2025 (6) TMI 1173 - AT - Service Tax

Classification of service - Works Contract Service or not - appellants were not discharging service tax on the services rendered by them during the disputed period from 15.10.2004 to 31.01.2007 and the returns for this period were filed on 05.05.2007 - invocation of extended period of limitation - HELD THAT - It is an admitted fact that appellant had carried out activities under composite contract and as per the findings in the impugned order at para 4 the adjudicating authority has observed that appellant had received gross amount for providing service and it is inclusive of cost of material which were used by the service provider in rendering the said services. It is further observed that M/s. Karnataka Power Corporation Bellary are the receiver of the service provided by the appellant which is a commerical public sector undertaking managed by Government of Karnataka for supply of electricity to its consumers and due to that reason adjudicating authority held that the said activities of work are liable to be covered under the category of Commerical or Industrial Construction service as per Section 65(25b)(a) of the Finance Act 1994. Though the issue at the relevant time was not settled and after considering the issue in detail in the matter of CCE vs. Larsen Toubro Ltd. and Ors. 2015 (8) TMI 749 - SUPREME COURT Hon ble Surpeme Court held that such activity cannot be considered under any other classification other than the classification under works contract service . Since levy of service is under works contract service is effected only from 01.06.2007 such composite contract is not classifiable under the category of Commerical or Industrial Construction Service . Conclusion - Composite contracts involving both goods and services are taxable under Works Contract Service only from 01.06.2007 and prior demands under other service categories for such contracts are invalid. The impugend order confirming the demand for the period from 15.10.2004 to 31.01.2007 is unsustainable - Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

• Whether the service rendered by the appellant falls under the category of 'Works Contract Service' or 'Commercial or Industrial Construction Service' for the purposes of service tax.
• Whether service tax was leviable on the composite contract during the disputed period from 15.10.2004 to 31.01.2007, given that 'Works Contract Service' was brought under the service tax net only from 01.06.2007.
• Whether the demand for service tax raised by invoking the extended period of limitation is sustainable.
• Whether penalty and interest imposed in respect of the demand are justified when the principal demand itself is disputed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Service Rendered - 'Works Contract Service' vs. 'Commercial or Industrial Construction Service'

Relevant legal framework and precedents: The classification of composite contracts involving construction services was under dispute. Section 65(25b)(a) of the Finance Act, 1994, defined 'Commercial or Industrial Construction Service'. However, the Supreme Court's judgment in CCE vs. Larsen & Toubro Ltd. clarified that composite contracts involving both transfer of goods and provision of services cannot be taxed under any classification other than 'Works Contract Service'. Importantly, 'Works Contract Service' was brought under the service tax net only with effect from 01.06.2007.

Court's interpretation and reasoning: The Tribunal examined the nature of the contract between the appellant and M/s. Karnataka Power Corporation. It was undisputed that the contract was composite, involving both supply of materials and construction services, with no bifurcation between material cost and service value. The adjudicating authority had earlier held the contract liable under 'Commercial or Industrial Construction Service' for the disputed period.

However, following the Supreme Court's ruling in the Larsen & Toubro case, the Tribunal held that such composite contracts are classifiable only as 'Works Contract Service'. Since the service tax on 'Works Contract Service' was introduced only from 01.06.2007, the appellant could not be held liable for service tax for the period prior to this date.

Key evidence and findings: The appellant's agreement and the undisputed fact that the contract was composite were central. The Tribunal also noted that the appellant had been discharging taxes on sale of goods, indicating recognition of the composite nature of the contract.

Application of law to facts: The Tribunal applied the Supreme Court's authoritative interpretation to the facts, concluding that the demand for service tax under 'Commercial or Industrial Construction Service' for the period before 01.06.2007 was unsustainable.

Treatment of competing arguments: The revenue contended that the contract fell under 'Commercial or Industrial Construction Service' and that service tax was payable. The appellant countered by relying on the Supreme Court's judgment and the absence of a charging provision for 'Works Contract Service' before 01.06.2007. The Tribunal accepted the appellant's submissions.

Conclusion: The Tribunal held that the services rendered by the appellant were 'Works Contract Service' and not 'Commercial or Industrial Construction Service', and that service tax was leviable only from 01.06.2007 onwards. Hence, the demand for the disputed period was not sustainable.

Issue 2: Validity of Demand Raised by Invoking Extended Period of Limitation

Relevant legal framework: Under the service tax law, the normal period of limitation for issuing a demand notice is three years from the date of filing of the return or the date when the service tax became payable. Extended period of limitation can be invoked only under specific circumstances such as suppression of facts or fraud.

Court's interpretation and reasoning: The appellant's returns for the disputed period were filed on 05.05.2007, and the departmental investigations revealing non-payment were conducted on 27.02.2007. The demand notice was issued on 17.04.2009, which was beyond the normal limitation period of three years from the return filing date.

The Tribunal found that the extended period of limitation was not justified as the department did not demonstrate any suppression or fraud warranting such invocation.

Key evidence and findings: The timing of investigations, return filing, and notice issuance were critical. The appellant's compliance in filing returns and absence of any concealment were noted.

Application of law to facts: Since no grounds for invoking extended limitation were established, the demand notice issued beyond the normal limitation period was held to be time-barred.

Treatment of competing arguments: The revenue relied on the extended limitation period to sustain the demand. The appellant argued that the delay rendered the demand invalid. The Tribunal sided with the appellant.

Conclusion: The demand raised by invoking the extended period of limitation was unsustainable and barred by limitation.

Issue 3: Penalty and Interest on Unsustainable Demand

Relevant legal framework and precedents: Penalty and interest can be imposed only when the principal tax demand is valid. The Supreme Court decision in Prathiba Processor vs. UOI establishes that if the principal demand is not payable, interest and penalty cannot be levied.

Court's interpretation and reasoning: Since the Tribunal held the principal demand for service tax to be unsustainable, it logically followed that penalty and interest imposed thereon could not be sustained.

Key evidence and findings: The invalidity of the principal demand was the basis for rejecting penalty and interest.

Application of law to facts: The Tribunal applied the principle that penalty and interest are corollaries of a valid demand and cannot survive independently.

Treatment of competing arguments: The revenue maintained the penalty and interest imposition, while the appellant argued against it. The Tribunal accepted the appellant's position.

Conclusion: Penalty and interest imposed on the disputed demand were not sustainable.

3. SIGNIFICANT HOLDINGS

"We need only state that in view of our finding that the said Finance Act lays down no charge or machinery to levy and assess service tax on indivisible composite works contracts, such argument must fail. This is also for the simple reason that there is no subterfuge in entering into composite works contracts containing elements both of transfer of property in goods as well as labour and services."

"Since levy of service tax has been found to be non-existent, no question of any exemption would arise."

"The appellants cannot be put to jeopardy for the reason that they have been paying service tax before 01.06.2007 though they were not legally required to pay in view of the judgment in the case of L&T."

"The impugned order confirming the demand for the period from 15.10.2004 to 31.01.2007 is unsustainable."

"When the principal demand itself is not sustainable, the question of interest or penalty does not arise."

The Tribunal established the core principle that composite contracts involving both goods and services are taxable under 'Works Contract Service' only from 01.06.2007, and prior demands under other service categories for such contracts are invalid. It also affirmed that extended limitation cannot be invoked without proper grounds, and penalty/interest cannot be levied when the principal demand fails.