2025 (7) TMI 1711 - AT - Service Tax

Classification of services - Works Contract service - eligibility of composition scheme under Works Contract - non-exercising of option is a condonable procedural lapse - maintaiability of refund claim without challenging the self-assessment - principles of audi alteram partem - violation of principles of natural justice. Whether the services rendered by the appellants can be categorised under Works Contract service? - HELD THAT - On going through the definition under Section 65 (105) (zzzza) it appears that the term Works Contract includes categories of the Service like Works Contract for carrying out erection commissioning or installation. It is found as submitted by the appellants that the service earlier existed under erection commissioning or installation included to cover the value of services rendered with respect to activities like installation commissioning or erection; it does not include the value the plant machinery or the equipment etc to be erected installed or commissioned in the rendering of such service - in case of turnkey projects the contract may be indivisible where no separate value could be assigned to commissioning or installation of goods; since the service tax is leviable on the value of services incurred on erection commissioning or installation charges only and not on the goods supplied difficulties arose in ascertaining the correct value of the actual services rendered; it is apparent that legislature introduced new category of services namely Works Contract Service w.e.f. 1.6.2007 to obviate such problems. After the introduction of the service indivisible contracts which could have been otherwise classified under other heads earlier had to be classified under this heading only. Hon ble Apex Court in the case of Larsen and Toubro 2015 (8) TMI 749 - SUPREME COURT went to the extent of holding that such indivisible contracts could not have been held exigible to Service Tax before 1.6.2007. Therefore we are of the considered opinion that the services rendered by the appellant fall under Works Contract Service . Whether the appellants are eligible to avail the composition scheme under Works Contract ? - Whether the non-exercising of option is a condonable procedural lapse; would it disentitle the appellants from a substantial right? - HELD THAT - A perusal of the Rule 3 gives an understanding that the said Rules lays down the three conditions that (i). The provider should file the option to pay service tax under this category prior to payment of service tax.(2) the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs used in or in relation to the said works contract under the provisions of CENVAT Credit Rules 2004 and that (3).the provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract. The services rendered by the appellant fall under the Works Contract service . The fact that the appellants paid VAT in respect of the services rendered by them is not denied. They have recovered Service Tax from their customers at the rate of 4% as applicable to Works Contract service . Therefore the intent to avail the compounded scheme under WCS is evident. The appellant has not availed Cenvat Credit on inputs which is barred by sub-Rule (2) of Rule 3 of Works Contract Rules. Therefore the second condition is not violated. Regarding the third condition the appellant having deposited the entire duty albeit at the rate of 12.36% had no chance to change in between for payment of duty. The appellant has mistakenly paid the duty at higher rate and seeking the refund of the same. Therefore the only violation appears to be that of non-exercising of the option. It was held in a number of cases that not exercising option is not fatal and does not take away the benefit that is due to the appellant. Thus non-exercising of the option is only a procedural infirmity; substantial benefit cannot be denied for procedural infractions. It is found that any other approach to restrict the benefit would read down the intention of the scheme. Therefore the appellants are eligible for the compounded scheme under Work Contract Service . It is found that the Learned authorised representative for the revenue relies on the Apex Court s decision in the case of Dilip Kumar Company 2018 (7) TMI 1826 - SUPREME COURT (LB) wherein it was held that exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. Whether the refund claim is maintainable without challenging the self-assessment? - HELD THAT - The appellants should have appealed against the self-assessment made by them in the ST-3 returns; refund cannot be sanctioned unless the assessment is modified by a competent authority by due process of Law. Revenue relies on the decision of Hon ble High Court of Delhi in the case of BT (India) Private Limited 2023 (11) TMI 478 - DELHI HIGH COURT . Hon ble High Court has held that the decision of ITC Ltd 2019 (9) TMI 802 - SUPREME COURT (LB) is applicable in the case of service tax also and without modification of the self-assessment made the refund claim cannot be allowed. It is argued that if Revenue who have set up a case by issuing Show Cause Notice on certain premises raises an altogether new premise at this juncture it would amount to violation of principles of Natural Justice and dictum of audi alteram partem and Rule of Civil Law. It is found that Hon ble Supreme Court in the case of Mohinder Singh Gill v Chief Election Commissioner 1977 (12) TMI 138 - SUPREME COURT discussed at length and enunciated the principles of law like Principles of Natural Justice Audi Alteram Partem Democratic Rule of Law. Hon ble Supreme Court held that an order has to be sustained on the basis of the findings given thereunder and not on what could be the intention of the person passing the order. The appellants have a strong case in their favour and the Revenue submissions on the applicability of the ITC case are not applicable in the instant case - Appeal allowed.

Summary

ISSUES:

Whether the services rendered fall under the category of 'Works Contract service' as defined under the relevant service tax laws.Whether the appellants are eligible to avail the composition scheme under 'Works Contract service' despite non-exercising of the option as prescribed under Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.Whether non-exercising of the option under the composition scheme is a condonable procedural lapse and whether such non-compliance disentitles the appellants from the substantial benefit of reduced tax liability.Whether the refund claim is maintainable without challenging or modifying the self-assessment made by the appellants in their ST-3 returns.Whether the availment of Cenvat credit on input services violates the condition under sub-rule (2) of Rule 3 of the Composition Scheme Rules, 2007.

RULINGS / HOLDINGS:

The services rendered by the appellants fall under the category of 'Works Contract service' as per the definition under Section 65(105)(zzzza), since the contract was indivisible and included transfer of property in goods along with erection, commissioning, or installation services.The appellants are eligible to avail the composition scheme under 'Works Contract service' despite non-exercising of the option prior to payment of service tax; such non-exercising is a "mere procedural lapse" and does not "take away the substantial benefit" due to the appellants.The non-filing of a formal option under Rule 3(3) is not fatal, especially since no specific format or application has been prescribed, and the payment of service tax at the composition rate in returns filed is sufficient compliance.The refund claim is maintainable even though the self-assessment was not challenged or modified, as the issue of non-challenge was not raised in the Show Cause Notice or adjudication proceedings and cannot be raised at this stage without violating principles of natural justice.The appellants did not violate sub-rule (2) of Rule 3 of the Composition Scheme Rules, 2007, as they availed Cenvat credit only on input services, which is not barred, and not on inputs or cess paid on inputs.

RATIONALE:

The Court applied the statutory definition of 'Works Contract service' under Section 65(105)(zzzza) and the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, particularly Rule 3, which prescribes conditions for availing the composition scheme.The Court relied on precedent decisions including International Metro Civil Contractors, Harsh Construction Pvt Ltd, Vaishno Associates, ABL Infrastructure Pvt Ltd, and Shree Balaji Warehouse, which distinguish between mandatory conditions and procedural requirements for composition schemes and hold that procedural lapses can be condoned without denying substantive benefits.The Court emphasized that the absence of a prescribed format or specific procedural mandate for exercising option under Rule 3(3) indicates legislative intent that such procedural non-compliance should not bar substantive benefits.The Court rejected the Revenue's reliance on decisions requiring challenge/modification of self-assessment for refund claims, noting that the issue was not part of the original proceedings and raising it at the appellate stage violates the principles of natural justice and audi alteram partem.The Court distinguished the Apex Court's strict interpretation of exemption notifications (Dilip Kumar & Company) from the present case, which concerns procedural compliance under Rules rather than eligibility for exemption.The Court applied principles from Mohinder Singh Gill v Chief Election Commissioner and subsequent Tribunal decisions that an order must be sustained on the grounds stated therein and cannot be supplemented by fresh reasons at a later stage.The Court noted that the appellants paid excess service tax inadvertently and did not recover the excess from customers, thereby negating the bar of unjust enrichment and entitling them to refund.