Increase in Tax Rate not to affect Pending Contracts: Calcutta HC allows 6 Year Old Petition of L&T and allows reduced Service Tax [Read Order]

The Calcutta High Court altered the decision of the single bench and held that the petitioners are entitled to pay service tax at compounded rates. The Division Bench of Justice T S Sivagnanam and Justice Hiranmay Bhattacharya relied on the settled position of law that an increase in service tax rates shall not affect the pending contracts between parties.

The appellant entered into several works contracts during the year 2006-2007 on turnkey basis. After coming into the force of the Works Contract (Composition Scheme) for Payment of Service Tax Rules, 2007, the appellant exercised the option under the scheme and paid service tax at 2%.

By Notification No. 7/2008 issued on 01.03.2008 the rate of service tax under the composition scheme was enhanced from 2% to 4% with effect from the date of notification. The department issued Show Cause Notice to the assessee alleging tax evasion by way of the Works Contract (Composition Scheme) for Payment of Service Tax Rules.

The reply submitted by the appellant was rejected by the department on the ground that the appellant had exercised option only on 26.03.2008 when the rate of service tax was enhanced from 2% to 4%. Subsequently, the demand was confirmed along with penalty and interest.

Aggrieved, the assessee challenged the constitutional validity of the revised tax rate notification along with the validity in terms of Finance Act, 1994.

Mr. Maiti appearing for the revenue referred to the decision of the Supreme Court in Nagarjuna Constructions Company Limited Versus Government of India and contended that the appellant having failed to exercise the option prior to the payment of tax is not entitled to the benefit of the composition scheme at 2%.

The Bench observed that, the department having accepted such a portion of the judgment, cannot argue contrary to what has been held against them as the substantial part of the order passed by the learned Single Bench was ruled in favour of the appellant.

The Calcutta High Court therefore allowed the compounded rate of tax at 2% for the relevant period to be imposed instead of the increased rate.

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