The Chennai bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) observed that bonafide payment of service tax on composite contracts under Complex Service ( CCS ) instead of Works Contracts Service ( WCS ) and set aside the demand of service tax for an extended period.
M/s.R.R. Constructions, the appellant is proprietary concern holding service tax registration for providing construction services like Construction of Complex Service ( CCS ), Commercial or Industrial Complex Service ( CICS ), and Works Contracts Service ( WCS ). The appellant discharged service tax liability for the period April 2009 to June 2012 under Construction of Complex Service by claiming 67% abatement under Notification No.1/2006-ST dt. 1.3.2006.
After perusal of the documents of the appellant, the department was of the view that as the constructions were composite the services have to be rightly classified under WCS in terms of Section 65 (105) (zzzza) of the Finance Act, 1994. A show cause notice was issued to the appellant proposing to demand differential service tax for the disputed period along with interest and for imposing penalties. After due process of law, the original authority confirmed the demand, and interest and imposed penalties. Aggrieved by such order, the appellant is now before the Tribunal.
Counsel Shri G. Natarajan appeared and argued for the appellant and submitted that the appellant had discharged service tax entirely during the disputed period. In respect of three residential projects, undertaken during this period, the appellant had paid Service Tax under “construction of complex service – CCS”, after availing 67 % abatement from value, as per Notification 1/2006 ST Dt. 01.03.2006.
The department alleged that the activities undertaken by the appellant involved the transfer of property in goods and hence merit classification under Works Contract Service, as defined under Section 65 (105) (zzzza) of the Finance Act, 1994. Under Works Contract service, to levy Service Tax only on the service component of the works contract, two methods have been prescribed; Method (i) Rule 2 A of the Service Tax (Determination of Value) Rules, 2006, by which, from the gross amount, the value of transfer of property on an actual basis (value on which VAT is paid) to be excluded and on the remaining value, Service Tax at appropriate rate has to be paid; Method (ii) Under Works Contract (Composition scheme for payment of Service Tax) Rules, 2007 – Service tax can be paid at a reduced rate of 4 % on the gross amount.
While quantifying the service tax after classifying the services under WCS, the department has not given any abatement or reduction as to the value of materials which forms part of the consideration received by the appellant. It was alleged that the appellant had neither furnished the value of transfer of property in goods as per VAT law nor exercised their option for the composition scheme and thus Service Tax has been demanded on the entire value received by the appellant, after excluding only the amount received towards land value.
It was evident that the payment of Service Tax by the appellant under CCS is only due to the bonafide belief and per contemporaneous view entertained by the department in many cases. The appellant had paid Service tax and also filed their ST-3 returns, by indicating the category of service and the benefit of abatement claimed. Thus, the appellant had not suppressed any facts from the knowledge of the department.
The CBIC itself has issued a circular bearing No. 98/1/2008 ST Dt. 04.01.2008, wherein it has been clarified that ongoing contracts, which were classified under CICS / CCS before the introduction of works contract service, shall continue to be classified under CICS / CCS and vivisecting a single composite service and classifying the same under two different taxable services depending upon the time of receipt of consideration is not legally sustainable.
Shri M. Ambe appeared for the department and argued that on perusal of records, the appellant had not furnished details of VAT paid by them. Therefore, the department has not applied method (i). Method (ii) under Rule 2A of Service Tax (Determination of Value) Rules, 2006 has not been applied for the reason that the appellant had not obtained permission to apply the composition scheme. The Department has rightly assessed the service tax at the rate of 12% on the taxable value for the disputed period. It is prayed that the appeal may be dismissed.
It was settled that composite contracts can be classified only under WCS. The appellant had classified the services under CCS on bonafide belief and had discharged service tax by availing abatement under Notification No.1/2006-ST. The appellant has thus paid service tax on 33% of the consideration received.
A two-member bench of Ms Sulekha Beevi C S, Member (Judicial) And Mr Vasa Seshagiri Rao, Member (Technical) observed that the issue of classification of construction services was doubtful and the issue of classification of services being interpretational and set aside the demand raised for the extended period.
It was further viewed that the department has not brought out any positive act of suppression on the part of the appellant. The entire figures have been taken from the accounts of the appellant and the Department reclassified the services under WCS. The appellant has correctly discharged service tax and the allegation is only about the classification of the construction services. “The demand for the period April 2012 to June 2012 would fall within the normal period and the appellant is required to pay service tax for this period under the category of WCS. However, the demand raised by the department @ 12% denying abatement and composition scheme is not sustainable. The reason for denying the benefit of the composition scheme is that the appellant has not obtained permission from the Department for applying the composition scheme.”, the Tribunal held.
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