2010 (6) TMI 91 - HC - Service Tax

Works contract Service - option to avail composition scheme - Existing contracts commenced prior to 1.6.2007 - Circular No. 98/1/2008-ST dated 01-01-2008 - Held that - . On a true and fair construction of Rule 3(3) of the 2007 Rules, it is clear that where in respect of a works contract service tax has been paid, no option to pay service tax under the composition scheme could be exercised. There is no ambiguity in this provision. The entitlement to avail the benefits of the composition scheme is only after an option is exercised under Rule 3(3) of the 2007 Rules and this provision specifically enjoins a disqualification forexercise of such option where service tax had been paid in respect of a works contract. To put it succinctly, where service tax has been paid in respect of a works contract, the eligibility to exercise an option to avail the benefits of the composition scheme under the 2007 Rules is excluded.

Issues Involved:
1. Validity of Circular No. 98/1/2008-ST dated 01-01-2008.
2. Entitlement to benefits under the Works Contract (Composition Scheme for Payment of Service Tax) Rules 2007.
3. Classification of taxable services and eligibility for composition scheme.

Issue-wise Detailed Analysis:

1. Validity of Circular No. 98/1/2008-ST dated 01-01-2008:
The petitioner challenged the circular issued by the Government of India, Ministry of Finance, which clarified that service providers who paid service tax prior to 01.06.2007 for certain taxable services (erection, commissioning or installation, commercial or industrial construction, or construction of complex) are not entitled to change the classification of the single composite service for the purpose of payment of service tax on or after 01.06.2007 and hence, are not entitled to avail the Composition Scheme. The court found that the impugned circular is wholly in conformity with the provisions of Rule 3(3) of the 2007 Rules, which clearly enjoins that the provider of taxable service who opts to pay service tax under these Rules shall exercise such option in respect of works contract prior to payment of service tax in respect of the said works contract.

2. Entitlement to Benefits under the Works Contract (Composition Scheme for Payment of Service Tax) Rules 2007:
The petitioner, a service provider, claimed that the works pursued by it fall within the purview of 'works contract' and that it should be entitled to the benefits under the composition scheme. However, the court noted that Rule 3(3) of the 2007 Rules specifically disqualifies the exercise of such an option where service tax had already been paid in respect of a works contract. The court emphasized that there is no ambiguity in this provision, and the eligibility to exercise an option to avail the benefits of the composition scheme is excluded where service tax has been paid in respect of a works contract.

3. Classification of Taxable Services and Eligibility for Composition Scheme:
The court discussed the legislative and statutory changes, including the introduction of service tax through the Finance Act 1994 and subsequent amendments. The court noted that the classification of taxable services is determined based on the nature of service provided, and the liability to pay service tax is related to the receipt of consideration. The court held that vivisecting a single composite service and classifying the same under two different taxable services depending upon the time of receipt of the consideration is not legally sustainable. The court concluded that the impugned circular merely reiterates the eligibility criterion specified in Rule 3(3) as the condition precedent for entitlement to exercise an option for coming within the composition scheme.

Conclusion:
The writ petition was dismissed, and the interim order in this writ petition stands dissolved. The court held that the impugned circular is in conformity with the provisions of Rule 3(3) of the 2007 Rules and that the petitioner is not entitled to the benefits of the composition scheme under the 2007 Rules for services provided prior to 01.06.2007.

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