By TIOL News Service

AHMEDABAD, APR 14, 2014 : THE length to which the revenue officers can go to deny an assessee the benefit of CENVAT credit is aptly illustrated in this case.

The appellant is engaged in providing taxable services in the category of Work Contract Services and are availing CENVAT credit on inputs/input services.

It is the Department's view that in respect of ‘Works Contract Services' the appellant had no option to pay full service tax but to pay reduced service tax as per provision of rule 2A of the Service Tax (Determination of values) Rules, 2006 or to pay service tax @ 4% under the WorksContract (Composition Scheme for payment of Service Tax) Rules, 2007.

The hidden agenda presumably in this allegation is that once the appellant falls for the bait of reduced service tax, he would be deprived of CENVAT credit in view of the following provisions in the ST Valuation Rules, 2006 & the Composition Rules respectively -

Explanation 2. - For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

(2) The provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

Be that as it may, a SCN came to be issued seeking denial of CENVAT credit availed by theservice provider on cement, channels, CTD or TMT bars and other items used for construction of factory shed, building and foundation for the client. The period involved is April 2008 - Sept. 2009. Penal and interest provisions also found their way into the SCN.

The CCE, Vapi confirmed the demand with penalty etc. and so the appellant is before the CESTAT.

The appellant submitted –

++ The appellant had many options of discharging the service tax liability under the provisions of Sec. 67 of Finance Act 1994 and decided to discharge the service tax on the entire taxable value of the contract executed by them.

++ There is no prohibition under the Act or the rules made thereunder for discharging service tax liability at the full applicable rate on the gross amount charged for rendering services.

++ The adjudicating authority had erred in imposing on the appellant provisions of rule 2A of Service Tax Valuation rules.

++ As the Rule 2A begins with an expression "subject to provisions of section 67", it would mean that the Valuation Rules are governed by the provisions of section 67 and the same would prevail. However, the method of valuation as prescribed in rule 2A of the Service Tax Valuation Rules needs to be applied only in case of where there is difficulty in determining correct value of works contract.

++ Similarly, Rule 3 of the Composition Rules also begins with a non-obstante clause ‘ Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006…' .

++ Reliance is placed on the decisions in South India (P) Ltd., vs. Secretary Board of Revenue, Tvm, (AIR.164.SC.207.215)& ChandavarkarSitaRatnaRaovsAshalatha S Guram (AIR.1987.SC.117)  t o explain the significance of the ‘non obstante' clause .

++ Rule 3 of Composition Rules is merely another option provided to the service provider for discharging of service tax liability.

++ Rule 2A of Service Tax Valuation Rules or Rule 3 of the Composition Rules does not grant any exemption whether wholly or partly from payment of service tax but only provides for the manner of determination of taxable value in respect of works contract services and, therefore, reliance placed by the adjudicating authority on the Explanation appearing at the end of Rule 3 of CENVAT Credit Rules, 2004 is entirely misplaced.

The Revenue representative reiterated the findings recorded by the adjudicating authority and submitted that the entire issue is availment of ineligible CENVAT credit by the appellant for erection of factory for their clients; that the said client could not have availed CENVAT credit of duty paid on inputs like steel and construction materials which are structural and construction materials and hence this modus operandi was adopted. That since the appellant are accepting that the services provided by them areWork Contract services, they should have discharged the service tax liability on the amount as is required to be calculated under the provisions of Rule 2A of the Service Tax Rules or Rule 3 of Composition Rules. Inasmuch as the appellant has done wrong by availing CENVAT credit and passing on the same to service recipient, the representative concluded.

The Bench observed that the entire issue is misconceived by the Adjudicating Authority for more than one reason and inter alia added -

++ In terms of section 67 of the FA, 1994, Service Tax liability is to be discharged on the gross amount charged by the service provider. In the case in hand there is no dispute as to the value or gross amount which needs to be considered for discharge of service tax liability. It is admitted by both sides that the value of the works contract executed by the appellant is the value on which the appellant has discharged full rate of service tax.

++ The said provision of section 67 can be departed only, and we reiterate only, when value as per the provisions of 67(1), (2), (3) are not ascertainable, and recourse can be taken to provisions of section 67 (4). While applying provisions of 67(4) necessary implication is that the value for discharge of service tax liability needs to be determined by referring to service tax valuation rules. In the case in hand since there is no dispute as to the gross value charged by the appellant there is no necessity to take recourse for determining the value under Service Tax (Determination of Value) Rules 2006.

++ The said rule 2A starts with the expression "subject to the provisions of section 67" and means that value of the services, involved in execution of works contract if cannot be determined under said Section, then only the said provisions of Rule 2A would apply and shall be determined in the manner as is indicated therein. In our considered view, this rule will not be applicable to the case in hand.

++ After reading the expression in the opening part of the rule 3 (of Composition Rules), at first blush the use of 'non-obstante clause' may give an impression that the rule will prevail over the provision of section 67 and rule 2A of the Valuation Rules for determination of value for discharge of Service Tax liability in cases of works contracts, but on deeper reading we find that the said provisions indicate another intention of legislature.

++ Rule 3(1) of Works Contract (composition scheme for payment of service tax) Rules 2007 if read carefully would indicate that the service provider in relation to works contract, service has an option to discharge service tax liability in respect of works contract services in the manner prescribed therein. If there is an option which needs to be exercised and if an assessee chooses not to exercise such an option of discharge of service tax liability under works contract (Composition Scheme for payment of Service Tax) Rule 2007, then only meaning that can be attributed will be that the service provider or an assessee has to discharge the Service Tax liability at the full rate.

++ If the rule 3(1) of Works Contract (Composition Scheme) for payment of Service Tax 2007 is to be considered as having overriding effect over section 67 and rule 2A of Valuation Rules on literal construction of non obstante clause, then an incongruous result will follow since the statutory provisions will be rendered nugatory and otiose. Further, we are of the view that an anomalous situation would arise, if it is held so, as benefit Rule 2A of Valuation Rules would no longer be available as an option to the service provider if 'non obstante' clause employed in Rule 3(1) of Composition Rules is read in the manner revenue wants us to read. In our view, this can neither be the intention of the legislature and no such interpretation can be done which renders a statutory provision nugatory. In our view, Rule 3 of Composition rules is merely one of the options provided to the service provider to discharge of Service Tax liability vis-à-vis options available in Section 67 of the Finance Act 1994.

++ As there is no dispute to the fact that appellant is discharging full Service Tax under the category of Works Contract Service using Inputs and Input Service and which are used for rendering of 'output services'; on reading of provisions of Rule 2(l) of the CCR, 2004 it would indicate that assessee is eligible to avail CENVAT credit of Inputs and input services which are used to provide 'output service' which would include 'setting up' of a factory premises.

++ It is undisputed that the appellant had provided output services which are covered by Works Contract for setting up of plant and, therefore, it has to be held that CENVAT credit availed by the appellant is in consonance with the provisions of the CCR, 2004. We also hold that the discharge of Service Tax liability at full rate by the appellant by applying provisions of section 67 of the Finance Act 1994 cannot be called in question by the Revenue.

In fine, the order of the adjudicating authority was set aside and the appeal was allowed with consequential relief.

(See 2014-TIOL-559-CESTAT-AHM)