2025 (5) TMI 1283 - AT - Service Tax

Liability to pay service tax - Commercial or Industrial construction service - Appellant who had carried out works contracts is liable to pay service tax or not - HELD THAT - The new category of works contract service was introduced w.e.f. 01.06.2007 with an intent to tax service element in the works contract. Following the ratio of the judgment in CCE Kerala VS Larsen Toubro Ltd 2015 (8) TMI 749 - SUPREME COURT service provided in relation to execution of a Works Contract is liable to service tax only from 01.06.2007. It is found that appellant was paying service tax from 1.6.2007 to 31.03.2009 under Works contract service and the demand as per impugned order confirmed service tax for said period also under the category of Commercial or Industrial construction service . For the period up to 01.06.2007 the appellant is not liable for payment of service tax for the execution of works contract following the ratio of the judgment of the Hon ble High Court in the matter of the Larsen Toubro Ltd. 2015 (8) TMI 749 - SUPREME COURT . Further for the period 01.06.2007 to 31.03.2009 the appellant has paid service tax under works contract service . Therefore the confirmation of entire demand of service tax for the period 10.09.2004 to 31.03.2009 under the category of Commercial or Industrial construction service is unsustainable hence the impugned order is set aside. Conclusion - The service tax liability on works contracts is governed by the introduction of the Works Contract Service category effective 01.06.2007 and prior to this date no service tax is leviable on such contracts under the Commercial or Industrial construction service category. Appeal allowed.

The core legal question considered in this appeal is whether the Appellant, engaged in executing works contracts, is liable to pay service tax under the category of 'Commercial or Industrial construction service' for the period from 10.09.2004 to 31.03.2009.

Another related issue is the applicability of service tax under the 'Works Contract Service' category introduced effective 01.06.2007, and whether the Appellant's payment of service tax under this category for the period post-introduction satisfies the tax liability for the relevant period.

Additionally, the question of whether partial supply of materials by the client affects the classification of the service and consequent tax liability was also considered.

Issue-wise analysis:

1. Liability to pay service tax under 'Commercial or Industrial construction service' for the period prior to 01.06.2007

The relevant legal framework involves the Finance Act, 1994, and the introduction of the 'Works Contract Service' category effective 01.06.2007. Prior to this date, the taxability of works contracts under service tax law was ambiguous, with some service tax levied under 'Commercial or Industrial construction service'. The Supreme Court judgment in Commissioner of C.Ex. & Cus., Kerala Vs. Larsen & Toubro Ltd clarified that service tax on works contracts is leviable only from 01.06.2007 under the newly introduced category.

The Tribunal interpreted this precedent as decisive, holding that the Appellant was not liable to pay service tax under 'Commercial or Industrial construction service' for the period before 01.06.2007. The Appellant had not paid service tax before this date, instead paying VAT under the works contract provisions of the Kerala General Sales Tax Rules, 1963, as evidenced by VAT returns and assessments.

The Appellant's submission was supported by documentary evidence including agreements with clients and VAT payment records. The Tribunal gave weight to the Supreme Court's ruling, which settled the issue as res judicata. The Revenue's argument that partial supply of materials by the client negated the benefit of Works Contract service was not found persuasive for this period, as the service tax law and judicial precedents clearly delineated the tax liability timeline.

Conclusion: The Appellant is not liable to pay service tax under 'Commercial or Industrial construction service' for the period prior to 01.06.2007.

2. Liability to pay service tax under 'Works Contract Service' for the period 01.06.2007 to 31.03.2009

From 01.06.2007, the Finance Act, 1994, introduced 'Works Contract Service' as a distinct taxable category to capture the service element in works contracts. The Appellant applied for and was granted registration under this category on 04.03.2008 and paid service tax accordingly for the period from 01.06.2007 to 31.03.2009.

The Tribunal noted that the impugned order confirmed the demand of service tax for the entire period under 'Commercial or Industrial construction service', thereby overlapping with the period the Appellant had already paid service tax under 'Works Contract Service'. The Tribunal held that the Appellant's payment under the correct category post 01.06.2007 satisfied their tax liability.

The Revenue's contention that partial supply of materials by the client disqualified the Appellant from claiming the benefit of 'Works Contract Service' was considered but not accepted. The Tribunal relied on the settled position in the Larsen & Toubro Ltd case and subsequent decisions which clarified that the service element in works contracts is taxable under the 'Works Contract Service' category irrespective of partial supply of materials by the client.

Conclusion: The Appellant's payment of service tax under 'Works Contract Service' for the period 01.06.2007 to 31.03.2009 is adequate, and no additional tax under 'Commercial or Industrial construction service' is payable.

3. Effect of partial supply of materials by the client on classification and tax liability

The Revenue argued that when the client partially supplies materials, the service provider cannot claim the benefit of the 'Works Contract Service' category and must be taxed under 'Commercial or Industrial construction service'.

The Tribunal, however, did not find merit in this argument. It referred to judicial precedents which established that the service element in works contracts is taxable under 'Works Contract Service' regardless of whether materials are supplied by the client or the contractor. The primary focus is on the nature of the service rendered rather than the source of materials.

Conclusion: Partial supply of materials by the client does not alter the classification of the service as 'Works Contract Service' for service tax purposes.

Significant holdings:

"Following the ratio of the judgment in CCE, Kerala VS Larsen & Toubro Ltd, service provided in relation to execution of a 'Works Contract' is liable to service tax only from 01.06.2007."

"For the period up to 01.06.2007, the appellant is not liable for payment of service tax for the execution of works contract following the ratio of the judgment of the Hon'ble High Court in the matter of Larsen & Toubro Ltd."

"The confirmation of entire demand of service tax for the period 10.09.2004 to 31.03.2009 under the category of 'Commercial or Industrial construction service' is unsustainable."

The core principle established is that the service tax liability on works contracts is governed by the introduction of the 'Works Contract Service' category effective 01.06.2007, and prior to this date, no service tax is leviable on such contracts under the 'Commercial or Industrial construction service' category. Additionally, the payment of service tax under the correct category post-introduction discharges the tax liability, and the partial supply of materials by the client does not affect this classification.

The final determination was to set aside the impugned order confirming the demand under 'Commercial or Industrial construction service' and allow the appeal with consequential relief in accordance with law.

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