Whether Service Tax circular no. 96/7/2007 as amended by circular no. 98/1/2008-ST is illegal to some extent?

[Surender Gupta, FCA]

Circular No. 98/1/2008-ST dated 4-1-2008 has been issued to insert a new entry no. 097.03 / 04.01.08  in the circular no. 96/7/2007-ST dated 23-8-2007. This entry pertains to levy of duty and classification of taxable services with regard to services involve in execution of works contract.

In the circular it is clarified that:

"Classification of a taxable service is determined based on the nature of service provided whereas liability to pay service tax is related to receipt of consideration. Vivisecting a single composite service and classifying the same under two different taxable services depending upon the time of receipt of the consideration is not legally sustainable.

 In view of the above, a service provider who paid service tax prior to 01.06.07 for the taxable service, namely, erection, commissioning or installation service, commercial or industrial construction service or construction of complex service, as the case may be, is not entitled to change the classification of the single composite service for the purpose of payment of service tax on or after 01.06.07 and hence, is not entitled to avail the Composition Scheme."

Impact of the above clarification:

If, an assessee accepts the clarification as above, it would be resulting into payment of service tax into two different categories for the same nature of services.

For an example, a person engaged in execution of contract, of construction of commercial complex, since 2005 is required to pay service tax under the old category. However, on the other hand, if he undertakes the same work or after 1-6-2008, the same is taxable under the category of "Works Contract".

Is it possible to classify the same service under two categories for different periods?

The answer is certainly no.

The classification of a particular service is to be done under Section 65A of the Chapter V of the Finance Act (Service Tax). According to the clause (a) of sub-section 2 of this section:

65A(2)(a)  "the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description;"

CBEC has issued the clarification with reference to "Vivisecting a single composite service". While giving the clarification, CBEC has ignored the provisions of Section 65A which is more specific and relevant.

It is pertinent here to mention the new category of taxable service named as "Services provided in relation to execution of works contract [section 65(105)(zzzza)]" has been introduced without any changed made in the existing categories covering the services specified in the new category.

Therefore, by virtue of various Judicial Decisions, Services provided in relation to execution of works contract were not taxable before 1-6-2007. Some of these decisions are being referred as under:

In case of BOARD OF CONTROL FOR CRICKET IN INDIA Versus COMMR. OF S.T., MUMBAI reported in 2007 -TMI - 1530 - CESTAT, MUMBAI, honorable tribunal has held that:

"If subsequent entry was covered by earlier entry, there was no reason or scope to create present entry. Creation of new entries not by way of bifurcation of earlier entry inasmuch as earlier entry relating to advertisement remains unchanged without any change in tax rate. Introduction of new tariff entry implies that coverage in new tariff for the purpose of tax was an area not covered by earlier entry".

In case of GLAXO SMITHKLINE PHARMACEUTICALS LTD. Versus C.C.E., MUMBAI-IV, reported in 2008 -TMI - 2459 - CESTAT, NEW DELHI, honorable tribunal has held that,

"Nnature of the Executory Services provided by the Marketing Team Staff would more appropriately fall under 'business auxiliary service" & not "Management Consultancy service" as the definition of Management Consultancy Service remains the same even after the levy of inclusion & of Service Tax on "business auxiliary service" in the year 2003. When an existing Tariff definition remains the same, then the introduction of new Tariff entry would imply that the coverage under the new Tariff for purpose of Tax is an area not covered by the earlier entry. The new entry is extension of the scope of coverage if Service Tax and not carving out of a new entry, from the erstwhile entry of "Management Consultancy Service". Therefore, it has to be held, that in the facts of this case, the levy of Service Tax on Staff Costs defined by BWIL, under the heading 'Management Consultancy Service' cannot be upheld. Levy on such costs could be as on business auxiliary service, which was not a Taxable Service prior to 2003 & appellant is not a service provider as Management Consultant".

In case of M/s. ZEE Telefilms Ltd. v. CCE, Mumbai reported in 2006 -TMI - 750 - CESTAT, MUMBAI in was held that,

"When the legislative body by the scope of the term 'Broadcasting Agency' has itself described the activity of appellant's herein as selling of time slots of advertisement for the foreign broadcaster or obtaining sponsorships for programme of the foreign broadcaster & the appellants as a representative of foreign broadcaster, therefore, they cannot claim themselves or become liable to be an "Advertising Service Provider, to Service Tax since Advertising Service Providers definition has not been shown to have undergone a change after 16-7-2001. That the levy on 'Broadcasting Services' is a fresh coverage of Service Tax levy with effect from 16-7-2001."

Conclusion

From the decisions of the tribunal as referred above, it is very much clear that when a new entry is inserted without change or modification in the existing entry, it implies that the same was not taxable earlier and no demand of service tax for the previous period is sustainable.

Therefore, since the new entry of services involved in execution of work contract was brought into first time with effect from 1-6-2007, the same can not be held taxable for the period before 1-6-2007. This fact remains same even if some assesses have deposited service tax on these services considering the same under the existing entries.

Since the services were not taxable before 1-6-2007, no circular or clarification can validate the payment of service tax on these services before 1-6-2007.