CC AND CE AND ST, NOIDA versus M/S INTERARCH BUILDING PRODUCTS PVT. LTD. on 2 May 2023

[2023] 7 S.C.R. 977

CC AND CE AND ST, NOIDA

v.

M/S INTERARCH BUILDING PRODUCTS PVT. LTD.

(Civil Appeal No. 11330 of 2018)

MAY 02, 2023

[M. R. SHAH AND KRISHNA MURARI, JJ.]

Finance Act, 1994 – ss. 64,65(105)(zzq),65(105)(zzzza),66,67 and 73 – Service (Determination of Value) Rules, 2006 – Rule2A – CENVAT Credit Rules, 2004 – Payment of service tax – Liabilityfor – Respondent–assessee was engaged in the business ofmanufacture, supply and erection at the site of prefabricated steelbuildings – They paid service tax under the category “commercialor industrial constructions services” as referred u/s.65(105)(zzq)of the Finance Act, 1994 – Respondent availed CENVAT credit andshort paid the Service Tax in cash – Revenue was of the view thatthe service rendered by the respondent was classifiable under “workscontract service”(chargeable under sub clause(zzzza) of s.65(105)and it was mandatory for the respondent to either follow Rule 2A ofService Tax (Determination of Value) Rules, 2006 or adoptComposition Scheme – Tribunal held that there was no question onapplicability of Rule 2A nor there was any question of forciblyapplying the option of composition scheme and respondent wasentitled to CENVAT credit on inputs – Before the Supreme Court,the case on behalf of the respondent-assessee was that Rule 2A andeven in the composition scheme the words used are subject to theprovisions of s.67 the assessee had an option to pay the service taxon the entire contract value and that the Rule 2A is not compulsoryand the composition scheme is optional – Whether an assessee whois liable to pay service tax under works contract service has thelegal right not to follow Rule 2A nor the composition Scheme on theground that in terms of s. 67 of the Act of 1994 an assessee isentitled to take the total contract value which includes both goodsand services and remit service tax on the entire value as workscontract service and in the process also entitled to avail the CENVATCredit – Held: Services rendered by the respondent can be said tobe ‘works contract service’ as per the Finance Act, 1994 w.e.f.01.06.2007 as per s.64(54) r/w. s. 65(105)(zzzza) – In the case of

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A‘works contract service’ an assessee is liable to pay the service taxon the service element and the sales tax on the element of goodstransferred pursuant to the contract – The submission of therespondent made cannot be accepted as it would make Rule 2A andcomposition scheme otiose – As per the scheme of the Act thedetermination of value of service portion in the execution of theBworks contract is to be made as per Rule 2A, however with an optionto the assessee to avail the benefit of composition scheme – Eitherthe assessee has to go for composition scheme or go fordetermination of value as per Rule 2A and the assessee has to payservice tax on service element and can claim CENVAT credit on theCsaid amount only – Therefore, the respondent has to pay the servicetax on the value of services as per Rule 2A of the (Determination ofValue) Rules, 2006 and thereafter to avail the CENVAT Creditaccordingly – The impugned judgment and order passed by theCESTAT is quashed and set aside.

DAllowing the appeal, the Court

HELD:1. The service elements have found a statutoryrecognition as part of Rule 2A of the Service Tax (Determinationof Value) Rules, 2006 w.e.f. 01.06.2007 which has been referred.The applicability of Rule 2A has been dealt with and consideredEby this Court in extenso in the case of Larsen and Toubro.Therefore, as per the law laid down by this Court in the case of‘works contract service’ an assessee is liable to pay the servicetax on the service element/value of the service rendered and thesales tax/tax on the element of goods transferred pursuant to thecontract. [Para 8.4][1000-B-C]F

2. It is the case on behalf of the respondent – assessee thatas in Rule 2A and even in the Composition Scheme the wordused are subject to the provisions of Section 67 the assesseehad an option to pay the service tax on the entire contract valuei.e. on gross amount charged by the service provider and thatGRule 2A is not compulsory and the Composition Scheme isoptional. However, the aforesaid has no substance. If thesubmission on behalf of the assessee is accepted in that caseRule 2A and the Composition Scheme shall become otiose. [Para8.8][1001-E]

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3. With respect to the ‘works contract service’ and/or theComposition Works Contract the valuation has to be made asper Rule 2A of the Valuation Rules, 2006. Even as per theComposition Scheme vide Notification 32/2007 dated 22.04.2007an assessee has an option to discharge the service tax liabilityon the works contract service provided or to be provided, insteadof paying service tax at the rate specified in Section 66 of the Actby paying equivalent to 2% of the gross amount charged for theworks contract. It is to be noted that Rule 3(1) providesnotwithstanding anything contained in Section 67 of the Act andRule 2A of the Service (Determination of Value) Rules, 2006.Therefore, as per the Scheme of the Act the determination ofvalue of service portion in the execution of the works contract isto be made as per Rule 2A, however with an option to theassessee to avail the benefit of Composition Scheme. Therefore,either the assessee has to go for Composition Scheme or go forDetermination of Value as per Rule 2A and the assessee has topay service tax on the service element and can claim CENVATCredit on the said amount only. [Para 8.9][1001-F-H; 1002-A]

4. In view of the above the impugned judgment and orderpassed by the CESTAT taking the contrary view is unsustainableby which it is held that the assessee is entitled to take the totalcontract value which includes both goods and services and remitservice tax on the entire value as ‘works contract’ and theassessee is also entitled to avail the CENVAT Credit on the same.However, at the same time the service tax needs to be paid interms of Rule 2A of Service Tax (Determination of Value) Rules,2006 and since the assessee has not opted for compositionscheme, the matter is to be remitted back for re--computation ofthe demands in terms of Rule 2A. As the issue with respect tothe extended period of limitation has also not been decided byCESTAT the matter is to be remanded to the CESTAT to decidethe issue of limitation. [Para 9 and 9.1][1002-B-D]

5. The impugned judgment and order passed by theCESTAT is hereby quashed and set aside and it is held that theassessee is not entitled to take the total contract value which ABC

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Aincludes both goods and services and remit service tax on thevalue as works contract service and, in the process, also entitledto avail the CENVAT Credit on the entire amount. It is observedand held that the assessee has to pay the service tax on the valueof services as per Rule 2A of the (Determination of Value) Rules,2006 and thereafter to avail the CENVAT Credit accordingly.BHowever, it is also observed and held that demand for the periodJanuary 2007 to May 2007 is unsustainable. [Para 10][1002-E-F]

Commissioner of Central Excise v. Larsen and Toubro(2016) 1 SCC 170 : [2015] 8 SCR 1046; TotalCEnvironment Building Systems Pvt. Ltd. v. DeputyCommissioner of Commercial Taxes (2022) SCC OnlineSC 953; Gannon Dunkerly and Co. v. State ofRajasthan (1993) 1 SCC 364 : [1992] 3 Suppl. SCR103 – referred to.

DCCE v. S.V. Jiwani 2014 (35) STR 351 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 11330of 2018.

From the Judgment and Order dated 09.11.2017 of the CustomFExcise Service Tax Appellate Tribunal in A. No. 70517 of 2017.

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N. Venkataraman, ASG, Ms. Nisha Bagchi, Shantanu Sharma,Ms. Shraddha Deshmukh, VCS Bharathi, Mukesh Kumar Maroria, Advs.for the Appellant.

V. Raghuraman, Sr. Adv., Shailesh Sheth, Sandeep Bisht, DivyamGarg, Yati Ranjan, Raghavendra CR, Ranjan Kumar Pandey, Advs. forthe Respondent.

The Judgment of the Court was delivered by

M. R. SHAH, J.

1. Feeling aggrieved and dissatisfied with the impugned judgmentand order dated 09.11.2017 passed by the Customs, Excise and ServiceTax Appellate Tribunal, Regional Bench at Allahabad (hereinafter referredto as ‘the Appellate Tribunal’) by which the learned Tribunal has allowedthe said appeal preferred by the respondent and has set aside the Order-in-Original dated 31.03.2017 disallowing the CENVAT Credit, theRevenue 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 ofmanufacture, supply and erection at the site of prefabricated/pre-engineered steel buildings and parts thereof classifiable under the relevantHeadings/sub-headings of the First Schedule to the Central Excise TariffAct, 1985. The respondent was having centralized registration for ServiceTax with the Service Tax Department for services under “Commercialor Industrial Construction Service” and “Construction Services” rightfrom the commencement of production. The goods manufactured werecleared from the place of manufacture on payment of central exciseduty on which CENVAT Credit was made by the respondent. The unitat Greater Noida registered as a Centralized Service Provider, availedCENVAT Credit

(i) Excise duty paid by the units at the time of removal

(ii) duty paid on capital goods

(iii) service tax paid on input services.

They paid service tax on the gross amount of contract forengineering, procurements supply, construction, erection etc. under thecategory “commercial or industrial constructions services” as referredunder Section 65(105)(zzq) of the Finance Act, 1994 (hereinafter referredto as ‘the Act, 1994’).

2.2 Based on specific intelligence that the respondent had wronglyclassified the services rendered by them, availed inadmissible CENVATCredit and short paid the Service Tax in cash. Department was of theview that the services rendered by the respondent amounted to WorksContract which were chargeable to tax under sub clause [zzzza] of A

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ASection 65(105] of the Finance Act, 1994. Therefore, according to theRevenue on classifiable service under ‘works contract service’ therespondents availed CENVAT Credit on Central Excise duty paid oninputs.

2.3 Therefore, the Department issued a Show Cause Notice allegingBinter alia that the respondent had utilized CENVAT Credit ofRs.1,12,60,92,760/- on building material during June, 2007 to March, 2012which was inadmissible. It was alleged that the said amount had beenrecovered as service tax from the customer under Section 73(1) of theAct, 1994. It appeared to the Revenue that services should have beenclassified under “Works Contract Service”. It was mandatory for theCrespondent to either follow Rule 2A of Service Tax (Determination ofValue) Rules, 2006 or adopt Composition Scheme. The said Rule 2Aand Composition Scheme do not allow the availment of CENVAT Crediton input. Therefore, it appeared to the Revenue that the CENVAT Creditof Rs.112,60,92,760/- as availed on input was inadmissible and therefore,Dthe said debit has resulted in short payment of Service Tax.

2.4 The Show Cause Notice was related to the period from June,2007 to March, 2012. The respondent was called upon to show cause asto why the services being provided by them be reclassified under “WorksContract Service” in place of “Commercial or Industrial ConstructionEServices”, inadmissible CENVAT Credit of building material amountingto Rs.112,60,92,760/- be disallowed in terms of Rules 2 & 3(1) ofCENVAT Credit Rules, 2004; an amount of Rs.22,37,01,811/- on accountof short paid Service Tax towards the liability debited from the inadmissibleCenvat Credit on construction materials be recovered under Section73(1) of the Act, 1994;an amount of Rs.90,23,90,907/- alleged to haveFbeen collected as cash in excess of the Service Tax assessed/determinedby passing the inadmissible CENVAT Credit to their recipients of taxableservice be demanded under Section 73A of the Act, 1994 along with theappropriate rate of interest under Sections 73B and 75 of the Act andthe penalties be imposed under Sections 77 & 75 of the Act, 1994 readGwith Rule 15(3) of CENVAT Credit Rules, 2004. By Order dated28.03.2004 the Adjudicating Authority who disallowed the CENVATCredit amounting to Rs.1,12,60,92,760/- confirmed the amounts ofRs.22,37,01,811/- being short paid, confirmed the claim in the show causenotice.

2.5 The department had issued further Show Cause Notices/statement of demands for the subsequent period also.

2.6 By order dated 18.11.2015, the learned Tribunal set aside theadjudication order and remanded the matter back to the adjudicatingauthority with the direction that the tax liability be re-determined afterhearing the respondent.

On remand the adjudicating authority passed a fresh order dated31.03.2017 and confirmed the demands. The Commissioner held thatthe services rendered by the respondent was classifiable as ‘WorksContract Service’ and rejected the availability of CENVAT Credit amountand directed recovery under Section73A of the Act, 1994. The Order-in-Original passed by the adjudicating authority was the subject matterof the present appeal before the Tribunal.

2.7 Before the Tribunal the Order-in-Original passed by theAdjudicating Authority was challenged on the following grounds:

(i) “The Id. Commissioner disallowed Cenvat credit availedon 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 showcause notice dated 23.10.2012 and the amounts in case other3 notices as specified above and that such order is notsustainable in law.

(ii) The provision of Rule 2A of Service Tax (Determination ofValue) Rules, 2006, start with expression “subject to theprovisions of Section 67” which means the provisionprescribed under said Rule 2A, is subject to the provisionsof Section 67 of the Finance Act, 1994.

(iii) Opening Para of Rule 3 of Composition Scheme reads as-“Notwithstanding anything contained in Section 67 of theAct and Rule 2A of the Service Tax (Determination ofValue) Rules, 2006, the person liable to pay Service Tax inrelation to Works Contract Service shall have the option todischarge his Service Tax liability on the Works ContractService.” It clearly indicates that it is one of the optionsgiven to the Service Provider to discharge Service Taxliability in respect of Works Contract Service and it is notmandatory to adopt the said Rule under CompositionScheme for discharge of Service Tax liability.

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A(iv)Section 67 of the Finance Act, 1994 provides for arriving atassessable value which states “subject to the provisions ofthis Chapter, where Service Tax is chargeable on any taxableservice with reference to its value, then such value shall ina case where the provision of service is for a considerationin money, be the gross amount charged by the serviceBprovider for such service provided or to be provide by him.”Therefore, the said provision which is fundamental in natureand is applicable to any taxable service.

(v) The demand towards Cenvat credit confirmed in case ofshow cause notice dated 23.10.2012 is substantially timebarred.

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(vi) In the impugned order, Id. Commissioner has distinguishedthe judgment of this Tribunal in the case of S.V. Jiwani(supra) and the grounds on which Id, Commissionerdistinguished the judgment are invalid.”

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2.8 By the impugned judgment and order the learned Tribunal hasallowed the appeal preferred by the respondent and has set aside theOrder-in-Original passed by the adjudicating authority by observing thatthe composition scheme is optional and the provisions of Rule 2A of thesaid Rules are subject to provisions of Section 67 of the Act, 1994. TheElearned Tribunal has also observed that it is clear from the provisions ofsub-section 4 of Section 67 of the Act, that where value cannot bedetermined as provided under sub-rule (1) to (3) of Section 67 of theAct, then only the value is to be determined as provided under the Rules.Therefore, the Tribunal held that there is no question on applicability ofFRule 2A nor there was any question of forcibly applying the option ofComposition Scheme. The learned Tribunal held that in both thesecircumstances, the respondent was entitled to CENVAT Credit on inputs.

2.9 Feeling aggrieved and dissatisfied with the impugned judgmentand order passed by the learned Tribunal setting aside the Order-in-GOriginal, the Revenue has preferred the present appeal.

3. Shri N. Venkataraman, learned ASG has appeared on behalf ofthe Revenue and Shri V. Raghuraman, learned Senior Counsel hasappeared on behalf of the respondent – assessee.

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CC AND CE AND ST, NOIDA v. M/S INTERARCH BUILDINGPRODUCTS PVT. LTD. [M. R. SHAH, J.]

4. Shri N. Venkataraman, learned ASG appearing on behalf ofthe Revenue has made the following submissions challenging thecorrectness and legality of the impugned order passed by the CESTAT:

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(i) That the period under dispute is January, 2007 to March,2014. He has submitted that the definition of ‘workscontract service’ was brought into the Finance Act, 1994Bw.e.f. 01.06.2007. Therefore, he has fairly conceded thedemand for the period January, 2007 to 31.05.2007 shallnot be maintainable in light of the decision of this Court inthe case of Commissioner of Central Excise vs. Larsenand Toubro, (2016) 1 SCC 170 as well as TotalCEnvironment Building Systems Pvt. Ltd. vs. DeputyCommissioner of Commercial Taxes, (2022) SCCOnline 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 thedemand should go.

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4.2 It is submitted that however, for the period commencing01.06.2007 to 31.03.2014 the demands are sustainable and the Orders-in-Original need to be restored.

4.3 Shri N. Venkataraman, learned ASG has taken us to therelevant provisions of the Act, 1994 more particularly Chapter 5 and thedefinition of ‘works contract’ and the definition of ‘taxableservice’contained in Section 64(54) and Section 65(105)(zzzza)respectively. It is submitted that post 01.07.2012, the Finance Act, 1994underwent major amendments by the insertion of both negative list anddeclared services. It is submitted that Section 66E was introduced forthe first time which defined declared services. He has taken us to sub-clause (h) of Section 66E of the Act.

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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 29/2007dated 22.05.2007 w.e.f. 01.06.2007 which reads as under, which hasbeen amended periodically:

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“Prior to 01.07.2012 it reads as under:

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A2A. Determination of value of services involved in theexecution of a works contract:

(1) Subject to the provisions of section 67, the value of taxableservice in relation to services involved in the execution of a workscontract (hereinafter referred to as works contract service),Breferred to in sub-clause (zzzza) of clause (105) of section 65 ofthe Act, shall be determined by the service provider in the followingmanner:-

(i) Value of works contract service determined shall be equivalentto the gross amount charged for the works contract less the valueCof transfer of property in goods involved in the execution of thesaid works contract.

Explanation.- For the purposes of this rule,- (a) gross amount charged for the works contract shall not includeValue Added Tax (VAT) or sales tax, as the case may be, paid, ifDany, on transfer of property in goods involved in the execution ofthe said works contract; (b) 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; E

(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery andtools used for the execution of the works contract;F(v) cost of consumables such as water, electricity, fuel, used inthe execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply oflabour and services;

(vii) other similar expenses relatable to supply of labour andGservices; and

(viii) profit earned by the service provider relatable to supply oflabour and services;

(ix) Where Value Added Tax or sales tax, as the case may be, hasbeen paid on the actual value of transfer of property in goodsH

CC AND CE AND ST, NOIDA v. M/S INTERARCH BUILDINGPRODUCTS PVT. LTD. [M. R. SHAH, J.]

involved in the execution of the works contract, then such valueadopted for the purposes of payment of Value Added Tax or salestax, as the case may be, shall be taken as the value of transfer ofproperty in goods involved in the execution of the said workscontract for determining the value of works contract service underclause (i).”

4.5 It is submitted that vide notification 32/2007 – ST dated22.04.2007 the Central Government in exercise of its powers conferredby Sections 93 and 94 of the Act, 1994 introduced the Works Contract(Composition Scheme for Payment of Service Tax) Rules, 2007. Rule3(1) of the said Rules reads as under:

“3. (1) Notwithstanding anything contained in section 67 of theAct and rule 2A of the Service (Determination of Value) Rules,2006, the person liable to pay service tax in relation to workscontract service shall have the option to discharge his service taxliability on the works contract service provided or to be provided,instead of paying service tax at the rate specified in section 66 ofthe Act, by paying an amount equivalent to two per cent of thegross amount charged for the works contract.

Explanation. - For the purposes of this rule, gross amount chargedfor the works contract shall not include Value Added Tax (VAT)or sales tax, as the case may be, paid on transfer of property ingoods involved in the execution of the said works contract.”

4.6 It is submitted that the sub-rules came to be amended videNotification No.23/2009 – ST dated 07.07.2009 and further amended byNotification 1/2011 – ST dated 01.03.2011.

4.7 It is submitted that Section 67 of the Act, 1994 deals withvaluation of taxable services reads as under:

“67. Valuation of taxable services for charging Service Tax-1) Subject to the provisions of this Chapter, service tax chargeableon any taxable service with reference to its value shall, -

(i) in a case where the provision of service is for a considerationin money, be the gross amount charged by the serviceprovider for such service provided or to be provided byhim; A

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(ii) in a case where the provision of service is for a considerationnot wholly or partly consisting of money, be such amount inmoney, with the addition of service tax charged, is equivalentto the consideration;

(iii) in a case where the provision of service is for a considerationwhich is not ascertainable, be the amount as may bedetermined in the prescribed manner.

(2) Where the gross amount charged by a service provider, forthe service provided or to be provided is inclusive of service taxpayable, the value of such taxable service shall be such amountas, with the addition of tax payable, is equal to the gross amountcharged.

(3) The gross amount charged for the taxable service shall includeany amount received towards the taxable service before, duringor after provision of such service.

(4) Subject to the provisions of sub-sections (1), (2) and (3), thevalue shall be determined in such manner as may be prescribed.

Explanation-For the purposes of this section, - (a) “consideration” includes

(i) any amount that is payable for the taxable services provided orto be provided;

(ii) any reimbursable expenditure or cost incurred by the serviceprovider and charged, in the course of providing or agreeing toprovide a taxable service, except in such circumstances, andsubject to such conditions, as may be prescribed.

(iii) Any amount retained by the lottery distributor or selling agentfrom gross sale amount of lottery tickets in addition to the fee orcommission, if any, or, as the case may be, the discount received,that is to say, the difference in the face value of lottery ticket andthe price at which the distributor or selling agent gets such ticket.

(c) “gross amount charged” includes payment by cheque, creditcard, deduction from account and any form of payment by issueof credit notes or debit notes and [2][book adjustment, and anyamount 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 thetransaction of taxable service is with any associated enterprise.]]”

4.8 It is submitted that the Central Board of Excise and Customsvide letter dated 22.05.2007 issued clarifications regarding variousamendments brought out Vide Finance Act, 2007. It is submitted thatparas 9.1 to 9.7 which are relevant read as under:

“9.1 Works contract is a composite contract for supply of goodsand services. A composite works contract is vivisected and, -(i)VAT/sales tax is leviable on transfer of property in goods involvedin the execution of works contract [Art.366 (29A)(b) of theConstitution of India], and

(ii) Service tax will be leviable on services provided in relation tothe execution of works contract.

9.2 Service tax is chargeable on the gross amount charged by theservice provider for the taxable services provided (Section 67).In the case of works contract, the taxable value of services is tobe determined by vivisecting the composite works contract. Rule2A of Service Tax (Determination of Value) Rules, 2006[Notification No.29/2007-Service tax, dated 22.05.2007], providesthat value of works contract service shall be equivalent to thegross amount charged for the works contract less the value oftransfer of property in goods involved in the execution of the saidworks contract. Thus, wherever the service provider maintainsrecords, the value of services shall be the gross amount chargedfor the works contract less the value of transfer of property ingoods involved in the execution of works contract.

9.3 Wherever VAT/sales tax on transfer of property in goodsinvolved in the execution of works contract is paid on actual value,the same value is also taken for the purpose of determining thevalue of works contract service. In other cases, value of workscontract service shall be determined based on the actual. It hasalso been explained that value of works contract service shallinclude: (i) labour charges for execution of the works; (ii) amountpaid to a sub-contractor for labour and services; (iii) charges forplanning, designing and architect’s fees; (iv) charges for obtainingon hir or otherwise, machinery and tools uses for the execution ofthe works contract; (v) cost of consumables such as water, A

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electricity, fuel, used in the execution of the works contract, theproperty in which is not transferred in the course of execution ofworks contract; (vi) cost of establishment of the contract relatableto supply of labour and services; (vii) other similar expensesrelatable to supply of labour and services; and (viii) profit earnedby the service provider relatable to supply of labour and service; 9.4 If the gross amount charged for the works contract is inclusiveof VAT or sales tax, the value for the purposes of service tax shallbe computed as follows: [Gross amount charged – (value oftransfer of property in goods involved in the execution of workscontract and VAT or sales tax paid, if any, on the said transfer ofproperty in goods involved in the execution of said works contract)].

9.5 As a trade facilitation measure and also for ease ofadministrative convenience, the service provider has been givenan option to adopt the composition scheme for payment of servicetax on works contract service. The Works Contract (CompositionScheme for Payment of Service Tax) Rules, 2007 has accordinglybeen notified vide Notification No.32/2007-Service Tax, dated22.05.2007.

9.6 The scheme provides that the service provider shall have anoption to pay an amount equivalent to 2% of the gross amountcharged for the works contract instead of paying service tax atthe rate specified in section 66. Gross amount charged for theworks contract shall not include VAT or sales tax paid on transferof property in goods involved in the execution of the said workscontract. The provider of taxable service opting to pay servicetax under the said composition scheme is not entitled to takeCENVAT Credit of duty on inputs, used in or in relation to the saidworks contract, under the provisions of CENVAT Credit Rules,2004.

9.7 The provider of taxable service who opts to pay service taxunder these rules shall exercise such option in respect of a workscontract prior to payment of service tax in respect of the saidworks contract and the option so exercised shall be applicable forthe entire works contract and cannot be withdrawn until thecompletion of the said works contract.”

4.9 Relying upon the above provisions, rules and regulations andthe circulars, it is submitted that works contract is contract involvingsupply of goods and services together. A composite works contract getsvivisected into transfer of property into goods liable to sales tax/VAT interms of Article 366 (29A)(b) of the Constitution of India and the serviceportion liable to service tax w.e.f. 01.06.2007. Reliance is placed on thedecision of this Court in the case of Larsen and Toubro (supra)(paragraphs 14 to 16).

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4.10 It is submitted that the ratio of this Court in Larsen andToubro (supra) would be that the list of service elements as found inGannon Dunkerly and Co. vs. State of Rajasthan, (1993) 1 SCC364 case will suffer service tax and the goods portion would suffer VATor sales tax.

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4.11. It is submitted that the Constitutional Bench of this Court inthe case of Gannon Dunkerly and Co. (supra) while dealing with themeasure of tax vide para 47 had provided a list of exclusions from thecost of valuation of goods and as to what would constitute the serviceelements. He has heavily relied upon para 47 of the said decision. It issubmitted that this Court observed in para 47 in the case of GannonDunkerly and Co. (supra) as under:

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“47. ….. The value of the goods involved in the executionof a works contract will, therefore, have to be determined bytaking into account the value of the entire works contract anddeducting therefrom the charges towards labour and serviceswhich would cover—

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(a) Labour charges for execution of the works; F

(b) amount paid to a sub-contractor for labour and services;

(c) charges for planning, designing and architect’s fees; (d)charges for obtaining on hire or otherwise machinery andtools used for the execution of the works contract; G(e)cost of consumables such as water, electricity, fuel, etc.used in the execution of the works contract the property inwhich is not transferred in the course of execution of aworks contract; and H

A(f)cost of establishment of the contractor to the extent it isrelatable to supply of labour and services; (g)other similar expenses relatable to supply of labour andservices; (h)profit earned by the contractor to the extent it is relatableBto supply of labour and services.

The amounts deductible under these heads will have to bedetermined in the light of the facts of a particular case on thebasis of the material produced by the contractor.”

4.12 It is submitted that the above service elements have found aCstatutory recognition as the same stood incorporated as part of Rule 2Aof the Service Tax (Determination of Value) Rules, 2006 w.e.f.01.06.2007.

4.13 It is submitted that consequently this Court while dealingDwith the decision of Larsen and Toubro (supra) had specificallyaddressed this issue by bringing the similarity of the service elements asmentioned in Constitution Bench’s decision in Gannon Dunkerly (supra)and framed as Rule 2A of the Valuation Rules, 2006. Reliance is placedon paras 25 and 26 of the said judgment.

4.14 It is submitted that the decision of this Court rendered inELarsen and Toubro (supra) came up for reconsideration in the batchof matter in the case of Total Environment Building Systems Pvt.Ltd. (supra) wherein this Court vide para 28 rejected the request torefer the matter to the larger Bench by observing in paragraph 28 whichreads as under:F

“28. While appreciating the prayer/submission made on behalfof the Revenue to re-consider the binding decision of this Court inthe case of Larsen and Toubro Limited (supra) and to refer thematter to the Larger Bench, few facts are required to be takeninto consideration, which are as under:—

G(i) The decision of this Court in the case of Larsen and ToubroLimited (supra) has been delivered/passed in the year 2015, inwhich, it is specifically observed and held that on indivisible workscontracts for the period pre-Finance Act, 2007, the service taxwas not leviable; H

(ii) After considering the entire scheme and the levy of servicetax pre-Finance Act, 2007 and after giving cogent reasons, aconscious decision has been taken by this Court holding that theservice tax was not leviable pre-Finance Act, 2007 on indivisible/Composite Works Contracts;

(iii) While holding that for the period pre-Finance Act, 2007, onindivisible/Composite Works Contracts, the service tax is notleviable, number of decisions have been dealt with and consideredby this Court in the aforesaid decision;

(iv) That subsequently, the decision of this court in the caseof Larsen and Toubro Limited (supra) has been followed andconsidered by this Court in the case of Commissioner of ServiceTax and Ors. Bhayana Builders Pvt. Ld. And Ors, (2018) 3SCC 782,;

(v) That after the decision of this Court in the case of Larsenand Toubro Limited (supra) rendered in the year 2015, the saiddecision has been consistently followed by various High Courtsand the Tribunals;

(vi) The decisions of the various High Courts and the Tribunals,which were passed after following the decision of this Court inthe case of Larsen and Toubro Limited (supra) have attainedfinality and in many cases, the Revenue has not challenged thesaid decisions;

(vii) No efforts were made by the Revenue to file any reviewapplication to review and/or recall the judgment and order passedby this Court in the case of Larsen and Toubro Limited (supra).If the Revenue was so serious in their view that decision of thisCourt in the case of Larsen and Toubro Limited (supra) requiresre-consideration, Revenue ought to have filed the reviewapplication at that stage and/or even thereafter. No such reviewapplication has been filed even as on today.

(viii) Merely because in the subsequent cases, the amount of taxinvolved may be higher, cannot be a ground to pray forreconsideration of the earlier binding decision, which has beenconsistently followed by various High Courts and the Tribunals inthe entire country.”

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A4.15 It is submitted that therefore what is taxed under Section65(105)(zzzza) which later became Section 66E(h) of the Finance Act,1994 is the service portion in the execution of works contract. ThatSection 67(1) makes it abundantly clear that service tax is chargeableonly on the taxable service with reference to its value. It is submittedthat this Court in the case of Larsen and Toubro (supra) as reiteratedBin Total Environment Building (supra) has made it clear that the goodsvalue in the nature of transfer of property of goods would suffer salestax/VAT and the service components or elements would suffer servicetax w.e.f. 01.06.2007 by virtue of the definition of taxable service underSection 65(105)(zzzza) and later as Section 66E(h) as a declared serviceCpost 01.07.2012.

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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 ValuationRules, 2006 clearly identifying the service elements or components whichwould constitute the value for determination and payment of serviceDtax. These components again were retained even after the insertion ofSection 66E(h) post 01.07.2012.

4.17 It is submitted that this Court in the case of Larsen andToubro (supra) vide para 25 had referred to Rule 2A of the ValuationRules, 2006 and its purport by holding that the said Rule goes on to sayEthat the service component of the works contract is to include the 8elements laid down in the second Gannon Dunkerly’s case and thevalue attributable to the service in the works contract would be the serviceelements in such contracts as this scheme alone would comply with theconstitutional requirements as it seeks to bifurcate a composite indivisibleworks contract and takes care to see that no element is attributable toFthe property in goods transferred pursuant to such contract enters intothe computation of the service tax. It is submitted that therefore thepurport of Rule 2A of the valuation rules is only to bring the elements ofservice tax as that alone would meet the constitutional requirements andno elements attributable to the property in goods should enter in theGcomputation of service tax. It is, therefore, the entire contention of therespondent - assessee that they have a legal right to pay tax even on thegoods portion as service tax and also take input credit on the duty paidon the goods is clearly contrary to para 25 of the Larsen and Toubro(supra)judgment and Rule 2A of the Valuation Rules, 2006.

4.18 Now so far as the composition scheme is concerned, it issubmitted that the assessee falling under the definition of ‘works contractservice’ from 01.06.2007 has to discharge service tax liability either underRule 2A of the valuation rules only on the service components withouttaking any CENVAT Credit on the input goods or go for the option of acomposition scheme in which case the rates of tax specified at variouspoints of time should have been complied with on the total contract value.It is submitted that the invented method of the respondent – assessee byseeking to pay service tax on entire contract value after taking theCENVAT Credit on the input goods is clearly unsustainable in law. Thecontention that Rule 2A is subject to Section 67 which according to therespondent – assessee permits payment of tax on the contract valueincluding the goodsruns 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 serviceand as a value of taxable service.

4.19 It is submitted that Finance Act, 1994 read with the Rulespermit only 2 options either to pay service tax on the service elements asenvisaged under Rule 2A of the Valuation Rules, 2006 without taking theCENVAT Credit on input goods or opt for composition. It is submittedthat the third variant of paying service tax on the total contract valueincluding goods and correspondingly availing CENVAT Credit on theinput is not only misconceived but also legally untenable besides aConstitutional bar.

4.20 Now so far as the reliance is placed upon the decision of thisCourt in the case of Commissioner of Service Tax and Ors. BhayanaBuilders Pvt. Ld. and Ors, (2018) 3 SCC 782 is concerned, it issubmitted that on facts it has no relevance. It is submitted that on thecontrary the decision of this Court in the case of Larsen and Toubro(supra)would apply. It is submitted that even the circular dated 22.05.2005makes it amply clear as to how a works contract service needs to betaxed and vide para 9.2 referred to Rule 2A of the Valuation Rules, 2006to affirm that the value of works contract service shall be equivalent tothe gross amount charged for the works contract less the value of transferof property in goods involved in the execution of the said contract andvide para 9.3 rings out the elements of services which matches exactlywith the elements laid down by this Court in the case of GannonDunkerly (supra).

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5. Making above submissions it is prayed to allow the present Aappeal.

6. Present appeal is vehemently opposed by Shri V. Raghuraman,learned Senior Counsel appearing on behalf of the respondent –assessee.B6.1 While opposing the present appeal and in support of theimpugned order passed by the CESTAT, learned counsel appearing onbehalf of the respondent has made the following submissions:

(i) That the composition scheme is optional as per Rule 3(1)of the Composition Rules; C

(ii) Provisions of Rule 2A of the Valuation Rules are subject tothe provisions of Section 67 of the Finance Act, 1994;

(iii) Once the provisions of Section 67 of the Finance Act, 1994have been complied with, neither the question of applicabilityof Rule 2A of the Valuation Rules arise nor was there anyquestion of forcibly applying option of Composition Schemeon the assessee; D

(iv) Even if the services of the respondent are considered asclassifiable under ‘works contract service’ after 1[st] June,2007, as claimed by the Revenue, the further claims of theERevenue that there were only two options as above forvaluation of the works contract service namely thecomposition rules and the Rule 2A of the Valuation Rulesavailable to the assessee and consequential non-admissibilityof 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 Section67 of the Finance Act, 1994 and that valuation methodsprescribed under Rule 2A or composition scheme are merelyoptions provided to the assessee; G

(vi) Therefore, the benefit of CENVAT Credit on inputs cannotbe denied to the respondents in absence of any specific baror prohibition in the CENVAT Credit Rules, 2004 or theFinance Act, 1994.

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6.2 It is further submitted by learned counsel appearing on behalfof the respondent that while passing the impugned order the learnedTribunal has rightly followed its earlier decision in the case of CCE vs.S.V. Jiwani, 2014 (35) STR 351 affirmed by the Bombay High Courtwhich is squarely applicable. It is submitted that in the said case it washeld that the composition rules and Rule 2A of the Valuation Rules aremerely options provided to the service provider to discharge of servicetax liability vis-à-vis options available in Section 67 of the Finance Act,1994.

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6.3 It is further submitted that Rule 2A of the Valuation Rulesbegins with the words ‘subject to provisions of Section 67’. It is submittedthat this would mean that Rule 2A would apply only when value of theservice involved in execution of the works contract could not bedetermined under Section 67 of the Act.

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6.4 It is further submitted by learned counsel appearing on behalfof the respondent – assessee that prior to 01.07.2012 the assessee hadthree options:

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(i) Follow the tenets of Section 67 and pay tax on the full valueand take input tax credit.

(ii) Rule 2A of the Valuation Rules: to pay service tax at thefull applicable rate on the taxable value as determined inEterms of Rule 2A of the Valuation Rules. No bar to availCENVATCredit on inputs.

(iii) Composition Rules: To pay service tax @ 2.06% (increasedto 4.12% w.e.f. 01.03.2008) on the gross amount chargedfor the Contract, in terms of the Composition Rules. Cenvatcredit 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 valueand take input tax credit.

G(ii)Rule 2A(i): To determine the taxable value of service afterdeducting the actual value of the material involved.

(iii) Rule 2(ii): To pay service tax on specified percentage ofthe total amount charged for the works contract.

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6.6 It is submitted therefore under the above scheme the assesseehad the option to pay the service tax at full value on the entire amountcharged towards providing construction service or works contractservices under the provisions of Section 67 of the Finance Act, 1994.

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6.7 It is submitted that in this case the assessee would be eligibleBto full CENVAT Credit and input, input services and capital goods underCENVAT Credit Rules, 2004 OR to pay service tax under the headconstruction services by opting for abatements specified in Notificationunder 15/2004 – HT, as amended from time to time or replaced withnew notification; OR to pay service tax under the head ‘works contractservices’ either in terms of Rule 2A of the Valuation Rules or in terms ofCthe Composition Rules.

6.8 It is further submitted that the words used in Rule 2A ‘subjectto Section 67’ conveys the clear idea that the valuation done underSection 67 is supreme and the rules are subject to the Act.

D6.9 It is submitted that therefore the composition rules arecompletely optional for the assessee to exercise the assessee can optfor Section 67.

6.10 It is submitted that taking CENVAT duty on inputs is barredonly if one opts for Composition Rules and not if tax is paid at normalEprevailing rates on full gross value of contract under Section 67.

6.11 It is further prayed on behalf of the respondent that in casethe appeal be allowed on merits, the Tribunal has not rendered any findingon extended period of limitation and/or other issues and therefore thematters may be remanded back to the Tribunal.F7. Heard learned counsel for the respective parties at length.

8. The short question which is posed for consideration before thisCourt is as to whether an assessee who is liable to pay service tax underworks contract service has the legal right not to follow Rule 2A of theService Tax (Determination of Value) Rules, 2006 nor theGCompositionScheme on the ground that in terms of Section 67 of theFinance Act, 1994 an assessee is entitled to take the total contract valuewhich includes both goods and services and remit service tax on theentire value as works contract service and in the process also entitled toavail the CENVAT Credit?

8.1 At the outset, it is required to be noted that as such servicesrendered by the respondent – assessee can be said to be ‘works contractservice’ as per the Finance Act, 1994 w.e.f. 01.06.2007 as per Section64(54) read with Section 65(105)(zzzza).

8.2 As per the law laid down by this Court in the case of Larsenand Toubro (supra) and Gannon Dunkerly and Co. (supra) and thesubsequent decision in the case of Total Environment Building Systems

Pvt. Ltd. (supra) with respect to the works contract an assessee isliable to sales tax on the goods element and the service tax on theavailment of service/value of service rendered.

8.3 In the case of Gannon Dunkerly and Co. (supra) whiledealing with measure of tax in para 47 this Court had provided a list ofexclusions from the cost of valuation of goods and as to what wouldconstitute the service elements. As per the law laid down by this Courtin the aforesaid decision the following are to be excluded from the costof valuation of the goods.

“47. ….. The value of the goods involved in the execution of aworks contract will, therefore, have to be determined by takinginto account the value of the entire works contract and deductingtherefrom the charges towards labour and services which wouldcover—

(a) Labour charges for execution of the works; (b) amount paid to a sub-contractor for labour and services;

(c) charges for planning, designing and architect’s fees; (d) charges for obtaining on hire or otherwise machinery and toolsused for the execution of the works contract; (e) cost of consumables such as water, electricity, fuel, etc. usedin the execution of the works contract the property in which is nottransferred in the course of execution of a works contract; and (f) cost of establishment of the contractor to the extent it is relatableto supply of labour and services; (g) other similar expenses relatable to supply of labour andservices; (h) profit earned by the contractor to the extent it is relatable tosupply of labour and services.

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1000SUPREME COURT REPORTS

AThe amounts deductible under these heads will have to bedetermined in the light of the facts of a particular case on thebasis of the material produced by the contractor.”

8.4 It is required to be noted that thereafter the above serviceelements have found a statutory recognition as part of Rule 2A of theBService Tax(Determination of Value) Rules, 2006 w.e.f. 01.06.2007which has been referred to hereinabove. The applicability of Rule 2Ahas been dealt with and considered by this Court in extenso in the caseof Larsen and Toubro (supra). Therefore, as per the law laid down bythis Court in the case of ‘works contract service’ an assessee is liable topay the service tax on the service element/value of the service renderedCand the sales tax/tax on the element of goods transferred pursuant to thecontract.

8.5 In light of the above now the next main question posed forconsideration before this Court is required to be considered namelywhether despite Rule 2A of the Service Tax (Determination of Value)DRules, 2006 and the Composite Scheme still the assessee is entitled totake the total contract value which includes both goods and services interms of Section 67 of the Act, 1994 and remit service tax on the entirevalue as works contract service and the assessee is also entitled to availCENVAT Credit?E

8.6 Rule 2A applicable prior to 01.07.2012 is reproducedhereinabove. It is to be noted that Rule 2A is the specific provision fordetermination of value of taxable service in relation to services involvedin the execution of a works contact shall be determined by the serviceprovider in the manner provided under Rule 2A(1)(i) i.e. value of worksFcontract service determined shall be equivalent to the gross amountcharged for the works contract. As per explanation to Rule 2A grossamount charged for the works contract shall not include Value AddedTax (VAT) or sales tax, as the case may be, paid, if any, on transfer ofproperty in goods involved in the execution of the works contract. Theposition is made more clear post 01.07.2012. Post 01.07.2012 as perGRule 2A value of service portion in the execution of a works contractshall be determined taking into consideration the value of service portionin the execution of a works contract equivalent to the gross amountcharged for the works contract less the value of property of goodstransferred in the execution of the said works contract. Therefore, asHsuch the things which were already there as per the decision of this Court in the case of Gannon Dunkerly and Co. (supra) and Rule 2Aearlier has been made explicitly clear.

8.7 However, as per the Composition Scheme vide notification32/2007 – ST dated 22.04.2007 by which works contract (CompositionScheme for payment of Service Tax) Rules, 2007 came to be introduced,as per Rule 3(1) and notwithstanding anything contained in Section 67 ofthe Act and Rule 2A of the Rules, 2006, the person liable to pay servicetax in relation to works contract service shall have the option to dischargethe service tax at the rate specified in Section 67 of the Act, by payingan amount equivalent to 2% of the gross amount charged for the workscontract. Explanation specifically provides that gross amount chargedfor the works contract shall not include the VAT or sales tax, as the casemay be paid on transfer of property in goods involved in the execution ofthe said works contract. At this stage, it is required to be noted that post01.07.2012 Rule 2A specifically provides that the taxable service shallnot take CENVAT Credit of duty or cesspaid on inputs used in or inrelation to said works contract, under the provisions of CENVAT CreditRules, 2004.

8.8 It is the case on behalf of the respondent – assessee that as inRule 2A and even in the Composition Scheme the word used are subjectto the provisions of Section 67 the assessee had an option to pay theservice tax on the entire contract value i.e. on gross amount charged bythe service provider and that Rule 2A is not compulsory and theComposition Scheme is optional. However, the aforesaid has nosubstance. If the submission on behalf of the assessee is accepted inthat case Rule 2A and the Composition Scheme shall become otiose.

8.9 With respect to the ‘works contract service’ and/or theComposition Works Contract the valuation has to be made as per Rule2A of the Valuation Rules, 2006. Even as per the Composition Schemevide Notification 32/2007 dated 22.04.2007 an assessee has an option todischarge the service tax liability on the works contract service providedor to be provided, instead of paying service tax at the rate specified inSection 66 of the Act by paying equivalent to 2% of the gross amountcharged for the works contract. It is to be noted that Rule 3(1) providesnotwithstanding anything contained in Section 67 of the Act and Rule 2Aof the Service (Determination of Value) Rules, 2006. Therefore, as perthe Scheme of the Act the determination of value of service portion inthe execution of the works contract is to be made as per Rule 2A, however ABC

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Awith an option to the assessee to avail the benefit of Composition Scheme.Therefore, either the assessee has to go for Composition Scheme or gofor Determination of Value as per Rule 2A and the assessee has to payservice tax on the service element and can claim CENVAT Credit onthe said amount only.

B9. In view of the above the impugned judgment and order passedby the CESTAT taking the contrary view is unsustainable by which it isheld that the assessee is entitled to take the total contract value whichincludes both goods and services and remit service tax on the entirevalue as ‘works contract’ and the assessee is also entitled to avail theCENVAT Credit on the same.C

9.1 However, at the same time the service tax needs to be paid interms of Rule 2A of Service Tax (Determination of Value) Rules, 2006and since the assessee has not opted for composition scheme, the matteris to be remitted back for re-computation of the demands in terms ofRule 2A. As the issue with respect to the extended period of limitationDhas also not been decided by CESTAT the matter is to be remanded tothe CESTAT to decide the issue of limitation.

10. In view of the above and for the reason stated above, thepresent appeal succeeds. The impugned judgment and order passed bythe CESTAT is hereby quashed and set aside and it is held that theEassessee is not entitled to take the total contract value which includesboth goods and services and remit service tax on the value as workscontract service and, in the process, also entitled to avail the CENVATCredit on the entire amount. It is observed and held that the assesseehas to pay the service tax on the value of services as per Rule 2A of theF(Determination of Value) Rules, 2006 and thereafter to avail the CENVATCredit accordingly. However, it is also observed and held that demandfor the period January 2007 to May 2007 is unsustainable.

10.1 In that view of the matter now the service tax needs to becomputed in terms of Rule 2A of the(Determination of Value) Rules,G2006 and as the assessee has not opted for the composition scheme, thematter is remitted back to the CESTAT for re-computation of the demandsin terms of Rule 2A.

As observed hereinabove the Tribunal has also not decided theissue of extended period of limitation. Therefore, while quashing andsetting aside the impugned judgment and order passed by the CESTAT,H

the matter is remitted back to the CESTAT limited only to decide theissue of limitation and re-computation of the demands in terms of Rule2A. The aforesaid exercise be completed by the CESTAT on remandwithin a period of three months from the date of the present order.

Present appeal is accordingly allowed. However, in the facts andcircumstances of the case there shall be no order as to costs.

Ankit Gyan(Assisted by : Aarsh Choudhary, LCRA)

Appeal allowed.

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