By TIOL News Service

AHMEDABAD, MAY 28, 2014: THE issue to be decided in the present proceedings is whether appellant is entitled to Composition Scheme under the provisions of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 (effective from 01.6.2007) when the contracts for rendering services was entered before 01.6.2007 and part of the services were also rendered before 01.6.2007.  Further, the Advance payment for the service to be provided was received before 01.6.2007 and duly reflected in the returns filed with the Revenue but no service tax was paid before 01.6.2007.

The appellant entered into an agreement dated 14.02.2007 with M/s. Essar Oil Limited for the expansion of an oil refinery set up by the latter.  The execution of the contract began in July 2007 and even some advances were received by the appellant from M/s. Essar Oil Limited prior to 01.6.2007 but no service tax was paid prior to 01.6.2007.  It is the case of the appellant that the condition of Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, as explained by CBEC in their Circular dated 24.08.2010, was entirely fulfilled and service tax @ 2% (later enhanced to 4% with effect from 01.3.2008) was correctly paid under Works Contract Services.

As the Commissioner, Central Excise, Rajkot vide his order dated 18.10.2012 denied the benefit of the Composition Scheme and confirmed service tax demands for the extended period, the appellant is before the CESTAT.

The relevant provisions of Rule 3(3) of the Works Contract Rules, 2007 reads:-

"Option to avail Composition Scheme;

3 (1) ..................

(2) .................

(2A) ................

(3) 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the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract."

The provisions of the above Rule 3(3) have been further clarified by CBEC under   Circular No. 128/10/2010-ST dated 24.8.2010 in the following words:-

"3. As regards applicability of composition scheme, the material fact would be whether such a contract satisfies rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. This provision casts an obligation for exercising an option to choose the scheme prior to payment of service tax in respect of a particular works contract. Once such an option is made, it is applicable for the entire contract and cannot be altered. Therefore, in case a contract where the provision of service commenced prior to 1-6-2007 and any payment of service tax was made under the respective taxable service before 1-6-2007, the said condition under rule 3(3) was not satisfied and thus no portion of that contract would be eligible for composition scheme. On the other hand, even if the provision of service commenced before 1-6-2007 but no payment of service tax was made till the taxpayer opted for the composition scheme after its coming into effect from 1-6-2007, such contracts would be eligible for opting of the composition scheme.

4. The Boards previous Circular No. 98/1/2008-S.T., dated 4-1-2008 and the ratio of judgment of the High Court of Andhra Pradesh in the matter of M/s. Nagarjuna Construction Company Limited v. Government of India [2010 (19) S.T.R. 321 (A.P.) - 2010-TIOL-403-HC-AP-ST are in line with the above interpretation."

The Bench after hearing extensive arguments from both sides observed -

++ The crucial element for eligibility to Composition Scheme under the Works Contract Rules, 2007 is the event of payment of Service Tax and the exercising of option, whether the same has been done before 01.6.2007 or after 01.6.2007.

++ The words used in Rule 3(3) of these Rules are regarding exercising of option to pay service tax under Composition Scheme before payment of service tax in respect of a Works Contract.

++ There is no explanation in the said Rule to clarify that payment of service tax shall also mean the situation where service tax was payable but not paid by the assessee.  In the absence of any such provision in the Composition Scheme introduced under Works Contract Rules, 2007, it will not be correct to hold that intention behind the scheme should be seen when no such intention is coming out of the legal provisions of Rule 3(3).

++ Appellant has, therefore, correctly availed the Composition Scheme for the Works Contracts for which the option and payment of service tax was exercised after 01.6.2007 and no service tax was paid before 01.6.2007.

The Bench also held that the value of Supply Contract cannot be clubbed to the Service Contract in view of its order No. A/10908-10909/WZB/HAD/2013 dated 11.7.2013 in the case of Essar Projects (India) Limited vs. CCE & ST, Rajkot.

There is another argument made by the Revenue representative that the CBEC Circular No. 98/1/2008-ST, dt.04.01.2008 bars an assessee from claiming the benefit of Composition Rules, 2007 for the works contract services provided after 01.06.2007, if tax at the full standard rate (and not the composition rate) had become payable on a part of the contract value prior to 01.06.2007.

The contention of the Revenue is that a single contract cannot be vivisected and classified into two, for the purposes of Composition Rules, 2007 and as in the present case an advance had been received prior to 01.06.2007 and liability to pay Service Tax thereon had arisen at the full standard rate on this part of the contract value, albeit under a different classification, i.e. Commercial & Industrial Construction Services, consequently the remainder of the contract value could not be granted the benefit of Composition Scheme in view of the bar contained in Rule 3(3) of the Composition Rules 2007.

The Bench relied upon the decision in Nagarjuna Construction Company Ltd Vs GoI - 2010-TIOL-403-HC-AP-ST and held -

+ The CBEC Circular dt.04.01.2008 only prohibits vivisection of a single composite service into two taxable categories merely by virtue of the fact that a part of the consideration was received after 01.06.2007.  Significantly, this circular does not prohibit vivisection of a composite contract under two classifications.

+ In respect of the task/service completed prior to 01.06.2007, if part of the consideration was received before 01.06.2007 and part thereafter, whether for that part of the consideration received after 01.06.2007, the composition scheme could be claimed was the only question considered by the CBEC in Circular dt.04.01.2008.  It is in this context that CBEC Circular clarified that a single composite service covered by the first task/service could not be vivisected, so that a part of its value is classified as Works Contract Service merely by reason of the consideration being received after 01.06.2007.

+ Thus, as long as the assessee is clear in choosing the Composition option in respect of services provided after 01.06.2007 and does not vacillate on his choice, he is entitled to avail of the Composition rate under Rule 3(1) for the value of Works Contract Service which, as discussed above, refers to services provided after 01.06.2007. The classification of services rendered prior to 01.06.2007 cannot affect the assessees' entitlement to the Composition Scheme in respect of services rendered after 01.06.2007.

+ In the present case, it is not in dispute that in respect of the services provided after 01.06.2007, which alone are regarded as Works Contract Service, the appellant had opted to pay tax at the Composition rate and not at the standard rate and was thus eligible for the composition benefit in respect of services provided after 01.06.2007.

+ However, in respect of advance received prior to 01.06.2007 which tantamount to provision of service prior to 01.06.2007, the benefit of composition rate could not have been claimed, on the said advance and Service Tax on the same was payable under the head of Commercial or Industrial Construction Services, as has been held by the respondent.

+ As such, the appellants contention that they were entitled to pay tax at the composition rate on advances received prior to 01.06.2007 cannot be accepted.

Nonetheless, it was observed that since the appellant had clearly stated in the ST-3 return that Service Tax was not discharged in view of the fact that the service in the contract was an indivisible Works Contract and which view was holding the field in view of the decision in Daelim case coupled with the fact that there was no deliberate suppression of facts, the bench held that extended period cannot be invoked and, therefore, the alternative question whether the appellant would have been eligible for abatement while computing the tax liability on advance payments is not being analysed.

The appeal was allowed.

(See 2014-TIOL-880-CESTAT-AHM)