The Supreme Court of India has recently held that the assessee is not entitled to take the total contract value which includes both goods and services and remit service tax on the value as works contract service and, in the process, also entitled to avail the CENVAT Credit on the entire amount.
Feeling aggrieved and dissatisfied with the impugned judgement and order dated 09.11.2017 passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) by which the Tribunal has allowed the said appeal preferred by the respondent and has set aside the Order-in-Original dated 31.03.2017 disallowing the CENVAT Credit, the Revenue has preferred the present appeal.
The respondent – assessee was engaged in the business of manufacture, supply and erection at the site of prefabricated/pre engineered steel buildings and parts.
The respondent was having centralised registration for Service Tax with the Service Tax
Department for services under “Commercial or Industrial Construction Service” and “Construction Services” right from the commencement of production.
The goods manufactured were cleared from the place of manufacture on payment of central excise duty on which CENVAT Credit was made by the respondent. The unit at Greater Noida registered as a Service Provider, availed CENVAT Credit on the Excise duty paid by the units at the time of removal, duty paid on capital goods and service tax paid on input services.
The department was of the view that the services rendered by the respondent amounted
to Works Contract which were chargeable to tax under Section 65(105)[zzzza] of the Finance Act, 1994.
Therefore, according to the Revenue, on classifiable service under ‘works contract service’ the respondents availed CENVAT Credit on Central Excise duty paid on inputs.
The Order-in–Original passed by the Adjudicating Authority was challenged before the tribunal.
Challenging the impugned judgement and order passed by the learned Tribunal setting aside the demand order of allegedly wrongfully availed CENVAT Credit, the Revenue has preferred the present appeal.
N. Venkataraman, ASG appeared on behalf of the Revenue and V. Raghuraman, learned appeared on behalf of the respondent assessee.
The ASG, relying upon the above provisions, rules and regulations and the circulars, it was submitted that a works contract is a contract involving supply of goods and services together. He further contended that, A composite works contract gets vivisected into transfer of property into goods liable to sales tax/VAT in terms of Article 366 (29A)(b) of the Constitution of India and the service portion liable to service tax w.e.f. 01.06.2007.
It was also submitted that, “Finance Act, 1994 read with the Rules permit only 2 options either to pay service tax on the service elements as envisaged under Rule 2A of the Valuation Rules, 2006 without taking the CENVAT Credit on input goods or opt for composition. It was thus contended that the third variant of paying service tax on the total contract value including goods and correspondingly availing CENVAT Credit on the input is not only misconceived but also legally untenable besides a Constitutional bar.”
While opposing the present appeal, counsel appearing on behalf of the respondent-assessee submitted that in case of ‘works contract service’ also, the assessment can be done under the provisions of Section 67 of the Finance Act, 1994 and that valuation methods prescribed under Rule 2A or composition scheme are merely options provided to the assessee. It was thus contended that the benefit of CENVAT Credit on inputs cannot be denied to the respondents in absence of any specific bar or prohibition in the CENVAT Credit Rules, 2004 or the Finance Act, 1994.
It was further submitted that taking CENVAT duty on inputs is barred only if one opts for Composition Rules and not if tax is paid at normal prevailing rates on full gross value of contract under Section 67.
It was further prayed on behalf of the respondent that in case the appeal be allowed on merits, the Tribunal has not rendered any finding on extended period of limitation and/or other issues and therefore the matters may be remanded back to the Tribunal.
The Apex Court observed that, “Rule 2A is the specific provision for determination of value of taxable service in relation to services involved in the execution of a works contract shall be determined by the service provider in the manner provided under Rule 2A(1)(i) i.e. value of works contract service determined shall be equivalent to the gross amount charged for the works contract.”
It was further noted that, as per explanation to Rule 2A gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the works contract.
It was also observed with regard to the options available with the assessee that, either the assessee has to go for Composition Scheme or go for Determination of Value as per Rule 2A of the Service (Determination of Value) Rules, 2006 and the assessee has to pay service tax on the service element and can claim CENVAT Credit on the said amount only.
In view of the above, the two-judge Supreme Court Bench of Justice M R Shah and Justice Krishna Murari quashed and set aside the impugned judgement and order passed by the CESTAT.
The matter was thereby remitted back to the CESTAT by the Apex Court only for the limited purpose of decision on the issue of limitation and re-computation of the demands in terms of Rule 2A of the Service (Determination of Value) Rules, 2006.
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