Shifting to Works Contract Service

PJ/Case Laws/2011-12/1318

Shifting to Works Contract Service - permissibility of

Case: LANCHO INFRATECH LTD VERSUS COMM. OF CUS., C.EX. & S.T., HYDERABAD

Citation: 2011(23) S.T.R. 351 (TRI-BANG.)

Issue:- Stay-Shifting from Commercial or industrial construction to composition scheme of works contract on ongoing projects permissible?

Whether abatement @ 67% is available when this shifting is not permitted?

Brief Facts:- Demand relates to the period from June 2007 to March 2008. Prior to 01.06.2007, when works contract service was made taxable, Appellant was paying Service Tax under the head “Commercial or Industrial Construction Service”. With the introduction of levy of Service Tax on “Work Contract” w.e.f. 1-6-2007, they opted for paying service tax under composition scheme of Works Contract @ 2%. Appellant paid service tax at the compounded rate of 2% in terms of Rule 3(3) of the Work Contract Rules, 2007. This practice continued upto 31st March 2008. They continued to pay service tax in like manner but at revised compounded rate of 4 %.

Department issued show cause notice alleging that the Appellant was not entitled to compounded rate of payment of Service Tax under the aforesaid Rules in as much as their payment of service tax were prior to 1.6.2007. It was alleged that it was not open to the noticee to opt for payment of service tax at the compounded rate under Rule 3 (3) where the payment of tax was actually made prior to 1.6.2007 under ongoing work contract. The Show cause notice relied on the Board Circular No. 98/1/2008- S.T. dated 4.1.2008, wherein CBEC had clarified that where a service provider who paid Service Tax prior to 1.6.2007 for the taxable service, namely, erection, commissioning, or installation services, commercial or industrial construction service or construction of complex service , as the case may be , is not entitled to change the classification of single composite service for the purpose of payment of service tax on or after 1.6.2007 and hence, is not eligible to avail Composition Scheme.

In the reply to the show-cause notice, the assessee contested the demand of Service Tax both on merits and on the ground of limitation. On both the issues, the Adjudicating Authority held against the assessee.

Appellant is before the Tribunal. An application seeking waiver of pre-deposit and grant of stay is filed.

Appellant’s Contention:- Appellant has argued that neither the Commissioner nor the Board considered the provisions of Rule 3(3) ibid in the correct perspective. In this connection, he has also referred to the High Court's decision in CST, Bangalore v. Tarrbotech Precision Engineering Pvt. Ltd. [2010 (18) S.T.R. 545 (Kai.)] wherein it was held that the assessee was not liable to pay Service Tax under the Works Contract service prior to 1-6-2007 in as much as the contract period was between 1997 and 2001, during which works contract service was not a taxable service. The learned Counsel has also claimed support from a few other decisions including Indian National Ship-owners' Association v. UOI [2009 (14) S.T.R. 289 (Born)]. The learned Counsel submits that the appellant had duly exercised option to pay Service Tax under works contract service in terms of Rule 3(3) bid in June, 2007 in respect of the works contracts execution of which was ongoing. It is submitted they were entitled to pay Service Tax at the compounded rate then in force (2%). Apart from the merits of the case, the learned Counsel has also pleaded [limitation by pointing out that all material facts were disclosed to the Department by way of letter dated 18-6-2007 to the Superintendent, the Service Tax Returns filed periodically, etc.

In the rejoinder, it was submitted that even if it be assumed that the Department is entitled to demand Service Tax at the normal rate for the period of dispute, the quantum of demand is liable to be revised. It is submitted that abatement from taxable value to the extent of 67%, should have been allowed to the appellant in terms of Notification No. 1/2006-5.T., in which event the quantum of Service Tax would have been worked out to Rs. 2,66,48,531/- only after taking into account the CENVAT Credit on input services availed by them.

Respondent’s Contention:- Revenue submits that the entire demand is within the normal period inasmuch as the Service Tax Return was filed on 24-10-2007 and the show-cause notice was served on the assessee on 23-10-2005. Revenue has particularly submitted that the Board's Circular well clearly covered the issue was upheld by the Hon'ble High Court in the case of Nagarjuna Construction Company Ltd. and, therefore, the Assessee cannot claim prima facie case against the demand of Service Tax which is based on Section 65(105)(zzzza).

Reasoning of Judgment:- The Tribunal held that they have not found prima facie case for the appellant against the impugned demand of Service Tax. However, the stand for claim of abatement was found acceptable. It was held that the Board's Circular clarified a point, which is squarely applicable to the facts of the present case. Service Tax prior to 1-6-2007 under any of three heads including commercial or industrial construction service. It was clarified that the service provider in such factual situation was not entitled to the benefit. This Circular was upheld by the High Court in the case of Nagarjuna Construction Company Ltd.

The Tribunal found from the said judgment that it operates against the appellant. However, the plea made by the appellant in their rejoinder merits consideration. In the result, the Tribunal were inclined to grant the benefit of abatement from taxable value of the works contract service under Notification No. 1/2006-S.T., for the present purpose and, consequently, the appellant will have to pre-deposit an amount of Rs. 2.66 crores.

Decision:- Stay granted partly.

Comment:- This issue has arisen in complete construction industry. At that time, most of consultants opined that when no option is given for on going projects then they can opt for the same. This option can be exercised only once and since levy under works contract was not there prior 1.6.2007, hence the option can be exercised now. But the High Court has given the verdict against the asseesee in case of Nagarjuna construction cited supra. Thereafter all the decisions are coming against the assessee. We have pointed out at that time also to our customers that the real beneficiary in this case will be client only and the hanging sword will be on us if the department goes in litigation. This has proved also. We have always opined that in case of litigation in indirect taxation, we should charge the same from our client and do not go for litigation. Later on, it proves to be huge liability.

Comments

PJ/Case Laws/2011-12/1318

Post a Comment

Query