on the transfer of property in goods. The Court ruled that the assessee cannot take the total contract value, including both goods and services, for service tax and avail CENVAT Credit on the entire amount, as it would render Rule 2A and the Composition Scheme otiose. 4. Extended Period of Limitation: The Supreme Court noted that the issue of the extended period of limitation was not decided by the CESTAT. The Court remitted the matter back to the CESTAT to decide on the limitation issue and re-compute the demands in terms of Rule 2A. Conclusion: The Supreme Court allowed the appeal, quashing the CESTAT's judgment that favored the respondent. It held that the assessee must pay service tax on the value of services as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006, and avail CENVAT Credit accordingly. The demand for the period January 2007 to May 2007 was deemed unsustainable. The matter was remitted back to the CESTAT for re-computation of demands and to decide the issue of limitation within three months. No costs were ordered.
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