2009 (9) TMI 342 - AT - Service Tax

Commercial or industrial construction service- the assessee was engaged in providing commercial or industrial construction and construction of residential complex services. During the material period it claimed deduction under Notification No. 12/2003-ST, dated 20.6.2003, in respect of the value of goods and materials consumed for providing above services. To determine the value of goods and material involved in the construction contract, the assessee followed the formula prescribed under Karnataka Vat Act and accordingly, paid VAT on 70 per cent of contract value and service tax on 30 percent of the value. However, a show cause notice was issued to the assessee proposing for demand of differential service tax on the ground that assessee had consumed materials in the provision of service but had not sold then to the customer, such consumption did not amount to sale and therefore it is not entitled to the benefit of the Notification. The Commissioner confirmed the said demand on the ground that assessee had not produced documents to evidence sale of materials for which exemption was claimed. Held that- the decision of the commissioner to collect service tax on the value on which the assessee had already paid State Vat was contrary to the principal of fiscal federalism adopted in the constitution. Thus the demand is not sustainable. Accordingly, the impugned order was vacated and appeal filed by the assesese was allowed.

Issues Involved:
1. Classification of construction activities as "works contract" and its tax implications.
2. Eligibility for exemption under Notification No. 12/2003-ST.
3. Eligibility for exemption under Notification No. 1/2006-ST.
4. Applicability of interest and penalties for alleged tax defaults.
5. Mutual exclusivity of service tax and sales tax.

Detailed Analysis:

1. Classification of Construction Activities as "Works Contract" and Its Tax Implications:
The appellants, engaged in construction activities, argued that their contracts were composite "works contracts" and could not be vivisected for tax purposes. They cited the Tribunal's decision in Daelim Industrial Co. v. CCE and CBEC Circular No. 98/1/2008-ST, which clarified that construction contracts were single composite contracts before 1-6-2007. The Tribunal accepted this argument, noting that works contracts came under the service tax net only from 1-6-2007. Hence, the impugned activities undertaken prior to this date were not taxable under the pre-existing categories of services.

2. Eligibility for Exemption under Notification No. 12/2003-ST:
The appellants claimed exemption under Notification No. 12/2003-ST, which exempts the value of goods and materials sold during the provision of service from service tax. The Commissioner denied this exemption, arguing that the appellants did not provide documentary evidence of such sales. However, the Tribunal found that the appellants maintained records as required and paid VAT on 70% of the contract value, indicating the sale of materials. The Tribunal referred to the CBEC's clarification and previous decisions, such as Shilpa Colour Lab v. CCE, which supported the appellant's claim. Consequently, the Tribunal held that the exemption under Notification No. 12/2003-ST was rightly availed by the appellants.

3. Eligibility for Exemption under Notification No. 1/2006-ST:
The appellants argued that they had the option to avail either Notification No. 12/2003-ST or Notification No. 1/2006-ST, which allowed a 67% abatement of the gross amount charged for construction services. They chose Notification No. 12/2003-ST and discharged their legitimate liability. The Tribunal did not find it necessary to address this issue further, as the appeal succeeded on the primary legal question regarding Notification No. 12/2003-ST.

4. Applicability of Interest and Penalties for Alleged Tax Defaults:
The Commissioner imposed penalties under section 76 of the Finance Act for the alleged default in service tax payment. The appellants contested this, citing the absence of intent to evade tax. The Tribunal, agreeing with the appellants, vacated the demand for interest and penalties, referencing the Apex Court's judgment in Hindustan Steel Ltd. v. State of Orissa, which stated that penalties could not be justified without intent to evade payment of duty.

5. Mutual Exclusivity of Service Tax and Sales Tax:
The Tribunal emphasized the constitutional principle of mutual exclusivity between service tax and sales tax. It referred to the Apex Court's observations in Bharat Sanchar Nigam Ltd. v. Union of India and Gujarat Ambuja Cements Ltd. v. Union of India, which highlighted that the Centre and States have distinct taxing powers. The Tribunal found the Commissioner's decision to collect service tax on the value already subjected to State VAT contrary to these principles. Consequently, the Tribunal vacated the impugned order, allowing the appeals filed by SDL.

Conclusion:
The Tribunal allowed the appeals, vacating the impugned order and the associated demands for differential duty, interest, and penalties. The decision was primarily based on the legal interpretation of Notification No. 12/2003-ST and the constitutional principles of fiscal federalism. The Tribunal did not find it necessary to address other issues raised in the appeal, as the primary legal question was decisive.

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