whether Service Tax can be discharged at full rate in case of works contract service?

Case:- M/s S V JIWANI Vs COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, VAPI

Citation:-2014-TIOL-559-CESTAT-AHM

Brief facts:-The relevant facts that arise for consideration, after filtering out unnecessary details are that appellant assessee herein are engaged in providing taxable services in the category of Work Contract Services, commercial and industrial construction services and transport of goods by road services and hold service tax registration for that purpose. The appellant are also availing facility of cenvat credit on inputs/input services as per the provisions of cenvat credit rules 2004 for the period April 2008 - Sept. 2009, the appellant assessee assessed the tax due on the services provided by them and filed statutory returns. The said statutory returns were scrutinized by the range jurisdictional superintendent, and it was noticed by the Supdt. That they have paid service tax and filed cenvat credit on the works contract services. It was jurisdictional superintend's view that in respect of taxable services; works contract services', appellant had no option to pay full service tax and had to pay reduced service tax as per provision of rule 2A of the Service Tax (Determination of values) Rules 2006 and or to pay service tax under composition scheme in terms of work contract (Composition Scheme) for payment of Service Tax Rule 2007. Coming to such a conclusion, show cause notice dated 10/12/2009 was issued to the appellant directing to show cause as to why the cenvat credit availed by them on cement, channels, CTD or TMT bars and other items used for construction of factory shed, building and foundation be not disallowed and interest be charged on such amount and why penalty be not imposed . Such show cause notice was contested by the appellant before the adjudicating authority on various grounds. The adjudicating authority after following due process of law vide impugned order confirmed the demand raised in the show cause notice alongwith interest and as also imposed equivalent amount of penalty on the appellant.

Appellant’s contentions:-Ld Counsel appearing on behalf of the appellant contested that the appellant had paid correct service tax on the correct value of relevant contract executed by them under taxable category 'works contract' services. It was submitted that there is no dispute as to the fact that contract which was entered by them was the works contract which require them to construct the entire factory building for one of their clients. It was also submitted that gross consideration which is indicated in the contract included the value of cement, steel etc., procured by the appellant on payment of duty as well as various input services availed for execution of said contract. It was submitted that the appellant availed cenvat credit of the excise duty paid on inputs and input services in terms of the provisions of Cenvat Credit Rules 2004. It was further submitted that appellant had many options of discharging the service tax liability under the provisions of Sec. 67 of Finance Act 1994 and decided to discharge the service tax on the entire taxable value of the contract executed by them. Further he contested that the amount of contract entered by the appellant was clearly known and determined hence the same is the correct value or gross value or taxable value in terms of provisions of section 67 (i) of the finance Act 1994. It was stated that there is no prohibition under the act or the rules made thereunder for discharging service tax liability at the full applicable rate on the gross amount charged for rendering services. The adjudicating authority has erred in imposing on the appellant provisions of rule 2A of Service Tax valuation rules as After reading the said rules, the authority did not considered that the rule specifically begin with an expression "subject to provisions of section 67", it would mean that the valuation rules are governed by the provisions of section 67 and the said section would prevail however, the method of valuation as prescribed in rule 2A of the Service Tax valuation rules needs to be applied only in case of where there is difficulty in determining correct value of works contract.

For this proposition, he relied upon the decision of the Apex court in the case of South India (P) Ltd., vs. Secretary Board of Revenue, Tvm, (AIR.164.SC.207.215). It was also submitted that the provision of Rule 3 of the composition rules shall not be gone into and after going through the said rules he submitted that the said Rule 3 specifically starts with an "non-obstante" clause and hence the provisions of the rule 3 of composition rule need to be applied only in cases where an assessee opts for discharging Service Tax on reduced rates. It was then submitted that apex court in case of Chandavarkar Sita Ratna Rao vs Ashalatha S Guram (AIR.1987.SC.117) had explained the scope of effect of non obstante to maintain that the provisions embraced in the non obstante clause will not be impediment for the operation of the enactment. Rule 3 of Composition Rule is merely another option provided to the service provider for discharging of service tax liability and the department wants to impose upon the appellant valuation under the Rule 2A of Service Tax Valuation Rules and or Rules 3 of works Contract Composition Rules in order to deny the benefits of cenvat credit of the duty paid inputs consumed as the appellant is fully benefitted of said Rules subject to condition put in Notification No.12/2003/ST which requires non-availment of cenvat credit. It was further contested that the legal position as to non-availment of benefit of Notification No. 12/2003/ST is recognized by the CBEC letter No. 80/10/2004-ST dated 17.9.2004 and refers to Para 13.5. It was submitted that the said Board Circular was binding on the department. It was also submitted that the reliance placed by the adjudicating authority on explanation at the end of Rule 3 Cenvat Credit Rule 2004 is entirely misplaced as this explanation will come into play only when there exists any rule or notification providing for grant of whole or partial exemption on condition of a non-availability of cenvat credit on inputs or capital good or input services. It was also submitted that rule 2A of Service Tax Valuation Rules, or Rule 3 of the composition rules does not grant any exemption whether wholly or partly from payment of service tax but only provides the manner of determination of taxable value in respect of works contract services. He also read sub Rule 2(A) inserted in Rule 3 of the composition rule which is in effect from 1.3.2011 only. It was his further submitted that denial of cenvat credit on inputs, input services is availed and is as per law and there cannot be any allegation of evasion of Service Tax as they have also discharged substantial amount of Service Tax through PLA.

Respondent’s contentions:- Learned Department Representative on the other hand drew attention to the findings recorded by the adjudicating authority. It was there submission that the appellant has availed cenvat credit of the duty paid on inputs like cement, steel etc., and input services for rendering work contract services. It is his submission that the entire issue is availment of ineligible cenvat credit by the appellant for erection of factory for their clients. It was there submission that the said client could not have availed cenvat credit of duty paid on inputs like steel, and construction materials which are structural and construction materials, which are consumed hence this modus operandi was adopted. It was also submited that when the appellant are accepting that it is work contract services which are provided, they should have discharged the service tax liability on the amount as is required to be calculated under the provisions of Rule 2A of the Service Tax Rules or Rule 3 of Composition Rules. It was his submission that both the authorities were correct in holding that the appellant has done wrong by availing cenvat credit and passing on the same to service recipient.

Reasoning of judgment:- it was held that undisputed facts of the case are that appellant were awarded a contract by Clasic Marbles Impex Pvt Ltd., for setting up of their plant which involved procurement of materials and erection. The appellant herein had discharged the service tax at 12.36% ie., full tax on the entire value of the contract under work contract services and availed cenvat credit of the duty paid on inputs like steel, cement and various other services. It was also undisputed that the Cenvat Credit was availed, on correct and valid documents. At the outset, it was recorded that adjudicating authority has proceeded on the ground that the appellant should have discharged Service Tax by adopting the valuation of services as per the provisions of Rule 2A of Service Tax (determination of value) Rules 2006 and or Works Contract (Composition Scheme for payment of service tax) Rules 2007. In judge’s considered view, the entire issue was misconceived by the Adjudicating Authority for more than one reason.

Firstly, the appellant entered into work contract service and service tax liability on such works contract needs to be discharged based on reading Section 67 of Finance Act 1994. Section 67 is read as

"67. Valuation of taxable services for charging service tax. - (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, -(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;

(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.

(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.

(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.

Explanation : For the purpose of this section, -

(a) "consideration" includes any amount that is payable for the taxable services provided or to be provided;

(b) "money" includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include

currency that is held for its numismatic value;

(c) "gross amount charged" includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called "Suspense account" or by any other name, in the books of accounts of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise."

It can be seen from the above reproduced Section, Service Tax liability was to be dischargedon the gross amount charged by the service provider. In the case in hand there was no disputeas to the value or gross amount which needs to be considered for discharge of service taxliability. It was admitted by both sides that the value of the works contract executed by theappellant is the value on which the appellant has discharged full rate of service tax. it was foundfrom the above reproduced Section 67 of Finance Act 1994, the said provision of section 67can be departed only, when value as per the provisions of 67(1)(2)(3)are not ascertainable, and recourse can be taken to provisions of section 67 (4). While applyingprovisions of 67(4) necessary implication is that the value for discharge of service tax liabilityneeds to be determined by referring to service tax valuation rules. In the case in hand sincethere was no dispute as to the gross value charged by the appellant there was no necessity to takerecourse for determining the value under Service Tax (determination of value) Rules 2006.

Secondly, it was founnd strong force in the contentions as raised by the Counsel as toapplicability of the provisions of Rule 2A of the service tax determination of value rules 2006.It was found that the said rule starts with the expression "subject to the provisions of section 67"means that value of the services, involved in execution of works contract if cannot bedetermined under said Section, then only the said provisions of Rule 2A would apply and shallbe determined in the manner as is indicated therein. In their considered view, this rule will not beapplicable to the case in hand.

Thirdly, it was found that the adjudicating authority and assertion of departmental should have discharged the service tax liability under work contract (Composite Scheme for payment of Service Tax) Rules 2007. They also perused the provisions of Rule 3 of the said works contract (Composite Scheme for payment of Service Tax) Rules 2007 and after reading the expression in the opening part of the rule 3 at first blush the use of 'non-obstante clause' gave an impression that the rule will prevail over the provision of section 67 and rule 2A of the Valuation Rules for determination of value for discharge of Service Tax liability in cases of works contracts, but on deeper reading it was that the said provisions indicate another intention of legislature. In order to appreciate a correct position, the relevant Rule needs to be reproduced.

"(1) These rules may be called the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

(2) They shall come into force with effect from the 1st day of June, 2007.

2. Definitions.- In these rules, unless the context otherwise requires,-

(a) "Act" means the Finance Act, 1994 (32 of 1994);

(b) "section" means the section of the Act;

(c) "works contract service" means services provided in relation to the execution of a works contract referred to in sub-clause (zzzza) of clause (105) of section 65 of the Act;

(d) words and expressions used in these rules and not defined but defined in the Act shall have the meanings respectively assigned to them in the Act.

3. (1) Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to two per cent. of the gross amount charged for the works contract.

Explanation.- For the purposes of this rule, gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.

(2) The provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

(3) The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract."

It is pertinent to note that the said rule 3(1) of Works Contract (composition scheme for payment of service tax) Rules 2007 if read carefully indicate that the service provider in relation to works contract, service has an option to discharge service tax liability in respect of works contract service in the manner prescribed therein. If there is an option which needs to be exercised and if an assessee chooses not to exercise such an option of discharge of service tax liability under works contract (Composition Scheme for payment of Service Tax) Rule 2007, then only meaning that can be attributed will be that the service provider or an assessee has to discharge the Service Tax liability at the full rate. They were fortified in this view, by Apex court in the case of Chandavarkar Sita Ratna Rao vs. Ashalata S Guram (Supra). It was also found that larger Bench of the tribunal in the case of Bhayana Builders P Ltd vs CST, Delhi - 2013(32) STR 49 (Tri.-LB) = (2013-TIOL-1331-CESTAT-DEL-LB) was considering more of less identical/similar situation, wherein it was held that cost of free supply of materials can not be considered for inclusion is gross value for discharging of service tax liability under the provisions of Finance Act 1994. In our view, if the rule 3(1) of Works Contract (Composition Scheme) for payment of Service Tax 2007 was to be considered as having overriding effect over section 67 and rule 2A of Valuation Rules on literal construction of non obstante clause, then an incongruous result will follow since the statutory provisions will be rendered nugatory and otiose. Further they were of the view that an anomalous situation would arise, if it was held so, as benefit Rule 2A of Valuation Rules would no longer be available as an option to the service provider if 'non obstante' clause employed in Rule 3(1) of Composition Rules is read in the manner revenue wanted us to read. In their view, this can neither be the intention of the legislature and no such interpretation can be done which rendered a statutory provision nugatory. In our view, Rule 3 of composition rules is merely one of the option provided to the service provider to discharge of Service Tax liability vis-a-vis options available in Section 67 of the Finance Act 1994.

Further, as there was no dispute to the facts that appellant is discharging full Service Tax under the category of Works Contract Service using Inputs and Input Service are used for rendering of 'output services'; on reading of provisions of Rule 2(l) of the cenvat credit rules 2004 it would indicate that assessee is eligible avail to cenvat credit of Inputs and input services which are used to provide 'output service' which would include 'setting up' of a factory premises. In the case in hand, it was undisputed that the appellant had provided output services which covered by works contract for setting up of plant, it has to be held that cenvat credit availed by the appellant was in consonance with the provisions of the Cenvat Credit Rules 2004. They also held that the discharge of Service Tax liability at full rate by the appellant by applying provisions of section 67 of the Finance Act 1994 cannot be called in question by the Revenue.

Decision:- Appeal is allowed.

Comment:- The analogy of the case is that appellant was correct in paying service tax at full rate in works contact service and not paying under rule 2A of the Service Tax Rules or Rule 3 of Composition Rules as Rule 2A of the service tax determination of value rules 2006. The tribunal has held that the service provider has an option to do so.

This practice of paying duty at full rate was followed by many assesses. By doing so, they will be able to take the credit of inputs and pass on the same to end-user. The service recipient was also covered in the cenvat chain and took the complete credit. By this way, even the credit of inputs was passed on to the service recipient. To curb this practice, the Cenvat Credit Rules were amended and credit was restricted to 40%. Hence, this practice of paying tax at full rate was stopped.

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