2021 (11) TMI 695 - AT - Service Tax

Valuation - Works contract service - Composition scheme - case of the Revenue is that since the appellant could not ascertain the actual value of goods transferred, it should have paid service tax under composition scheme - where the value of the works contract is split notionally into value of goods and value of services as per the State Act and Rules and VAT has been paid on the goods component on which and there is no break-up of the actual value of the goods which are transferred or deemed to have transferred in execution of the contracts, can service tax also be charged on the same amount? HELD THAT - In this case in view of the Tamil Nadu VAT Act and Tamil Nadu VAT Rules (which were also in existence prior to 01.07.2012 also) the appellant is bound to pay VAT on 70% of the value of the indivisible works contract deeming it to be the value of the goods transferred. It is undisputed that the appellant paid VAT accordingly and paid service tax on the remaining 30% - Since the works in this case were not original works, it falls under category B of clause (ii) of this Rule and service tax should be paid on 70% of the value of the works contract. In other words, if the Revenue s argument is accepted, the appellant will have to pay service tax on 70% of the gross amount charged for the works contract and the appellant has already paid VAT on 70% of the gross amount charged as per the Tamil Nadu VAT Act. This will lead to an anomalous situation where the appellant has to pay VAT as well as service tax on 40% of the total value of the works contract. Where the value has already been split as per the state law and VAT has been paid on the goods component of the composite works contract, no service tax can be levied on such component again taking recourse to Rule 2A(ii) of Service Tax (Determination of Value) Rules, 2006. The demand for the period post 01.07.2012 also needs to be set aside on this ground. Since the demand of service tax does not sustain, the demand of interest under Section 75 and imposition of penalty under Section 76, 77 and 78 do not also survive. The impugned order is set aside - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Applicability of the Composition Scheme for payment of service tax on works contracts up to 30.06.2012.
2. Determination of service tax liability for works contracts from 01.07.2012.
3. Imposition of interest and penalties under Sections 75, 76, 77, and 78 of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Applicability of the Composition Scheme for payment of service tax on works contracts up to 30.06.2012:

The appellant provided finishing services on a works contract basis and paid VAT on the goods component as per the Tamil Nadu VAT Act, while paying service tax on the service component. The Revenue argued that since the appellant did not separately invoice for goods and services, it should have paid service tax under the Composition Scheme. The Tribunal noted that the Composition Scheme is an option and cannot be enforced upon the taxpayer. It was highlighted that the term "shall" in the Composition Scheme indicates an option available to the taxpayer, not a mandatory requirement. The Tribunal cited the High Court of Andhra Pradesh and Telangana's ruling in Tiara Advertising versus Union of India, emphasizing that the Department cannot choose an option for the taxpayer. Consequently, the demand for service tax based on enforcing the Composition Scheme for the period up to 30.06.2012 was set aside.

2. Determination of service tax liability for works contracts from 01.07.2012:

From 01.07.2012, service tax became payable on all services except those in the negative list, including the service portion in the execution of works contracts. The appellant argued that it paid VAT on the goods component as per the Tamil Nadu VAT Act, and service tax should only be charged on the service component. The Revenue contended that since the actual value of goods transferred was not available, the appellant should determine the service tax as per Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006, which prescribes paying service tax on 70% of the total amount for certain works contracts. The Tribunal referred to the Supreme Court's decision in Safety Retreading Co. (P) Ltd. versus Commissioner of Central Excise, Salem, which held that the value attributable to the transfer of property in goods cannot be subjected to service tax if VAT has already been paid. The Tribunal concluded that no service tax could be levied on the goods component of the composite works contract if VAT has been paid on it. Thus, the demand for the period post-01.07.2012 was also set aside.

3. Imposition of interest and penalties under Sections 75, 76, 77, and 78 of the Finance Act, 1994:

Since the demand for service tax did not sustain, the Tribunal held that the demand for interest under Section 75 and the imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994, also did not survive.

Conclusion:

The impugned order dated 27.08.2018 was set aside, and the appeal was allowed with consequential relief to the appellant. The Tribunal pronounced the order in court on 18/11/2021.