CESTAT holds Exemption under Notification 19/2009-ST as Prospective, upholds Right to Tax Option under Rule 6(7B) [Read Order]

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has partly allowed an appeal filed by M/s Foundation One Infrastructures Pvt. Ltd., holding that while the reclassification of services under Works Contract Service (WCS) was justified, the extended period of limitation and penalty under Section 78 of the Finance Act, 1994 could not be sustained.

The matter arose from a Service Tax demand made by the Commissioner of Central Excise, Customs and Service Tax, Coimbatore, through Order-in-Original No. 1/2015 dated January 20, 2015. The dispute concerned whether the construction of residential complexes by the assessee was correctly classified under “Construction of Complex Service (CCS)” or whether it should be reclassified as “Works Contract Service (WCS)” under Section 65(105)(zzzza) of the Finance Act, 1994.

The assessee, engaged in the construction of residential projects, had paid Service Tax under CCS by availing the benefit of Notification No. 1/2006-ST dated March 1, 2006. Upon audit, the department noticed that the assessee was also registered under the Tamil Nadu VAT Act, 2006 and had paid VAT on materials used in construction such as cement and steel. The department therefore contended that the contracts executed were composite in nature comprising both goods and services and hence should fall under the scope of WCS.

A Show Cause Notice (SCN) dated March 3, 2014 was issued proposing reclassification, differential tax demand, interest, and penalties, invoking the extended limitation period. The Commissioner confirmed the demand and penalties under Sections 77 and 78 of the Finance Act, 1994, leading to the present appeal before the Tribunal.

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Shri M. Saravanan, Chartered Accountant, appearing for the appellant, argued that the construction activity undertaken by the builder using its own labour amounted to self-service, which was not taxable. It was further contended that the classification under CCS had already been accepted by the department and that the subsequent reclassification and extended period invocation were unsustainable. Relying on the Supreme Court’s decision in Larsen & Toubro Ltd. v. State of Karnataka [2015 (39) STR 913 (SC)], the appellant maintained that composite contracts involving transfer of goods could only fall under WCS and not CCS.

On the other hand, Ms. O.M. Reena, Authorized Representative for the department, supported the findings of the Commissioner and argued that the composite nature of the contracts clearly brought them within the ambit of WCS.

The Bench comprising Mr. P. Dinesha (Judicial Member) and Mr. M. Ajit Kumar (Technical Member) observed that since the assessee had paid VAT on materials used in construction, the transaction involved both supply and service elements and was therefore a composite contract. Following the ratio laid down by the Supreme Court in Larsen & Toubro Ltd., the Tribunal held that classification under WCS was appropriate.

However, the Tribunal noted that the demand arose purely from interpretational differences subsequently clarified by the Apex Court. As such, invoking the extended period of limitation and imposing penalties under Section 78 were unwarranted. It also observed that the appellant had already discharged tax on 25% of the gross amount as per the applicable valuation rules, which was admitted even in the SCN.

The Tribunal upheld the demand of Service Tax under WCS for the normal period but set aside the demand for the extended period along with the penalty under Section 78. The appeal was thus partly allowed to this extent.

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On the question of exemption, the Tribunal held that the 2011 amendment to Notification No. 19/2009-ST was not merely clarificatory but an expansion of scope to cover a wider class of service providers and recipients, including money changers and foreign banks. As such, it could not operate retrospectively. The Bench observed that the clear and unambiguous language of the Notification made it effective only from April 1, 2011.

However, the Tribunal bench of P. Dinesha, Member (Judicial) and Vasa Seshagiri Rao, Member(Technical) agreed with the appellant’s contention regarding the optional nature of Rule 6(7B). It held that the Revenue could not compel the assessee to adopt a valuation method it did not choose. The Bench noted that although some transactions reflected minor discrepancies between applied and prevailing market rates, these did not establish a deliberate undervaluation scheme.

On the issue of profits from the sale of foreign exchange to EEFC account holders, the Tribunal ruled that such transactions did not involve actual conversion and hence did not attract Service Tax. Similarly, the minor demand on profits from the settlement of travellers’ cheques was found unsustainable.

The appeal was partly allowed. The Tribunal upheld the Commissioner’s findings regarding the prospective nature of Notification No. 27/2011-ST but set aside the Service Tax demands relating to valuation under Rule 6(7B) and on EEFC transactions.

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