Full Judgment Text
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.11330 of 2018
CC and CE and ST, NOIDA ...Appellant(s)
Versus
M/s Interarch Building Products
Pvt. Ltd. ...Respondent(s)
J U D G M E N T
M. R. Shah, J.
1. Feeling aggrieved and dissatisfied with the
Signature Not Verified
impugned judgment and order dated
Digitally signed by R
Natarajan
Date: 2023.05.02
16:43:17 IST
Reason:
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09.11.2017 passed by the Customs, Excise and
Service Tax Appellate Tribunal, Regional Bench
at Allahabad (hereinafter referred to as ‘the
Appellate Tribunal’) by which the learned
Tribunal has allowed the said appeal preferred
by the respondent and has set aside the Order
inOriginal dated 31.03.2017 disallowing the
CENVAT Credit, the Revenue has preferred the
present appeal.
2. The facts leading to the present appeal in
nutshell are as under:
2.1 The respondent – assessee was engaged in the
business of manufacture, supply and erection
at the site of prefabricated/preengineered steel
buildings and parts thereof classifiable under
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the relevant Headings/subheadings of the
First Schedule to the Central Excise Tariff Act,
1985. The respondent was having centralized
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 Centralized Service Provider,
availed CENVAT Credit
(i) Excise duty paid by the units at the time of
removal
(ii) duty paid on capital goods
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(iii) service tax paid on input services.
They paid service tax on the gross amount of
contract for engineering, procurements supply,
construction, erection etc. under the category
"commercial or industrial constructions
services" as referred under Section 65(105)(zzq)
of the Finance Act, 1994 (hereinafter referred to
as ‘the Act, 1994’).
2.2 Based on specific intelligence that the
respondent had wrongly classified the services
rendered by them, availed inadmissible
CENVAT Credit and short paid the Service Tax
in cash. Department was of the view that the
services rendered by the respondent amounted
to Works Contract which were chargeable to
tax under sub clause [zzzza] of Section 65(105]
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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.
Therefore, the Department issued a Show
2.3
Cause Notice alleging inter alia that the
respondent had utilized CENVAT Credit of
Rs.1,12,60,92,760/ on building material
during June, 2007 to March, 2012 which was
inadmissible. It was alleged that the said
amount had been recovered as service tax from
the customer under Section 73(1) of the Act,
1994. It appeared to the Revenue that services
should have been classified under “Works
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Contract Service”. It was mandatory for the
respondent to either follow Rule 2A of Service
Tax (Determination of Value) Rules, 2006 or
adopt Composition Scheme. The said Rule 2A
and Composition Scheme do not allow the
availment of CENVAT Credit on input.
Therefore, it appeared to the Revenue that the
CENVAT Credit of Rs.112,60,92,760/ as
availed on input was inadmissible and
therefore, the said debit has resulted in short
payment of Service Tax.
The Show Cause Notice was related to the
2.4
period from June, 2007 to March, 2012. The
respondent was called upon to show cause as
to why the services being provided by them be
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reclassified under "Works Contract Service" in
place of "Commercial or Industrial
Construction Services", inadmissible CENVAT
Credit of building material amounting to
Rs.112,60,92,760/ be disallowed in terms of
Rules 2 & 3(1) of CENVAT Credit Rules, 2004;
an amount of Rs.22,37,01,811/ on account of
short paid Service Tax towards the liability
debited from the inadmissible Cenvat Credit on
construction materials be recovered under
Section 73(1) of the Act, 1994; an amount of
Rs.90,23,90,907/ alleged to have been
collected as cash in excess of the Service Tax
assessed/determined by passing the
inadmissible CENVAT Credit to their recipients
of taxable service be demanded under Section
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73A of the Act, 1994 along with the appropriate
rate of interest under Sections 73B and 75 of
the Act and the penalties be imposed under
Sections 77 & 75 of the Act, 1994 read with
Rule 15(3) of CENVAT Credit Rules, 2004. By
Order dated 28.03.2004 the Adjudicating
Authority who disallowed the CENVAT Credit
amounting to Rs.1,12,60,92,760/ confirmed
the amounts of Rs.22,37,01,811/ being short
paid, confirmed the claim in the show cause
notice.
2.5 The department had issued further Show
Cause Notices/statement of demands for the
subsequent period also.
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2.6 By order dated 18.11.2015, the learned
Tribunal set aside the adjudication order and
remanded the matter back to the adjudicating
authority with the direction that the tax
liability be redetermined after hearing the
respondent .
On remand the adjudicating authority passed a
fresh order dated 31.03.2017 and confirmed the
demands. The Commissioner held that the services
rendered by the respondent was classifiable as
‘Works Contract Service’ and rejected the availability
of CENVAT Credit amount and directed recovery
under Section 73A of the Act, 1994. The Orderin
Original passed by the adjudicating authority was
the subject matter of the present appeal before the
Tribunal.
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2.7 Before the Tribunal the OrderinOriginal
passed by the Adjudicating Authority was
challenged on the following grounds:
(i) “The Id. Commissioner disallowed Cenvat
credit availed on inputs in terms of Rule 2
& 3(1) of Cenvat Credit Rules, 2004 to the
extent of Rs.1,12,60,92,760/ in case of
show cause notice dated 23.10.2012 and
the amounts in case other 3 notices as
specified above and that such order is not
sustainable in law.
(ii) The provision of Rule 2A of Service Tax
(Determination of Value) Rules, 2006,
start with expression "subject to the
provisions of Section 67" which means the
provision prescribed under said Rule 2A,
is subject to the provisions of Section 67 of
the Finance Act, 1994.
Opening Para of Rule 3 of Composition
(iii)
Scheme reads as "Notwithstanding
anything contained in Section 67 of the
Act and Rule 2A of the Service Tax
(Determination of Value) Rules, 2006, the
person liable to pay Service Tax in relation
to Works Contract Service shall have the
option to discharge his Service Tax liability
on the Works Contract Service." It clearly
indicates that it is one of the options given
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to the Service Provider to discharge Service
Tax liability in respect of Works Contract
Service and it is not mandatory to adopt
the said Rule under Composition Scheme
for discharge of Service Tax liability.
(iv) Section 67 of the Finance Act, 1994
provides for arriving at assessable value
which states "subject to the provisions of
this Chapter, where Service Tax is
chargeable on any taxable service with
reference to its value, then such value
shall in a case where the provision of
service is for a consideration in money, be
the gross amount charged by the service
provider for such service provided or to be
provide by him." Therefore, the said
provision which is fundamental in nature
and is applicable to any taxable service.
The demand towards Cenvat credit
(v)
confirmed in case of show cause notice
dated 23.10.2012 is substantially time
barred.
(vi) In the impugned order, Id. Commissioner
has distinguished the judgment of this
Tribunal in the case of S.V. Jiwani (supra)
and the grounds on which Id,
Commissioner distinguished the judgment
are invalid.”
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2.8 By the impugned judgment and order the
learned Tribunal has allowed the appeal
preferred by the respondent and has set aside
the OrderinOriginal passed by the
adjudicating authority by observing that the
composition scheme is optional and the
provisions of Rule 2A of the said Rules are
subject to provisions of Section 67 of the Act,
1994. The learned Tribunal has also observed
that it is clear from the provisions of sub
section 4 of Section 67 of the Act, that where
value cannot be determined as provided under
subrule (1) to (3) of Section 67 of the Act, then
only the value is to be determined as provided
under the Rules. Therefore, the Tribunal held
that there is no question on applicability of
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Rule 2A nor there was any question of forcibly
applying the option of Composition Scheme.
The learned Tribunal held that in both these
circumstances, the respondent was entitled to
CENVAT Credit on inputs.
2.9 Feeling aggrieved and dissatisfied with the
impugned judgment and order passed by the
learned Tribunal setting aside the Orderin
Original, the Revenue has preferred the present
appeal.
3. Shri N. Venkataraman, learned ASG has
appeared on behalf of the Revenue and Shri V.
Raghuraman, learned Senior Counsel has
appeared on behalf of the respondent –
assessee.
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4. Shri N. Venkataraman, learned ASG appearing
on behalf of the Revenue has made the
following submissions challenging the
correctness and legality of the impugned order
passed by the CESTAT:
(i) That the period under dispute is January,
2007 to March, 2014. He has submitted
that the definition of ‘works contract
service’ was brought into the Finance Act,
1994 w.e.f. 01.06.2007. Therefore, he has
fairly conceded the demand for the period
January, 2007 to 31.05.2007 shall not be
maintainable in light of the decision of
this Court in the case of Commissioner
of Central Excise vs. Larsen and
Toubro, (2016) 1 SCC 170 as well as
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Total Environment Building Systems
Pvt. Ltd. vs. Deputy Commissioner of
Commercial Taxes, (2022) SCC Online
SC 953.
4.1 It is submitted that therefore the demand for
the period January, 2007 to May, 2007 is not
sustainable and therefore to that extent the
demand should go.
4.2 It is submitted that however, for the period
commencing 01.06.2007 to 31.03.2014 the
demands are sustainable and the Ordersin
Original need to be restored.
4.3 Shri N. Venkataraman, learned ASG has taken
us to the relevant provisions of the Act, 1994
more particularly Chapter 5 and the definition
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of ‘works contract’ and the definition of ‘taxable
service’ contained in Section 64(54) and Section
65(105)(zzzza) respectively. It is submitted that
post 01.07.2012, the Finance Act, 1994
underwent major amendments by the insertion
of both negative list and declared services. It is
submitted that Section 66E was introduced for
the first time which defined declared services.
He has taken us to subclause (h) of Section
66E of the Act.
4.4 It is submitted that the Service Tax
(Determination of Value) Rules, 2006 came into
force w.e.f. 19.04.2006 vide Notification
No.12/2006 – Service Tax. Rule 2A has been
inserted vide notification 29/2007 dated
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22.05.2007 w.e.f. 01.06.2007 which reads as
under, which has been amended periodically:
“Prior to 01.07.2012 it reads as under:
2A. Determination of value of
services involved in the execution of
a works contract:
(1) Subject to the provisions of section 67,
the value of taxable service in relation to
services involved in the execution of a
works contract (hereinafter referred to as
works contract service), referred to in sub
clause (zzzza) of clause (105) of section 65
of the Act, shall be determined by the
service provider in the following manner:
(i) Value of works contract service
determined shall be equivalent to the gross
amount charged for the works contract
less the value of transfer of property in
goods involved in the execution of the said
works contract.
For the purposes of this
Explanation.
rule,
(a) 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
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goods involved in the execution of the said
works contract;
(b) value of works contract service shall
include,
(i) labour charges for execution of the
works;
(ii) amount paid to a subcontractor for
labour and services;
(iii) charges for planning, designing and
architect’s fees;
(iv) charges for obtaining on hire or
otherwise, machinery and tools used for
the execution of the works contract;
(v) cost of consumables such as water,
electricity, fuel, used in the execution of
the works contract;
(vi) cost of establishment of the contractor
relatable to supply of labour and services;
(vii) other similar expenses relatable to
supply of labour and services; and
(viii) profit earned by the service provider
relatable to supply of labour and services;
(ix) Where Value Added Tax or sales tax, as
the case may be, has been paid on the
actual value of transfer of property in
goods involved in the execution of the
works contract, then such value adopted
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for the purposes of payment of Value
Added Tax or sales tax, as the case may
be, shall be taken as the value of transfer
of property in goods involved in the
execution of the said works contract for
determining the value of works contract
service under clause (i).”
4.5 It is submitted that vide notification 32/2007 –
ST dated 22.04.2007 the Central Government
in exercise of its powers conferred by Sections
93 and 94 of the Act, 1994 introduced the
Works Contract (Composition Scheme for
Payment of Service Tax) Rules, 2007. Rule 3(1)
of the said Rules reads as under:
| “3. | (1) Notwithstanding anything | |
|---|---|---|
| contained in section 67 of the Act and | ||
| rule 2A of the Service (Determination of | ||
| Value) Rules, 2006, the person liable to | ||
| pay service tax in relation to works | ||
| contract service shall have the option to | ||
| discharge his service tax liability on the | ||
| works contract service provided or to be |
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| provided, instead of paying service tax at | |
|---|---|
| the rate specified in section 66 of the | |
| Act, by paying an amount equivalent to | |
| two per cent of the gross amount | |
| charged for the works contract. |
| Explanation. | For the purposes of this | ||
|---|---|---|---|
| rule, gross amount charged for the | |||
| works contract shall not include Value | |||
| Added Tax (VAT) or sales tax, as the case | |||
| may be, paid on transfer of property in | |||
| goods involved in the execution of the | |||
| said works contract.” |
| 4.6 | It is submitted that the subrules came to be |
|---|
amended vide Notification No.23/2009 – ST
dated 07.07.2009 and further amended by
Notification 1/2011 – ST dated 01.03.2011.
| 4.7 | It is submitted that Section 67 of the Act, 1994 |
|---|
deals with valuation of taxable services reads
as under:
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“67. Valuation of taxable services for
1) Subject to the
charging Service Tax
provisions of this Chapter, service tax
chargeable on any taxable service with
reference to its value shall,
(i) in a case where the provision of service is
for a consideration in money, be the
gross amount charged by the service
provider for such service provided or to
be provided by him;
(ii) in a case where the provision of service is
for a consideration not wholly or partly
consisting of money, be such amount in
money, with the addition of service tax
charged, is equivalent to the
consideration;
(iii) in a case where the provision of
service is for a consideration which is not
ascertainable, be the amount as may be
determined in the prescribed manner.
(2) Where the gross amount charged by a
service provider, for the service provided
or to be provided is inclusive of service
tax payable, the value of such taxable
service shall be such amount as, with the
addition of tax payable, is equal to the
gross amount charged.
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(3) The gross amount charged for the
taxable service shall include any amount
received towards the taxable service
before, during or after provision of such
service.
(4) Subject to the provisions of sub
sections (1), (2) and (3), the value shall be
determined in such manner as may be
prescribed.
For the purposes of this
Explanation
section,
(a) "consideration" includes
(i) any amount that is payable for the
taxable services provided or to be
provided;
(ii) any reimbursable expenditure or
cost incurred by the service provider and
charged, in the course of providing or
agreeing to provide a taxable service,
except in such circumstances, and
subject to such conditions, as may be
prescribed.
(iii) Any amount retained by the lottery
distributor or selling agent from gross
sale amount of lottery tickets in addition
to the fee or commission, if any, or, as
the case may be, the discount received,
that is to say, the difference in the face
value of lottery ticket and the price at
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which the distributor or selling agent gets
such ticket.
(c) "gross amount charged" includes payment
by cheque, credit card, deduction from
account and any form of payment by
issue of credit notes or debit notes
2
and [book adjustment, and any amount
credited or debited, as the case may be,
to any account, whether called "Suspense
account" or by any other name, in the
books of account of a person liable to pay
service tax, where the transaction of
taxable service is with any associated
enterprise.]]”
4.8 It is submitted that the Central Board of Excise
and Customs vide letter dated 22.05.2007 issued
clarifications regarding various amendments
brought out Vide Finance Act, 2007. It is submitted
that paras 9.1 to 9.7 which are relevant read as
under:
“9.1 Works contract is a composite
contract for supply of goods and
services. A composite works contract
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is vivisected and, (i) VAT/sales tax is
leviable on transfer of property in
goods involved in the execution of
works contract [Art.366 (29A)(b) of the
Constitution of India], and
(ii) Service tax will be leviable on services
provided in relation to the execution of
works contract.
9.2 Service tax is chargeable on the
gross amount charged by the service
provider for the taxable services
provided (Section 67). In the case of
works contract, the taxable value of
services is to be determined by
vivisecting the composite works
contract. Rule 2A of Service Tax
(Determination of Value) Rules, 2006
[Notification No.29/2007Service tax,
dated 22.05.2007], provides that value
of works contract service shall be
equivalent to the gross amount
charged for the works contract less
the value of transfer of property in
goods involved in the execution of the
said works contract. Thus, wherever
the service provider maintains
records, the value of services shall be
the gross amount charged for the
works contract less the value of
transfer of property in goods involved
in the execution of works contract.
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9.3 Wherever VAT/sales tax on
transfer of property in goods involved
in the execution of works contract is
paid on actual value, the same value
is also taken for the purpose of
determining the value of works
contract service. In other cases, value
of works contract service shall be
determined based on the actual. It
has also been explained that value of
works contract service shall include:
(i) labour charges for execution of the
works; (ii) amount paid to a sub
contractor for labour and services; (iii)
charges for planning, designing and
architect’s fees; (iv) charges for
obtaining on hir or otherwise,
machinery and tools uses for the
execution of the works contract; (v)
cost of consumables such as water,
electricity, fuel, used in the execution
of the works contract, the property in
which is not transferred in the course
of execution of works contract; (vi)
cost of establishment of the contract
relatable to supply of labour and
services; (vii) other similar expenses
relatable to supply of labour and
services; and (viii) profit earned by the
service provider relatable to supply of
labour and service;
9.4 If the gross amount charged for
the works contract is inclusive of VAT
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or sales tax, the value for the
purposes of service tax shall be
computed as follows: [Gross amount
charged – (value of transfer of property
in goods involved in the execution of
works contract and VAT or sales tax
paid, if any, on the said transfer of
property in goods involved in the
execution of said works contract)].
9.5 As a trade facilitation measure
and also for ease of administrative
convenience, the service provider has
been given an option to adopt the
composition scheme for payment of
service tax on works contract service.
The Works Contract (Composition
Scheme for Payment of Service Tax)
Rules, 2007 has accordingly been
notified vide Notification No.32/2007
Service Tax, dated 22.05.2007.
9.6 The scheme provides that the
service provider shall have an option
to pay an amount equivalent to 2% of
the gross amount charged for the
works contract instead of paying
service tax at the rate specified in
section 66. Gross amount charged for
the works contract shall not include
VAT or sales tax paid on transfer of
property in goods involved in the
execution of the said works contract.
The provider of taxable service opting
to pay service tax under the said
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composition scheme is not entitled to
take CENVAT Credit of duty on inputs,
used in or in relation to the said works
contract, under the provisions of
CENVAT Credit Rules, 2004.
9.7 The provider of taxable service
who opts to pay service tax under
these rules shall exercise such option
in respect of a works contract prior to
payment of service tax in respect of
the said works contract and the option
so exercised shall be applicable for the
entire works contract and cannot be
withdrawn until the completion of the
said works contract.”
4.9 Relying upon the above provisions, rules and
regulations and the circulars, it is submitted
that works contract is contract involving supply
of goods and services together. 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
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tax w.e.f. 01.06.2007. Reliance is placed on
the decision of this Court in the case of Larsen
and Toubro (supra) (paragraphs 14 to 16).
4.10 It is submitted that the ratio of this Court in
Larsen and Toubro (supra) would be that the
list of service elements as found in
Gannon
Dunkerly and Co. vs. State of Rajasthan,
case will suffer service tax
(1993) 1 SCC 364
and the goods portion would suffer VAT or
sales tax.
4.11. It is submitted that the Constitutional Bench of
this Court in the case of
Gannon Dunkerly
and Co. (supra) while dealing with the
measure of tax vide para 47 had provided a list
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of exclusions from the cost of valuation of
goods and as to what would constitute the
service elements. He has heavily relied upon
para 47 of the said decision. It is submitted
that this Court observed in para 47 in the case
of Gannon Dunkerly and Co. (supra) as
under:
“47. ….. The value of the goods involved
in the execution of a works contract will,
therefore, have to be determined by taking
into account the value of the entire works
contract and deducting therefrom the
charges towards labour and services which
would cover—
( a ) Labour charges for execution of the works;
( b ) amount paid to a subcontractor for
labour and services;
( c ) charges for planning, designing and
architect's fees;
( d ) charges for obtaining on hire or otherwise
machinery and tools used for the
execution of the works contract;
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| (e) cost of consumables such as water,<br>electricity, fuel, etc. used in the execution<br>of the works contract the property in<br>which is not transferred in the course of<br>execution of a works contract; and | |
|---|---|
| (f) cost of establishment of the contractor to<br>the extent it is relatable to supply of<br>labour and services; | |
| (g) other similar expenses relatable to supply<br>of labour and services; | |
| (h) profit earned by the contractor to the<br>extent it is relatable to supply of labour<br>and services. | |
| The amounts deductible under these<br>heads will have to be determined in the<br>light of the facts of a particular case on the<br>basis of the material produced by the<br>contractor.” |
4.12 It is submitted that the above service elements
have found a statutory recognition as the same
stood incorporated as part of Rule 2A of the
Service Tax (Determination of Value) Rules,
2006 w.e.f. 01.06.2007.
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4.13 It is submitted that consequently this Court
while dealing with the decision of Larsen and
had specifically addressed this
Toubro (supra)
issue by bringing the similarity of the service
elements as mentioned in Constitution Bench’s
decision in and
Gannon Dunkerly (supra)
framed as Rule 2A of the Valuation Rules,
2006. Reliance is placed on paras 25 and 26 of
the said judgment.
4.14 It is submitted that the decision of this Court
rendered in came
Larsen and Toubro (supra)
up for reconsideration in the batch of matter in
the case of Total Environment Building
wherein this Court
Systems Pvt. Ltd. (supra)
vide para 28 rejected the request to refer the
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matter to the larger Bench by observing in
paragraph 28 which reads as under:
“28. While appreciating the
prayer/submission made on behalf of the
Revenue to reconsider the binding
decision of this Court in the case of Larsen
and Toubro Limited (supra) and to refer the
matter to the Larger Bench, few facts are
required to be taken into consideration,
which are as under:—
(i) The decision of this Court in the case
of Larsen and Toubro Limited (supra) has
been delivered/passed in the year 2015, in
which, it is specifically observed and held
that on indivisible works contracts for the
period preFinance Act, 2007, the service
tax was not leviable;
(ii) After considering the entire scheme and
the levy of service tax preFinance Act,
2007 and after giving cogent reasons, a
conscious decision has been taken by this
Court holding that the service tax was not
leviable preFinance Act, 2007 on
indivisible/Composite Works Contracts;
(iii) While holding that for the period pre
Finance Act, 2007, on
indivisible/Composite Works Contracts,
the service tax is not leviable, number of
decisions have been dealt with and
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considered by this Court in the aforesaid
decision;
(iv) That subsequently, the decision of this
court in the case of Larsen and Toubro
Limited (supra) has been followed and
considered by this Court in the case
of
Commissioner of Service Tax and Ors.
Bhayana Builders Pvt. Ld. And Ors,
(2018) 3 SCC 782, ;
(v) That after the decision of this Court in
the case of Larsen and Toubro
Limited (supra) rendered in the year 2015,
the said decision has been consistently
followed by various High Courts and the
Tribunals;
(vi) The decisions of the various High
Courts and the Tribunals, which were
passed after following the decision of this
Court in the case of Larsen and Toubro
Limited (supra) have attained finality and
in many cases, the Revenue has not
challenged the said decisions;
(vii) No efforts were made by the Revenue
to file any review application to review
and/or recall the judgment and order
passed by this Court in the case of Larsen
and Toubro Limited (supra). If the Revenue
was so serious in their view that decision
of this Court in the case of Larsen and
Toubro Limited (supra) requires re
consideration, Revenue ought to have filed
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34
the review application at that stage and/or
even thereafter. No such review application
has been filed even as on today.
(viii) Merely because in the subsequent
cases, the amount of tax involved may be
higher, cannot be a ground to pray for
reconsideration of the earlier binding
decision, which has been consistently
followed by various High Courts and the
Tribunals in the entire country.”
4.15 It is submitted that therefore what is taxed
under Section 65(105)(zzzza) which later
became Section 66E(h) of the Finance Act,
1994 is the service portion in the execution of
works contract. That Section 67(1) makes it
abundantly clear that service tax is chargeable
only on the taxable service with reference to its
value. It is submitted that this Court in the
case of Larsen and Toubro (supra) as
reiterated in
Total Environment Building
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(supra) has made it clear that the goods value
in the nature of transfer of property of goods
would suffer sales tax/VAT and the service
components or elements would suffer service
tax w.e.f. 01.06.2007 by virtue of the definition
of taxable service under Section 65(105)(zzzza)
and later as Section 66E(h) as a declared
service post 01.07.2012.
4.16 It is submitted that the incorporation of taxable
service w.e.f. 01.06.2007 also resulted in the
introduction of Rule 2A in the Valuation Rules,
2006 clearly identifying the service elements or
components which would constitute the value
for determination and payment of service tax.
These components again were retained even
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36
after the insertion of Section 66E(h) post
01.07.2012.
4.17 It is submitted that this Court in the case of
vide para 25 had
Larsen and Toubro (supra)
referred to Rule 2A of the Valuation Rules,
2006 and its purport by holding that the said
Rule goes on to say that the service component
of the works contract is to include the 8
elements laid down in the second
Gannon
Dunkerly’s case and the value attributable to
the service in the works contract would be the
service elements in such contracts as this
scheme alone would comply with the
constitutional requirements as it seeks to
bifurcate a composite indivisible works contract
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and takes care to see that no element is
attributable to the property in goods
transferred pursuant to such contract enters
into the computation of the service tax. It is
submitted that therefore the purport of Rule 2A
of the valuation rules is only to bring the
elements of service tax as that alone would
meet the constitutional requirements and no
elements attributable to the property in goods
should enter in the computation of service tax.
It is, therefore, the entire contention of the
respondent assessee that they have a legal
right to pay tax even on the goods portion as
service tax and also take input credit on the
duty paid on the goods is clearly contrary to
para 25 of the
Larsen and Toubro (supra)
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judgment and Rule 2A of the Valuation Rules,
2006.
4.18 Now so far as the composition scheme is
concerned, it is submitted that the assessee
falling under the definition of ‘works contract
service’ from 01.06.2007 has to discharge
service tax liability either under Rule 2A of the
valuation rules only on the service components
without taking any CENVAT Credit on the
input goods or go for the option of a
composition scheme in which case the rates of
tax specified at various points of time should
have been complied with on the total contract
value. It is submitted that the invented
method of the respondent – assessee by
seeking to pay service tax on entire contract
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value after taking the CENVAT Credit on the
input goods is clearly unsustainable in law.
The contention that Rule 2A is subject to
Section 67 which according to the respondent –
assessee permits payment of tax on the
contract value including the goods runs
counter to the scheme of works contract
service. It is submitted that the what would
constitute as goods under Article 366 (29A)(b)
of the Constitution cannot be construed as a
taxable service and as a value of taxable
service.
4.19 It is submitted that Finance Act, 1994 read
with the Rules permit only 2 options either to
pay service tax on the service elements as
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40
envisaged under Rule 2A of the Valuation
Rules, 2006 without taking the CENVAT Credit
on input goods or opt for composition. It is
submitted 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.
4.20 Now so far as the reliance is placed upon the
decision of this Court in the case of
Commissioner of Service Tax and Ors.
Bhayana Builders Pvt. Ld. and Ors, (2018) 3
is concerned, it is submitted that on
SCC 782
facts it has no relevance. It is submitted that
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41
on the contrary the decision of this Court in
the case of Larsen and Toubro (supra) would
apply. It is submitted that even the circular
dated 22.05.2005 makes it amply clear as to
how a works contract service needs to be taxed
and vide para 9.2 referred to Rule 2A of the
Valuation Rules, 2006 to affirm that the value
of works contract service shall be equivalent to
the gross amount charged for the works
contract less the value of transfer of property in
goods involved in the execution of the said
contract and vide para 9.3 rings out the
elements of services which matches exactly
with the elements laid down by this Court in
the case of
Gannon Dunkerly (supra).
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5. Making above submissions it is prayed to allow
the present appeal.
6. Present appeal is vehemently opposed by Shri
V. Raghuraman, learned Senior Counsel
appearing on behalf of the respondent –
assessee.
6.1 While opposing the present appeal and in
support of the impugned order passed by the
CESTAT, learned counsel appearing on behalf
of the respondent has made the following
submissions:
(i) That the composition scheme is optional
as per Rule 3(1) of the Composition Rules;
(ii) Provisions of Rule 2A of the Valuation
Rules are subject to the provisions of
Section 67 of the Finance Act, 1994;
(iii) Once the provisions of Section 67 of the
Finance Act, 1994 have been complied
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with, neither the question of applicability
of Rule 2A of the Valuation Rules arise
nor was there any question of forcibly
applying option of Composition Scheme
on the assessee;
(iv) Even if the services of the respondent are
considered as classifiable under ‘works
st
contract service’ after 1 June, 2007, as
claimed by the Revenue, the further
claims of the Revenue that there were only
two options as above for valuation of the
works contract service namely the
composition rules and the Rule 2A of the
Valuation Rules available to the assessee
and consequential nonadmissibility of
CENVAT Credit has no merit.
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(v) It is 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;
(vi) Therefore, 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.
6.2 It is further submitted by learned counsel
appearing on behalf of the respondent that
while passing the impugned order the learned
Tribunal has rightly followed its earlier decision
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45
in the case of CCE vs. S.V. Jiwani, 2014 (35)
affirmed by the Bombay High Court
STR 351
which is squarely applicable. It is submitted
that in the said case it was held that the
composition rules and Rule 2A of the Valuation
Rules are merely options provided to the
service provider to discharge of service tax
liability visàvis options available in Section 67
of the Finance Act, 1994.
6.3 It is further submitted that Rule 2A of the
Valuation Rules begins with the words ‘subject
to provisions of Section 67’. It is submitted
that this would mean that Rule 2A would apply
only when value of the service involved in
execution of the works contract could not be
determined under Section 67 of the Act.
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46
6.4 It is further submitted by learned counsel
appearing on behalf of the respondent –
assessee that prior to 01.07.2012 the assessee
had three options:
(i) Follow the tenets of Section 67 and pay tax
on the full value and take input tax credit.
(ii) Rule 2A of the Valuation Rules: to pay
service tax at the full applicable rate on the
taxable value as determined in terms of Rule
2A of the Valuation Rules. No bar to avail
CENVAT Credit on inputs.
(iii) Composition Rules: To pay service tax @
2.06% (increased to 4.12% w.e.f.
01.03.2008) on the gross amount charged
for the Contract, in terms of the Composition
Rules. Cenvat credit on inputs would be
inadmissible.
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6.5 After 01.07.2012 the assessee had three
options:
(i) Follow the tenets of Section 67 and pay tax on
the full value and take input tax credit.
(ii) Rule 2A(i): To determine the taxable value of
service after deducting the actual value of the
material involved.
(iii) Rule 2(ii): To pay service tax on specified
percentage of the total amount charged for
the works contract.
6.6 It is submitted therefore under the above
scheme the assessee had the option to pay the
service tax at full value on the entire amount
charged towards providing construction service
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48
or works contract services under the provisions
of Section 67 of the Finance Act, 1994.
6.7 It is submitted that in this case the assessee
would be eligible to full CENVAT Credit and
input, input services and capital goods under
CENVAT Credit Rules, 2004 OR to pay service
tax under the head construction services by
opting for abatements specified in Notification
under 15/2004 – HT, as amended from time to
time or replaced with new notification; OR to
pay service tax under the head ‘works contract
services’ either in terms of Rule 2A of the
Valuation Rules or in terms of the Composition
Rules.
6.8 It is further submitted that the words used in
Rule 2A ‘subject to Section 67’ conveys the
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clear idea that the valuation done under
Section 67 is supreme and the rules are
subject to the Act.
6.9 It is submitted that therefore the composition
rules are completely optional for the assessee
to exercise the assessee can opt for Section 67.
6.10 It is 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.
6.11 It is 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.
Civil Appeal No.11330 of 2018
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50
7 Heard learned counsel for the respective parties at
length.
8 The short question which is posed for consideration
before this Court is as to whether an assessee
who is liable to pay service tax under works
contract service has the legal right not to follow
Rule 2A of the Service Tax (Determination of
Value) Rules, 2006 nor the Composition Scheme
on the ground that in terms of Section 67 of the
Finance Act, 1994 an assessee is entitled to take
the total contract value which includes both
goods and services and remit service tax on the
entire value as works contract service and in the
process also entitled to avail the CENVAT Credit?
8.1 At the outset, it is required to be noted that as
such services rendered by the respondent –
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assessee can be said to be ‘works contract
service’ as per the Finance Act, 1994 w.e.f.
01.06.2007 as per Section 64(54) read with
Section 65(105)(zzzza).
8.2 As per the law laid down by this Court in the
case of Larsen and Toubro (supra) and
Gannon Dunkerly and Co. (supra) and the
subsequent decision in the case of Total
Environment Building Systems Pvt. Ltd.
(supra) with respect to the works contract an
assessee is liable to sales tax on the goods
element and the service tax on the availment of
service/value of service rendered.
8.3 In the case of Gannon Dunkerly and Co.
while dealing with measure of tax in
(supra)
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para 47 this Court had provided a list of
exclusions from the cost of valuation of goods
and as to what would constitute the service
elements. As per the law laid down by this
Court in the aforesaid decision the following
are to be excluded from the cost of valuation of
the goods.
| “47. ….. The value of the goods involved<br>in the execution of a works contract<br>will, therefore, have to be determined by<br>taking into account the value of the<br>entire works contract and deducting<br>therefrom the charges towards labour<br>and services which would cover— | |
|---|---|
| (a) Labour charges for execution of the<br>works; | |
| (b) amount paid to a subcontractor for<br>labour and services; | |
| (c) charges for planning, designing and<br>architect's fees; | |
| (d) charges for obtaining on hire or<br>otherwise machinery and tools used for<br>the execution of the works contract; | |
| (e) cost of consumables such as water,<br>electricity, fuel, etc. used in the |
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execution of the works contract the
property in which is not transferred in
the course of execution of a works
contract; and
( f ) cost of establishment of the
contractor to the extent it is relatable
to supply of labour and services;
( g ) other similar expenses relatable to
supply of labour and services;
( h ) profit earned by the contractor to
the extent it is relatable to supply of
labour and services.
The amounts deductible under these
heads will have to be determined in the
light of the facts of a particular case on
the basis of the material produced by
the contractor.”
8.4 It is required to be noted that thereafter the above
service elements have found a statutory
recognition as part of Rule 2A of the Service Tax
(Determination of Value) Rules, 2006 w.e.f.
01.06.2007 which has been referred to
hereinabove. The applicability of Rule 2A has been
dealt with and considered by this Court in extenso
in the case of .
Larsen and Toubro (supra)
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Therefore, as per the law laid down by this
Court in the case of ‘works contract service’ an
assessee is liable to pay the service tax on the
service element/value of the service rendered
and the sales tax/tax on the element of goods
transferred pursuant to the contract.
8.5 In light of the above now the next main
question posed for consideration before this
Court is required to be considered namely
whether despite Rule 2A of the Service Tax
(Determination of Value) Rules, 2006 and the
Composite Scheme still the assessee is entitled
to take the total contract value which includes
both goods and services in terms of Section 67
of the Act, 1994 and remit service tax on the
entire value as works contract service and the
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assessee is also entitled to avail CENVAT
Credit?
8.6 Rule 2A applicable prior to 01.07.2012 is
reproduced hereinabove. It is to be noted 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 contact 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. 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
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involved in the execution of the works contract.
The position is made more clear post
01.07.2012. Post 01.07.2012 as per Rule 2A
value of service portion in the execution of a
works contract shall be determined taking into
consideration the value of service portion in the
execution of a works contract equivalent to the
gross amount charged for the works contract
less the value of property of goods transferred
in the execution of the said works contract.
Therefore, as such the things which were
already there as per the decision of this Court
in the case of Gannon Dunkerly and Co.
and Rule 2A earlier has been made
(supra)
explicitly clear.
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8.7 However, as per the Composition Scheme vide
notification 32/2007 – ST dated 22.04.2007 by
which works contract (Composition Scheme for
payment of Service Tax) Rules, 2007 came to
be introduced, as per Rule 3(1) and
notwithstanding anything contained in Section
67 of the Act and Rule 2A of the Rules, 2006,
the person liable to pay service tax in relation
to works contract service shall have the option
to discharge the service tax at the rate specified
in Section 67 of the Act, by paying an amount
equivalent to 2% of the gross amount charged
for the works contract. Explanation specifically
provides that gross amount charged for the
works contract shall not include the VAT or
sales tax, as the case may be paid on transfer
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of property in goods involved in the execution
of the said works contract. At this stage, it is
required to be noted that post 01.07.2012 Rule
2A specifically provides that the taxable service
shall not take CENVAT Credit of duty or cess
paid on inputs used in or in relation to said
works contract, under the provisions of
CENVAT Credit Rules, 2004.
8.8
It is the case on behalf of the respondent –
assessee that as in Rule 2A and even in the
Composition Scheme the word used are subject
to the provisions of Section 67 the assessee
had an option to pay the service tax on the
entire contract value i.e. on gross amount
charged by the service provider and that Rule
2A is not compulsory and the Composition
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Scheme is optional. However, the aforesaid has
no substance. If the submission on behalf of
the assessee is accepted in that case Rule 2A
and the Composition Scheme shall become
otiose.
8.9 With respect to the ‘works contract service’
and/or the Composition Works Contract the
valuation has to be made as per Rule 2A of the
Valuation Rules, 2006. Even as per the
Composition Scheme vide Notification 32/2007
dated 22.04.2007 an assessee has an option to
discharge the service tax liability on the works
contract service provided or to be provided,
instead of paying service tax at the rate
specified in Section 66 of the Act by paying
equivalent to 2% of the gross amount charged
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for the works contract. It is to be noted that
Rule 3(1) provides notwithstanding anything
contained in Section 67 of the Act and Rule 2A
of the Service (Determination of Value) Rules,
2006. Therefore, as per the Scheme of the Act
the determination of value of service portion in
the execution of the works contract is to be
made as per Rule 2A, however with an option
to the assessee to avail the benefit of
Composition Scheme. Therefore, either the
assessee has to go for Composition Scheme or
go for Determination of Value as per Rule 2A
and the assessee has to pay service tax on the
service element and can claim CENVAT Credit
on the said amount only.
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9 In view of the above the impugned judgment
and order passed by the CESTAT taking the
contrary view is unsustainable by which it is
held that the assessee is entitled to take the
total contract value which includes both goods
and services and remit service tax on the entire
value as ‘works contract’ and the assessee is
also entitled to avail the CENVAT Credit on the
same.
9.1 However, at the same time the service tax
needs to be paid in terms of Rule 2A of Service
Tax (Determination of Value) Rules, 2006 and
since the assessee has not opted for
composition scheme, the matter is to be
remitted back for recomputation of the
demands in terms of Rule 2A. As the issue
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with respect to the extended period of
limitation has also not been decided by
CESTAT the matter is to be remanded to the
CESTAT to decide the issue of limitation.
10 In view of the above and for the reason stated
above, the present appeal succeeds. The
impugned judgment and order passed by the
CESTAT is hereby quashed and set aside and it
is 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. It is observed and held
that the assessee has to pay the service tax on
the value of services as per Rule 2A of the
(Determination of Value) Rules, 2006 and
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thereafter to avail the CENVAT Credit
accordingly. However, it is also observed and
held that demand for the period January 2007 to
May 2007 is unsustainable.
10.1 In that view of the matter now the service tax
needs to be computed in terms of Rule 2A of
the (Determination of Value) Rules, 2006 and
as the assessee has not opted for the
composition scheme, the matter is remitted
back to the CESTAT for recomputation of the
demands in terms of Rule 2A.
As observed hereinabove the Tribunal has
also not decided the issue of extended period of
limitation. Therefore, while quashing and
setting aside the impugned judgment and order
passed by the CESTAT, the matter is remitted
back to the CESTAT limited only to decide the
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issue of limitation and recomputation of the
demands in terms of Rule 2A. The aforesaid
exercise be completed by the CESTAT on
remand within a period of three months from
the date of the present order.
Present appeal is accordingly allowed.
However, in the facts and circumstances of the
case there shall be no order as to costs.
……………………………J.
(M. R. SHAH)
……………………………J.
(KRISHNA MURARI)
New Delhi,
May 2, 2023
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