2025 (6) TMI 1582 - AT - Service Tax

Classification of the service carried out by the appellant - works contract service or Commercial or Industrial Construction service - liability on composite works contract services prior to 01.06.2007 - applicability of exemption under N/N.15/2004 ST dated 10.09.2004 - HELD THAT - Since the issue is squarely covered by the judgment of Hon ble Supreme Court in the case of CCE vs. Larsen Toubro Ltd. 2015 (8) TMI 749 - SUPREME COURT wherein it had categorically held that indivisible works contract services are not liable to service tax prior to 01.06.2007. Hence the impugned order is set aside. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the service carried out by the appellant during the period 10.09.2004 to 30.11.2005 falls under the category of works contract service or under Commercial or Industrial Construction Service/Construction of Residential Complex Service.
• Whether service tax liability arises on composite works contract services prior to 01.06.2007.
• Whether the appellant is liable to pay service tax on the entire taxable value including the value of free supply materials provided by the client.
• Whether the appellant was entitled to exemption under Notification No.15/2004 - ST dated 10.09.2004.
• The applicability of the composition scheme under Notification No.32/2007/ST dated 12.05.2007 for contracts commenced after 01.06.2007.
• The validity of the demand and penalty imposed by the adjudicating authority based on the classification and taxability of the service.

2. ISSUE-WISE DETAILED ANALYSIS

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

Relevant legal framework and precedents: The classification of services under the service tax regime is governed by the relevant notifications and service tax laws effective during the period. The appellant was initially registered under 'Construction of Residential Complex Service' from 2004. The issue arose because the appellant claimed their service fell under works contract service, which was taxable only from 01.06.2007, whereas the revenue classified the service under Commercial or Industrial Construction Service and Construction of Complex Service effective from 10.09.2004 and 16.06.2005 respectively.

Court's interpretation and reasoning: The Tribunal had earlier remanded the matter for fresh consideration as the appellant did not advance the classification under works contract service before the adjudicating authority. Upon reconsideration, the adjudicating authority held that the appellant was not entitled to reclassify the service under works contract service since service tax on works contract service was introduced only from 01.06.2007, and the appellant had already paid service tax under the other categories prior to that date.

Key evidence and findings: The appellant produced evidence of sales tax (KGST) paid on the contract amount and argued that the service tax liability on works contract is only from 01.06.2007, hence no tax was due before that date under that classification.

Application of law to facts: The Tribunal noted that the appellant's activities prior to 01.06.2007 were subject to service tax under the Commercial or Industrial Construction Service and Construction of Complex Service categories. However, the appellant contended that the entire contract was a composite works contract and thus not taxable before 01.06.2007.

Treatment of competing arguments: The revenue argued that since the appellant paid service tax under the other categories, they could not change classification retrospectively to works contract service. The appellant relied on judicial precedents to support the composite nature of the contract and the non-taxability of works contract service prior to 01.06.2007.

Conclusions: The Tribunal found merit in the appellant's contention based on judicial precedent and remand directions, concluding that the classification issue needed to be resolved in light of the apex court's ruling.

Issue 2: Taxability of Composite Works Contract Services Prior to 01.06.2007

Relevant legal framework and precedents: The pivotal precedent is the judgment of the Hon'ble Supreme Court in CCE vs. Larsen & Toubro Ltd., which clarified the taxability of indivisible works contract services prior to the introduction of service tax on works contract service from 01.06.2007.

Court's interpretation and reasoning: The Supreme Court held that indivisible works contract services were not liable to service tax before 01.06.2007. This ruling directly impacts the appellant's liability for the period in question.

Key evidence and findings: The appellant relied on this judgment and the Tribunal's own prior order dated 19.06.2020, which allowed the appeal for the period from 01.12.2005 onwards, recognizing the composite nature of the contract and applying the Supreme Court's ruling.

Application of law to facts: The Tribunal acknowledged that since the appellant's activities were carried out before the works contract service was introduced for taxation, the appellant is exempt from service tax liability on such composite contracts for the relevant period.

Treatment of competing arguments: The revenue conceded that the appellant was entitled to exemption based on the Supreme Court's decision.

Conclusions: The Tribunal held that the appellant's works contract services prior to 01.06.2007 are not taxable, thereby setting aside the demand and penalty imposed.

Issue 3: Inclusion of Value of Free Supply Material in Taxable Value and Eligibility for Exemption

Relevant legal framework and precedents: Notification No.15/2004 - ST dated 10.09.2004 provides exemptions subject to conditions including the valuation of taxable services.

Court's interpretation and reasoning: The revenue contended that the appellant's receipts did not include the value of free supply material by the client, thus disqualifying them from exemption. The appellant challenged this on the basis of classification and taxability.

Key evidence and findings: The adjudicating authority issued a show-cause notice on this ground and confirmed the demand. However, the Tribunal's final view was influenced by the Supreme Court's ruling on composite contracts and the non-taxability of works contract service prior to 01.06.2007.

Application of law to facts: Since the service itself was held non-taxable, the issue of valuation inclusive of free supply material became immaterial for the relevant period.

Treatment of competing arguments: The appellant did not specifically contest the valuation issue after the classification and taxability were resolved in their favor.

Conclusions: The Tribunal did not uphold the demand based on valuation since the service was not taxable during the period.

Issue 4: Applicability of Composition Scheme under Notification No.32/2007/ST

Relevant legal framework and precedents: Notification No.32/2007/ST dated 12.05.2007 introduced a composition scheme for works contract service applicable to contracts commenced after 01.06.2007.

Court's interpretation and reasoning: The adjudicating authority relied on Circular No.128/10/2010-ST to hold that the composition scheme applies only to contracts after 01.06.2007.

Key evidence and findings: The appellant's contracts were prior to 01.06.2007 and thus outside the scope of the composition scheme.

Application of law to facts: The Tribunal accepted that the composition scheme was not applicable to the appellant's contracts for the relevant period.

Treatment of competing arguments: No significant dispute arose on this point as the appellant's main contention was exemption based on non-taxability.

Conclusions: The composition scheme was not applicable to the appellant's contracts during the period under consideration.

Issue 5