2024 (11) TMI 11 - AT - Service Tax

Service Tax on Works Contracts - Demand of service tax invoking extended period of limitation - appellant had rendered taxable service of construction of residential complexes chargeable to service tax under section 65(105) (zzzh) of the Finance Act, 1994 Whether the services of construction of the residential complexes for the government hospitals and the police department rendered by the appellant as works contracts chargeable to service tax under the head construction of residential complex service without abatement towards the value of the goods used? - The nature of works contracts came up before the Supreme Court in State of Madras vs. Gannon Dunkerley Company (Madras) Ltd. 1958 (4) TMI 42 - SUPREME COURT held that the power of the State Government to levy Sales Tax did not extend to levying tax on the goods used in works contracts. The finding of the Commissioner (Appeals) in the impugned order that since the appellant had not opted for the composition as provided in the Rules, the entire amount received for the works contracts should be treated as consideration and service tax should be collected on the total value of works contracts including the value of goods is not correct. This is because the power of taxation of the Union does not, after the twenty sixth amendment to the Constitution, extend to tax the value of the goods used in works contracts. The Act and the Rules cannot be interpreted so as to tax the value of the goods used in works contracts. Whether service tax could be charged under the head construction of residential complexes when such services were rendered as part of works contracts ? - In Larsen Toubro 2015 (8) TMI 749 - SUPREME COURT held that works contracts are a separate species of contracts recognized by the world of commerce different from the contracts for services simpliciter. The term works contracts in article 366 (29A) (b) of the Constitution was amply wide and cannot be confined to a particular understanding of the term or to a particular form. Contracts where the services are rendered along with transfer of materials are works contracts which have been made taxable after the introduction of clause 65(105)(zzzza) of the Act with effect from 1.6.2007. Other clauses of section 65(105) of the Act covered only services simpliciter and service tax could not be levied under those headings if the services were rendered as works contracts. To sum up a) Service tax can be levied and it has only been levied on the service component (and not on the goods component) of works contracts by introducing clause 65(105) (zzzza) of the Act. Therefore, the sections of the Act or the Rules made thereunder cannot be read so as to levy service tax also on the value of the goods transferred in the works contracts as has been erroneously done by the Commissioner (Appeals). b) Tax under various clauses of section 65(105) of the Act other than clause (zzzza) including clause (zzzh) under which the demand is confirmed in this case, cover only services simpliciter and not services rendered as a part of the works contract as held in Larsen Toubro. Since the appellant had rendered the service of construction of residential complexes as works contracts , the demand of service tax under section 65(105)(zzzh) of the Act towards construction of residential complexes cannot be sustained. c) The other submissions regarding the personal use or use of employees of the buildings constructed need not be considered because the services rendered by the appellant do not fall under section 65(105) (zzzh) of the Act at all. d) Consequently, the demand, interest and penalties on the appellant cannot be sustained and need to be set aside.

Summary

Issues Involved:

1. Whether the services of construction of residential complexes for government hospitals and police departments rendered by the appellant were chargeable to service tax under the head 'construction of residential complex service' without abatement towards the value of the goods used.
2. Whether the extended period of limitation was correctly invoked in the Show Cause Notice (SCN).
3. Whether penalties were correctly imposed on the appellant.

Issue-wise Detailed Analysis:

1. Chargeability of Service Tax on Works Contracts:

The core issue was whether the services provided by the appellant, which involved construction of residential complexes for government entities, were taxable under the head 'construction of residential complex service' without abatement for the value of goods used. The tribunal noted that all contracts in question were works contracts, involving both the provision of services and the transfer of property in goods. The Commissioner (Appeals) had held that the appellant's services fell under 'Works Contract Services' but denied abatement because the appellant had not opted for the composition scheme under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

The tribunal reviewed the legal framework and precedents, notably the Supreme Court's decision in Larsen & Toubro, which clarified that works contracts are distinct from service contracts simpliciter and that service tax can only be levied on the service component, not on the goods component, of such contracts. The tribunal concluded that the Commissioner (Appeals) erroneously interpreted the law by attempting to levy service tax on the entire value of the works contracts, including the goods component, which is beyond the Union's taxation power post the 26th Amendment to the Constitution. Therefore, the demand for service tax under section 65(105)(zzzh) of the Finance Act, 1994, was unsustainable.

2. Invocation of Extended Period of Limitation:

The appellant contested the SCN as time-barred, arguing it was issued beyond the normal limitation period of 18 months. The tribunal did not delve into this issue in detail, as the primary finding that the service tax demand itself was unsustainable rendered the question of limitation moot in this context.

3. Imposition of Penalties:

Given the tribunal's conclusion that the service tax demand was unsustainable, the imposition of penalties under sections 76, 77, and 78 of the Finance Act, 1994, was also deemed unsustainable. The tribunal emphasized that since the services rendered by the appellant did not fall under the taxable category as per the applicable provisions, the associated penalties could not be justified.

Conclusion:

The tribunal allowed the appeal, setting aside the impugned order and granting consequential relief to the appellant. The decision underscored the necessity of correctly distinguishing between service contracts and works contracts and ensuring that service tax is levied only on the service component of works contracts, in line with constitutional and statutory provisions.