2025 (4) TMI 1187 - AT - Service Tax

Classification of services - management maintenance or repair service or Commercial or Industrial Construction Service? - classification of services rendered post 01.07.2012 as works contract service by the appellant - scope of SCN - extended period fo limitation. Whether the services provided by the appellant during the period prior to 30.06.2012 are correctly classifiable as management maintenance or repair service or as Commercial or Industrial Construction Service (CICS) for the purpose of service tax levy and abatement? - HELD THAT - With effect from 01.07.2012 the Appellant classified the services in question as Works Contract Service and accordingly was discharging service tax. For the period post 01.07.2012 it has been alleged that the classification of the subject transaction as works contract is incorrect inasmuch as the Appellant failed to submit any documentary evidence to substantiate discharge of VAT on the value of goods involved in the execution of goods. For the period post July 2012 even when the adjudicating authority accepted that the underlying agreements qualifies as works contract services he has held that the valuation adopted by the Appellant in terms of Rule 2(A)(ii) of Service Tax Valuation Rules is incorrect since the Appellant is able to determine the value of VAT payable. Accordingly it was held that the Appellant ought to have adopted Rule 2(A)(i) for determination of value of services. Whether the classification of services rendered post 01.07.2012 as works contract service by the appellant is correct? - HELD THAT - Reliance placed on the decision in the case of Gainwell Commosales Pvt. Ltd. v. CCE ST Ranchi 2023 (6) TMI 1308 - CESTAT KOLKATA wherein this Tribunal has held that if a contract involves supply of goods as well services prior to 01.07.2012 then such composite contract cannot be classified under management maintenance or repair service. It has been held that such contracts would more appropriately be classifiable under works contact service and thus demand under management maintenance or repair service was set aside. The demand of service tax confirmed in the impugned order for the period prior to 30.06.2012 under the category of management maintenance or repair service is not sustainable. Accordingly the appellant has rightly classified the said service under the category of Commercial or Industrial Construction Service (CICS) and claimed abatement in terms of Sl. No. 10 of Notification No. 01/2006-ST dated 01.03.2006. Scope of SCN - Demand of service tax confirmed for the period from period from July 2012 to September 2014 - HELD THAT - The Ld. Commissioner has travelled beyond the scope of the Show Cause Notice and confirmed the demand on a ground which is not raised in the Notice. It is observed that nowhere in the Show Cause Notice was there any allegation or proposal with respect to the valuation of such services under Rule 2(A) of the Service Tax Valuation Rules. Once the allegation in the Show Cause Notice regarding the classification of the services in question has been decided the Ld. Commissioner cannot travel beyond the proposals in the Show Cause Notice and confirm the demand. It is a settled principle of law and has been held in a number of decisions that when an order goes beyond the allegations mentioned in the Show Cause Notice such order is violative of the principles of natural justice. Accordingly the demand confirmed post June 2012 up to September 2014 is liable to be set aside on this ground alone. Valuation of works contract under Rule 2A(ii)(c) of the Valuation Rules - HELD THAT - Regarding the method of valuation adopted by the Appellant we observe that as per the agreement between the Appellant and TSL the Appellant is required to raise its invoice for the composite service at the beginning of each month based on agreed contract value. Hence material requirements and details of such procurement is not known to the Appellant at the time of raising of invoice. Consequently it is impractical to compute service portion of the contract in terms of Rule 2(A)(i) of the Valuation Rules since value of goods used toward rendering of services is not known at the time raising the invoice. In view of the above the valuation cannot be done as per Rule 2A(i) of the Valuation Rules. Rule 2A provides two methods of valuing the works contract service and entails a right upon the assessee to choose any method of valuation of works contract. Thus it is at the discretion of the Appellant to choose the method of valuation as per their contract and convenience. Since the Appellant had not entered into the contract with intention of valuing the service and material elements separately hence the Appellant chose to determine value of goods under Rule 2(A)(ii) as it provides for a simplified and specific method of computation - the method of valuation adopted by the appellant as per rule 2(A)(ii) is in order. Accordingly the demand confirmed in the impugned order on account of valuation of works contract by adopting Rule 2(A(i) of the Valuation Rules is not sustainable. Since the demand itself is not sustainable the question of demanding interest and imposing penalties in the impugned orders does not arise. Extended period of limitation - HELD THAT - The present demands have been raised based on the information obtained from ST-3 returns and other documents submitted by the Appellant. In this case the Department has failed to bring in any evidence to allege suppression of fact with intention to evade the tax. In the absence of any suppression of facts on the part of the appellant the extended period of limitation is not invokable. Accordingly the demand confirmed for the extended period is liable to be set aside on the ground of limitation. Conclusion - i) The demand of service tax confirmed under the category of management maintenance or repair Service for the period prior to 30.06.2012 is not sustainable. The services rendered by the appellant for the period from 2009-10 up to 30.06.2012 is rightly classifiable under the category of Commercial or Industrial Construction Service (CICS) as classified by the appellant and the appellant are eligible for the abatement in terms of Sl. No. 10 of Notification No. 01/2006-ST dated 01.03.2006. ii) For the period post 01.07.2012 the service rendered by the appellant is rightly classifiable as works contract service . The demand of service tax confirmed in the impugned order by adopting Rule 2(A)(i) of the Valuation Rules is not sustainable and hence we set aside the same. The appellant has correctly opted for Rule 2(A)(ii) of Valuation Rules to discharge service tax on the works contract services rendered by them. iii) The demand confirmed by invoking the extended period of limitation is not sustainable. iv) No penalty is imposable on the appellant in the facts and circumstances of the case. Appeal allowed.

Summary

The core legal questions considered in this judgment include:

1. Whether the services provided by the appellant during the period prior to 30.06.2012 are correctly classifiable as 'management, maintenance or repair service' or as 'Commercial or Industrial Construction Service' (CICS) for the purpose of service tax levy and abatement.

2. Whether the classification of services rendered post 01.07.2012 as 'works contract service' by the appellant is correct, and if so, whether the valuation method adopted under Rule 2A(ii)(c) of the Service Tax (Determination of Value) Rules, 2006 is sustainable or the valuation should be done under Rule 2A(i).

3. Whether the adjudicating authority exceeded the scope of the Show Cause Notice (SCN) by confirming demand on grounds not raised in the SCN, thus violating principles of natural justice.

4. Whether the demand of service tax confirmed for the extended period of limitation is sustainable, especially in the absence of any suppression of facts by the appellant.

Issue-wise Detailed Analysis:

1. Classification of Services for the Period Prior to 30.06.2012

The appellant provided services under a composite contract with M/s Tata Steel Ltd., involving cleaning, maintenance, repair, renovation, and supply of goods such as pipes, steel items, cement, and bricks. The appellant classified the services as 'Commercial or Industrial Construction Services' (CICS) and claimed abatement under Notification No. 01/2006-ST.

The Revenue contended that the services were 'management, maintenance or repair service' and thus misclassified by the appellant. The adjudicating authority confirmed the demand on this basis.

The Tribunal analyzed the legal framework, specifically the definition of 'works contract' under Explanation to clause (zzzza) of Section 65(105) of the Finance Act, 1994, which prior to 01.07.2012, restricted service tax on composite contracts to five categories: erection and commissioning of plant and equipment, construction of immovable property and civil structures, construction of new residential complexes, turnkey projects, and repair, alteration, renovation, restoration only for immovable property, civil structures, and residential complexes.

The Tribunal observed that the appellant's contract was a composite contract involving supply of goods and services related to civil maintenance and repair, falling within these categories. Reliance was placed on the decision in Gainwell Commosales Pvt. Ltd. v. CCE & ST, which held that composite contracts involving supply of goods and services prior to 01.07.2012 cannot be classified as 'management, maintenance or repair service' but as 'works contract service'.

Applying this precedent, the Tribunal concluded that the demand under 'management, maintenance or repair service' was unsustainable. The appellant's classification of the service as CICS and claim of abatement was upheld.

2. Classification and Valuation of Services Post 01.07.2012

For the period post 01.07.2012, the appellant classified the services as 'works contract service' and discharged service tax accordingly under Rule 2A(ii)(c) of the Valuation Rules, which allows valuation on an abated gross value basis when the value of goods used is not ascertainable at the time of invoicing.

The Revenue accepted the classification as 'works contract service' but challenged the valuation method, contending that since the appellant had discharged VAT on the value of goods supplied, the value of goods was known, and therefore valuation should have been done under Rule 2A(i), which requires valuation by deducting the value of goods from the gross amount charged.

The Tribunal noted that the Show Cause Notice dated 22.04.2015 alleged misclassification but did not raise any issue regarding valuation under the Valuation Rules. The adjudicating authority's confirmation of demand based on valuation under Rule 2A(i), which was not alleged in the SCN, was held to be beyond the scope of the SCN and violative of principles of natural justice. The Tribunal cited multiple precedents establishing that an order cannot go beyond the allegations in the SCN.

On the merits of valuation, the Tribunal observed that the appellant raised invoices monthly based on agreed contract value without knowledge of material procurement details at the time of invoicing, making it impractical to value services under Rule 2A(i). The appellant's choice of Rule 2A(ii) was found to be a valid exercise of discretion, as Rule 2A provides two alternative methods and the assessee is entitled to choose the method suitable to their contract and convenience.

Accordingly, the Tribunal held that the demand confirmed on valuation grounds was unsustainable and that the appellant's valuation under Rule 2A(ii) was proper.

3. Scope of Show Cause Notice and Principles of Natural Justice

The Tribunal emphasized that the adjudicating authority cannot travel beyond the allegations contained in the SCN. Since the SCN did not allege incorrect valuation under Rule 2A(i), confirming demand on that basis was held to violate natural justice. This principle was supported by several authoritative decisions.

4. Limitation and Extended Period of Demand

The appellant contended that the demand was barred by limitation as it was raised for an extended period without any evidence of suppression or fraud. The Tribunal noted that the demand was based on information from ST-3 returns and other documents voluntarily submitted by the appellant. There was no evidence of suppression or intention to evade tax.

Relying on settled law, the Tribunal held that the extended period of limitation could not be invoked and the demand for the extended period was liable to be set aside.

Significant Holdings:

"We hold that the demand of service tax confirmed under the category of management, maintenance or repair Service' for the period prior to 30.06.2012, is not sustainable. We hold that the services rendered by the appellant for the period from 2009-10 up to 30.06.2012 is rightly classifiable under the category of 'Commercial or Industrial Construction Service' (CICS), as classified by the appellant and the appellant are eligible for the abatement in terms of Sl. No. 10 of Notification No. 01/2006-ST dated 01.03.2006."

"For the period post 01.07.2012, we hold that the service rendered by the appellant is rightly classifiable as 'works contract service'. The demand of service tax confirmed in the impugned order by adopting Rule 2(A)(i) of the Valuation Rules is not sustainable and hence we set aside the same. We hold that the appellant has correctly opted for Rule 2(A)(ii) of Valuation Rules to discharge service tax on the works contract services rendered by them."

"Once the allegation in the Show Cause Notice regarding the classification of the services in question has been decided, the Ld. Commissioner cannot travel beyond the proposals in the Show Cause Notice and confirm the demand. It is a settled principle of law and has been held in a number of decisions that when an order goes beyond the allegations mentioned in the Show Cause Notice, such order is violative of the principles of natural justice."

"In the absence of any suppression of facts on the part of the appellant, we hold that extended period of limitation is not invokable. Accordingly, we hold that the demand confirmed for the extended period is liable to be set aside on the ground of limitation."

"Since the demand itself is not sustainable, the question of demanding interest and imposing penalties in the impugned orders does not arise. Accordingly, we set aside the same."

The Tribunal thus established key principles regarding classification of composite contracts involving supply of goods and services prior to and post 01.07.2012, the discretionary right of the assessee to choose the valuation method under Rule 2A of the Valuation Rules, the inviolability of the scope of the Show Cause Notice in adjudication, and the conditions for invoking extended limitation periods.