2025 (7) TMI 73 - AT - Service Tax

Non-payment of service tax - Classification of service - Works Contract Services or Erection and Commissioning service - suppression of facts or not - Extended period of limitation - HELD THAT - A perusal of the facts of the case is that the appellant had provided Erection Commissioning or Installation Service as well as Works Contract Service to M/s Jodhpur Development Authority and Nagar Nigam Jodhpur and other authorities but they did not pay the applicable service tax on such services nor had taken registration under service tax. It is found that the impugned order itself has noted that the appellant had provided Works Contract Services. The Hon ble Supreme Court in the case of Larsen Toubro Ltd 2015 (8) TMI 749 - SUPREME COURT held that the Section 65(105) of the Finance Act 1994 refers only to service contracts simpliciter and not to composite works contracts - It defines taxable service as any service provided and all its sub-clauses refer to service contracts simpliciter without any other element in them. In the instant case the impugned order has noted that all works done by the appellant in 2005-06 to 2008-09 involved both goods and services hence services rendered during 01.04.2005 to 31.05.2007 also involved goods therefore the demand confirmed for this period is liable to be set- aside. Extended period of limitation - HELD THAT - There was substantial litigation on the issue relating to taxability of works contract services and divergent views had been taken in this regard. In such a situation allegation of fraud suppression on the appellant is not tenable. The non-payment of service tax was due to the prevalent confusion regarding the nature of such services which involved transfer of goods as well - the demand for the extended period cannot be upheld. The demand for the normal period is only upheld with the benefit of cum tax extended to the appellant. In view of the circumstances the penalties imposed on the appellant set aside. Appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the appellant provided Erection, Commissioning or Installation Service or Works Contract Service during the disputed period and whether such services were liable to service tax under the Finance Act, 1994.

2. Whether the demand for service tax raised by the Department is barred by limitation, particularly for the period prior to 1.6.2007 and for the extended period under Section 73 of the Finance Act, 1994.

3. Whether the appellant was liable to pay service tax under the composition scheme or under normal rates, and whether the benefit of abatement and cum-tax provisions could be extended to the appellant.

4. Whether the appellant suppressed material facts with intent to evade tax, thereby justifying invocation of extended limitation and imposition of penalties under Sections 76, 77, 78 and 80 of the Finance Act, 1994.

5. The applicability and interpretation of the Supreme Court's decision in Larsen & Toubro Ltd. regarding taxability of works contract services and separation of goods and services elements.

Issue-wise Detailed Analysis:

1. Classification of Services Rendered: Erection, Commissioning or Installation Service vs. Works Contract Service

Legal Framework and Precedents: Section 65(105)(zzd) defines "Erection, Commissioning or Installation Service" and Section 65(105)(zzzza) defines "Works Contract Service" under the Finance Act, 1994. The Board's Circular No. 123/5/2010-TRU clarified that installation of street lights and related electrical work falls under erection, commissioning or installation services. The Supreme Court judgment in Larsen & Toubro Ltd. (2014) clarified that the charging provisions of service tax apply to service contracts simpliciter and not to composite indivisible works contracts involving transfer of property in goods.

Court's Interpretation and Reasoning: The Tribunal noted that the appellant performed both erection, commissioning or installation services and works contract services during the relevant period. The Tribunal accepted the Department's finding that prior to 1.6.2007, the services were taxable under erection, commissioning or installation service, and from 1.6.2007 onwards, under works contract service. However, the Tribunal relied on the Larsen & Toubro judgment which held that composite works contracts involving transfer of goods and services cannot be taxed as service contracts simpliciter prior to introduction of works contract service category on 1.6.2007.

Key Evidence and Findings: The appellant submitted work orders, VAT-41 forms, and Form 16A showing that VAT was deducted on the contracts, indicating transfer of property in goods. The Department found that the contracts involved both goods and services and that the appellant was registered under the Sales Tax department and paying VAT on works contracts. The appellant did not produce evidence to show that only wiring work without installation was performed.

Application of Law to Facts: Applying Larsen & Toubro, the Tribunal held that prior to 1.6.2007, the appellant's contracts were composite works contracts involving transfer of goods and services and thus not taxable as service contracts simpliciter under the Finance Act. From 1.6.2007 onwards, the works contract service category was introduced, making such contracts taxable under that category. Therefore, service tax demand for the period before 1.6.2007 was liable to be set aside.

Treatment of Competing Arguments: The appellant argued that the services were erection and installation services and not works contract services prior to 1.6.2007. The Department contended that the nature of the contract and VAT deduction showed transfer of goods, making the contracts works contracts. The Tribunal sided with the appellant on the pre-1.6.2007 period based on Larsen & Toubro but upheld taxability post 1.6.2007 under works contract service.

Conclusion: The demand for service tax prior to 1.6.2007 was set aside as the contracts were composite works contracts not taxable as service contracts simpliciter. Demand for service tax from 1.6.2007 onwards under works contract service was upheld.

2. Limitation and Extended Period for Demand of Service Tax

Legal Framework and Precedents: Section 73(1) of the Finance Act, 1994 prescribes a limitation period of six months for issuing show cause notices for recovery of service tax. However, extended limitation of five years can be invoked if there is suppression of facts with intent to evade tax. The proviso to Section 73(1) and the amendment by Finance Act, 2013 inserting Section 73(2A) relate to the applicability of extended limitation. The Supreme Court decision in Collector of Central Excise, Jaipur vs. Alcobex Metal and Calcutta High Court decision in Infinity Infotech Parks Ltd. provide guidance on limitation and suppression.

Court's Interpretation and Reasoning: The Tribunal found that the show cause notice was issued on 13.04.2010, prior to the effective date of the amendment (1.7.2012). The appellant had not disclosed material facts or filed returns, but the Tribunal noted that there was substantial litigation and divergent views on the taxability of works contract services. The Tribunal relied on the principle that mere non-payment of tax does not amount to suppression with intent to evade tax in the absence of positive acts of concealment or fraud.

Key Evidence and Findings: The appellant did not voluntarily furnish details despite repeated letters from the Department. However, the Tribunal noted that the appellant had shown the receipts in books of account and that the confusion over taxability was genuine due to conflicting judicial interpretations.

Application of Law to Facts: Given the ongoing litigation and lack of clear legal position at the relevant time, the Tribunal held that invocation of extended limitation was not justified. The demand for the extended period was therefore set aside.

Treatment of Competing Arguments: The Department argued that suppression of facts warranted extended limitation and penalties. The appellant argued that the demand was barred by limitation and no suppression with intent was present due to genuine dispute. The Tribunal accepted the appellant's argument.

Conclusion: The demand for the extended period beyond normal limitation was rejected, and only the demand within the normal limitation period was upheld.

3. Benefit of Composition Scheme, Abatement, and Cum-Tax Provisions

Legal Framework and Precedents: Notification No. 6/2005-ST provides for composition scheme for works contract service. The Tribunal in Aryavrat Housing Construction (P) Ltd. held that abated value should be considered for such service tax demands. Section 67(2) of the Finance Act, 1994 provides for cum-tax valuation where service tax is included in the gross amount charged.

Court's Interpretation and Reasoning: The Tribunal accepted that the appellant was eligible for the benefit of composition scheme and abatement for the works contract service period post 1.6.2007. The Tribunal also extended the benefit of cum-tax valuation to the appellant. The Department's argument that the appellant did not show service tax separately in invoices was rejected as the appellant was entitled to cum-tax valuation benefit.

Key Evidence and Findings: The appellant produced work orders and VAT forms showing deduction of VAT and payment of sales tax. The appellant claimed benefit under the composition scheme and abatement as per Tribunal precedents.

Application of Law to Facts: The Tribunal applied the principles established in Aryavrat Housing and related decisions to extend composition and abatement benefits to the appellant for the relevant period.

Treatment of Competing Arguments: The Department contended that the appellant was not eligible for these benefits due to lack of registration and non-filing of returns. The Tribunal held that denial of these benefits was not justified given the facts and legal precedents.

Conclusion: The appellant was entitled to composition scheme benefits, abatement, and cum-tax valuation for the period from 1.6.2007 onwards.

4. Imposition of Penalties and Allegation of Suppression with Intent to Evade Tax

Legal Framework and Precedents: Sections 76, 77, 78, and 80 of the Finance Act, 1994 deal with penalties for non-payment, suppression, and other defaults. The Supreme Court and Tribunal decisions emphasize the need for positive evidence of suppression with intent to evade tax before imposing penalties.

Court's Interpretation and Reasoning: The Tribunal found that the appellant's failure to register and pay service tax was due to confusion and divergent judicial views on taxability rather than deliberate suppression with intent to evade tax. The Tribunal relied on the decision in Uniworth Textiles Ltd. which held that non-payment alone does not amount to suppression warranting extended limitation or penalties.

Key Evidence and Findings: The appellant did not file returns or register, but showed receipts in books of accounts. There was no evidence of deliberate concealment or fraud. The Department's reliance on absence of registration and non-filing was insufficient to prove suppression with intent.

Application of Law to Facts: Given the absence of malafide or fraudulent intent, the Tribunal set aside penalties imposed under Sections 76, 77, 78 and 80.

Treatment of Competing Arguments: The Department argued for penalties based on non-registration, non-payment, and non-filing. The appellant argued absence of intent and bona fide confusion. The Tribunal accepted the appellant's position.

Conclusion: Penalties imposed on the appellant were set aside due to lack of evidence of suppression with intent to evade tax.

5. Application of Supreme Court's Larsen & Toubro Judgment

Legal Framework and Precedents: The Larsen & Toubro judgment clarified that service tax under the Finance Act, 1994 applies to service contracts simpliciter and not to composite indivisible works contracts involving transfer of property in goods. It emphasized the need to bifurcate the contract value to separate goods and service elements for taxability.

Court's Interpretation and Reasoning: The Tribunal applied the Larsen & Toubro principles to hold that prior to 1.6.2007, composite contracts involving both goods and services were not taxable as service contracts simpliciter. Post 1.6.2007, introduction of works contract service category allowed taxation of such composite contracts under the composition scheme.

Key Evidence and Findings: The contracts involved transfer of goods as evidenced by VAT deductions and work order terms. The Tribunal found that the appellant's activities fell within the scope of works contract service post 1.6.2007.

Application of Law to Facts: The Tribunal applied the Supreme Court's reasoning to set aside demands for pre-1.6.2007 period and uphold demands for later periods under the works contract service category.

Treatment of Competing Arguments: The appellant relied on Larsen & Toubro to challenge demands for pre-1.6.2007 period. The Department contended that erection and installation services were taxable prior to that date. The Tribunal favored the appellant on this point.

Conclusion: Larsen & Toubro judgment was pivotal in determining the taxability periods and classification of services.

Significant Holdings:

"The Section 65(105) of the Finance Act, 1994 refers only to service contracts simpliciter and not to composite works contracts - It defines 'taxable service' as 'any service provided', and all its sub-clauses refer to service contracts simpliciter without any other element in them."

"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 work contracts, such arguments must fail."

"Burden to prove malafide of noticee is on department who makes the allegation. Onus to prove bonafide conduct is not on noticee even in term of Section 28 of the Customs Act. Mere non-payment of duties is not equivalent to collusion or wilful mis-statement or suppression of facts."

"In such a situation, allegation of fraud, suppression on the appellant is not tenable. The non-payment of service tax was due to the prevalent confusion regarding the nature of such services which involved transfer of goods as well."

"The demand for the extended period cannot be upheld. Consequently, the demand for the normal period is only upheld with the benefit of cum tax extended to the appellant. In view of the circumstances, we set aside the penalties imposed on the appellant."

Core principles established include:

• Service tax under the Finance Act, 1994 applies only to service contracts simpliciter prior to 1.6.2007; composite works contracts involving transfer of goods are not taxable as service contracts simpliciter before this date.
• Extended limitation period for service tax demand cannot be invoked without evidence of suppression with intent to evade tax, especially in cases where there is genuine litigation and divergent views on taxability.
• Benefit of composition scheme, abatement, and cum-tax valuation must be extended to eligible assessees in works contract service post 1.6.2007.
• Penalties under the Finance Act require proof of deliberate suppression or fraud; mere non-payment or non-registration is insufficient.

Final determinations on each issue were:

• Demand for service tax prior to 1.6.2007 was set aside as the contracts were composite works contracts not taxable as service contracts simpliciter.
• Demand for service tax from 1.6.2007 onwards under works contract service was upheld with composition scheme and abatement benefits.
• Demand for extended period beyond normal limitation was rejected due to absence of suppression with intent to evade tax.
• Penalties imposed were set aside due to lack of evidence of suppression or fraud.