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2009 (3) TMI 423 - AT - Service TaxWork contracts valuation - Commercial and industrial constructions - Notification No. 15/2004, dated 10.09.2004, 18/2005, dated 7.6.2005, and 1/2006 dated 1.03.2006- . Show-cause notice was issued to the appellant on the ground that the cost of materials supplied was excluded for purpose of payment of Service Tax and the relevant Notifications viz., No. 15/2004-ST, dated 10-9-2004 and No. 18/2005-ST, dated 7-6-2005 do not provide such exclusions. The Original Authority passed the impugned order confirming the proposals in the show-cause notice. Held that - The period involved in the present case is from 1-10-2005 to 31-3-2006. Therefore, legally works contract cannot be liable to service tax prior to 1-6-2007. In such circumstances, no Service Tax is leviable in respect of the works contract carried out by the appellant during the relevant period. On this ground also the impugned order has no merits. Hence, the same is set aside and the appeal is allowed with consequential relief.
Issues Involved:
1. Wrongful payment of Service Tax under incorrect categories. 2. Applicability of Service Tax on works contracts prior to 1-6-2007. 3. Inclusion of the cost of materials supplied by the service recipient in the taxable value. 4. Penalties imposed under sections 76 and 77 of the Finance Act, 1994. 5. Interest demanded under section 75 of the Finance Act, 1994. Issue-wise Detailed Analysis: 1. Wrongful Payment of Service Tax under Incorrect Categories: The appellants argued that they had wrongly paid Service Tax under the categories of 'construction of residential complex' and 'commercial or industrial construction service'. They claimed to be works contractors liable to Sales Tax under the Kerala General Sales Tax Act, 1957, or Kerala Value Added Tax Act, and not under the Service Tax regime. They contended that works contracts were made liable for Service Tax only from 1-6-2007 onwards as per section 65(105)(zzzza). Therefore, they sought a refund of the Service Tax paid for the period prior to 1-6-2007. 2. Applicability of Service Tax on Works Contracts Prior to 1-6-2007: The appellants cited several judicial decisions, including *Diebold Systems (P.) Ltd. v. CST* and *Daelim Industrial Co. Ltd. v. CCE*, to support their claim that works contracts involving supply of goods and materials, and erection, installation, and commissioning services, were only liable for Service Tax from 1-6-2007. The Tribunal agreed, noting that the definition of works contract was introduced in the Service Tax net from 1-6-2007, and thus, no Service Tax was leviable on works contracts for the period from 1-10-2005 to 31-3-2006. 3. Inclusion of the Cost of Materials Supplied by the Service Recipient: The show-cause notice issued to the appellants argued that the cost of materials supplied by the service recipient should be included in the taxable value. The appellants contended that the relevant Notifications (No. 15/2004-ST and No. 18/2005-ST) did not provide for such inclusions. They relied on the decision of the Madras High Court in *Larsen & Toubro Ltd. v. Union of India*, which interpreted the explanation to the Notification to mean that the value of goods supplied by the client should not be included. The Tribunal agreed with this interpretation, stating that including the cost of materials supplied by the service recipient would be contrary to section 67 of the Finance Act, 1994. 4. Penalties Imposed under Sections 76 and 77 of the Finance Act, 1994: The appellants argued that penalties under sections 76 and 77 were not sustainable, as they had a bona fide belief that sub-contractors were not required to pay Service Tax when the main contractor had paid it. They cited section 80 of the Finance Act, which provides that no penalties shall be imposed if the assessee proves reasonable cause for failure. The Tribunal found merit in this argument and noted that no reasons were adduced for imposing the penalties. 5. Interest Demanded under Section 75 of the Finance Act, 1994: The demand for interest under section 75 was also contested by the appellants. Given the Tribunal's findings that no Service Tax was leviable for the period in question and that the inclusion of the cost of materials supplied by the service recipient was incorrect, the demand for interest was also deemed unsustainable. Conclusion: The Tribunal concluded that the impugned order had no merits and set it aside. The appeal was allowed with consequential relief, emphasizing that no Service Tax was leviable on works contracts for the period prior to 1-6-2007, and the cost of materials supplied by the service recipient should not be included in the taxable value. The penalties and interest demanded were also found to be unsustainable.
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