Composition Scheme On Works Contract Cannot Be Denied On The Ground That Service Tax Was Discharged Earlier: CESTAT Bangalore

The Bench, consisting of members P Dinesha (Judicial Member) and P. Anjani Kumar (Technical Member), held that Works Contract Services are liable to Service Tax only from 01.06.2007. The CESTAT ruled that the appellant could not be put to jeopardy for the reason that it had been paying Service Tax before 01.06.2007 even though it was not legally required to pay.

The appellant MFAR Construction Private Limited obtained registration for rendering 'Commercial or Industrial Construction' services and 'Construction of Complex services', on which it had been paying Service Tax. After the introduction of levy of Service Tax on 'Works Contract Service' w.e.f. 01.06.2007, the appellant sought classification of the composite contract of 'Construction of Residential Complex' under Works Contract. The appellant opted for Composition Scheme under Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and started paying the applicable duty.

During the conduct of audit, the revenue department observed that in terms of the Circular No. 98/1/2008-ST dated 04.01.2008, a service provider who paid service tax prior to 01.06.2007 for taxable services like Commercial or Industrial Construction Service or Construction of Complex Service, was not entitled to change the classification of the Single Composite Service for the purposes of payment of service tax on or after 01.06.2007. Thus, the revenue department opined that the appellant was not entitled to avail the Composition Scheme.

A show cause notice was issued to the appellant denying the classification of the services rendered by the appellant under Works Contract Service. The show cause notice thus raised a demand of service tax. Subsequently, an order was passed confirming the demands raised by the show cause notice. Against this order, the appellant filed an appeal before the CESTAT.

The appellant MFAR Construction Private Limited submitted before the CESTAT that the appellant was executing 'Construction of Residential Complex' as a Composite Contract. The appellant averred that construction of residential complexes being a works contract is liable to Service Tax only from 01.06.2007 in view of the decision of the Supreme Court in the case of Commissioner, Central Excise & Custom, Kerala versus M/s Larsen & Toubro Ltd. (2015). Therefore, the appellant submitted that it had correctly classified the service and exercised the option of opting for the Composition Scheme before payment of Service Tax, and thus the demand raised by the show cause notice was not sustainable.

The appellant added that the contention of the revenue department, that the execution of composite contracts that were earlier classified under 'Commercial and Industrial Construction Service' or 'Construction of Complex Service' cannot be re-classified under Works Contract, was contrary to the law laid down by the Supreme Court.

The revenue department contended that as per the Circular No. 98/1/2008-ST dated 04.01.2008, the appellant was 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, therefore, the appellant was not entitled to avail the Composition Scheme.

The CESTAT observed that the Supreme Court in the case of Commissioner, Central Excise & Custom, Kerala versus M/s Larsen & Toubro Ltd. (2015) had held that the Finance Act, 1994, prior to 1.06.2007, laid down no charge or machinery to levy and assess Service Tax on indivisible composite works contracts.

The CESTAT held that in view of the decision of the Supreme Court in the case of M/s Larsen & Toubro Ltd. (2015) and the definition of the term "Works Contract", as defined under Section 65 (105) (zzzza) of the Finance Act, 1994 and incorporated with effect from 1.06.2007, Works Contract Services are liable to Service Tax only from 01.06.2007.

The CESTAT added that it was not disputed that the services rendered by the appellant was not in the nature of Composite Services and that the services rendered by the appellant was Works Contract Services.

The CESTAT observed that Rule 3 (1) of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 provides that a person providing Works Contract can pay Service Tax under the Composition Scheme if he opts for the same before payment of Service Tax. The CESTAT noted that the Delhi Bench of CESTAT in the case of B.R. Kohli Construction Pvt. Ltd. versus CST, Delhi (2017) had held that Composition Scheme cannot be denied merely on the ground of discharge of Service Tax under different head prior to 01.06.2007.

The CESTAT added that the Circular No. 98/1/2008-ST dated 04.01.2008 cited by the revenue department loses its relevance in view of the judgment of the Supreme Court in the case of M/s Larsen & Toubro Ltd. (2015).

Thus, the CESTAT held that the appellant had been paying Service Tax under a different head before 01.06.2007 even though it was not legally required to pay in view of the judgment of the Supreme Court in the case of M/s Larsen & Toubro Ltd. (2015). The CESTAT added that it would be a miscarriage of justice if the appellant was denied the compounded scheme of payment of duty under Works Contract after 01.06.2007, which could have been easily exercised by those who were not paying Service Tax before 01.06.2007. The CESTAT ruled that the appellant could not be put to jeopardy for the reason that it had been paying Service Tax before 01.06.2007 even though it was not legally required to pay.

Therefore, the CESTAT allowed the appeal of the appellant and quashed the order of the revenue department. The CESTAT directed the revenue authorities to allow the appellant the option to pay Service Tax under Composition Scheme.

Case Title: M/s MFAR Construction Private Limited versus C.C.E & C.S.T.- Bangalore Service Tax- I

Dated: 05.05.2022 (CESTAT Bangalore)

Representative for the Appellant: Shri M.S. Nagaraja, Advocate

Representative for the Respondent: Shri P. Rama Holla, Authorised Representative

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