2025 (5) TMI 1832 - AT - Service Tax

Classification of Services as Original Works or Completion and Finishing Services and Valuation under Rule 2A(ii)(A) - Differential duty - reverse charge mechanism - availing the abatement of 60% of the value of works contract services provided by the sub- contractor - Reversal of CENVAT Credit under Rule 6(3) - Discrepancies of financial accounts and ST-returns - period of limitation - HELD THAT - We have seen the photographs of the buildings in the form in which they are received and how they are completed. We also gone through the extensive work carried out by the appellant. Essentially the appellant converts a bare skeletal structure of a building into a complete show room including the electricity HVAC plumbing flooring ceiling air-conditioning partitioning etc. In our considered view this has to be considered as original work and it cannot be called merely finishing or completion work. If they are considered as original works they will be covered by 2A(ii)(A) of the Valuation Rules and will be entitled to 60% abatement. Service Tax has to be paid only on 40% of the value which the appellant did. We also note it is value taken by previous audit teams who audited the appellants work. Therefore demand on this count cannot be sustained either on merits or on limitation. There is no case to invoke extended period of limitation to demand service tax. It is also pointed out that the appellant had been paying service tax and filing ST-3 returns. These could have been scrutinized by the officers within time and if any discrepancy was noticed the demand could have issued within the normal period of limitation. As far as the demand within normal period of limitation is concerned we find it would be fruitless at this stage to remand the matter to compute service tax for the normal period of limitation because from 2017 the service tax has come to an end and CENVAT credit which was available to assessees was converted into tax credit under the GST. Any payment of service tax under reverse charged mechanism for a normal period of limitation would have to relate back to the time when the services were received and CENVAT credit would also have been available on the same date which would have reduced the service tax liability on the output services corresponding. At this stage when the CENVAT provisions under service tax are no longer in existence it would be fruitless to exercise to go through all this paperwork because revenue will not be entitled to even a rupee of additional service tax. Every rupee the appellant will pay under reverse charge mechanism will necessarily will available to it as CENVAT credit and it would necessarily reduce a rupee as service tax on output services of the appellant. We therefore find that the demand on this count needs to be set aside. We find that revenue is correct in contending that if common input services are used for providing both taxable and exempted services proportionate amount of CENVAT credit must be reversed as per rule 6(3) of CCR. However since the appellant had been filing returns we do not find in justification to invoke extended period of limitation. The demand on this count should be confined to the normal period of limitation. If the books of accounts show higher figures than the statutory returns the actual figures can be considered for determining the service tax payable by the appellant. However before considering the figures in the statutory returns and other records what needs to be ascertained is whether the figures therein represent the value of the taxable services provided or not. According to the learned counsel for the appellant it had not only provided taxable service but had also other transactions and the figures in its financial accounts reflected the total. Therefore they cannot be taken as representing the value of the taxable services provided only. The submissions made by the learned counsel for the appellant deserve to be accepted. Learned counsel further submits that the actual value of taxable services provided were made available to the audit party during audit. From the impugned order it cannot be established that the entire figures indicated in the commercial accounts reflected only the value of taxable services provided by the appellant. Therefore the demand of service tax on the count needs to be set aside. In view of the fact we have set aside the demand of most counts except the reversal of proportionate amount of CENVAT credit under rule 6(3) of CCR for the normal period we find no justification to uphold the penalties imposed on the appellant. Thus the appeal is partly allowed upholding the aforesaid reversal of CENVAT credit under rule 6(3) of CCR but only for the normal period of limitation. Rest of the demand and all penalties are set aside. The matter is remanded to the Commissioner for the limited purpose of determining the amount of CENVAT credit to be reversed under rule 6(3) considering only the normal period of limitation. The appeal is allowed and the impugned order is modified to the extent indicated above.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

(a) Whether the appellant's services involving conversion of bare commercial structures into usable showrooms qualify as "original works" or merely "completion and finishing services" for the purpose of service tax valuation under Rule 2A(ii)(A) of the Service Tax Valuation Rules, 2006, and consequently, the correct abatement applicable.

(b) Whether the demand of service tax under the reverse charge mechanism on services received from sub-contractors is sustainable, especially considering the appellant's availing of CENVAT credit on such payments.

(c) Whether the appellant was liable to reverse proportionate CENVAT credit under Rule 6(3) of the CENVAT Credit Rules, 2004 on common input services used partly for exempted services.

(d) Whether the demand of service tax based on discrepancies found during reconciliation of financial accounts with ST-3 returns is justified.

(e) Whether penalties imposed under various provisions of the Finance Act, 1994 and CENVAT Credit Rules, 2004 are justified in the facts of the case.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Classification of Services as Original Works or Completion and Finishing Services and Valuation under Rule 2A(ii)(A)

Relevant legal framework and precedents: The valuation of taxable services involved in execution of works contracts is governed by Rule 2A of the Service Tax Valuation Rules, 2006. Under clause (ii)(A), for original works, service tax is payable on 40% of the total contract value (60% abatement). For completion and finishing services, only 30% abatement is available, and service tax is payable on 70% of the contract value.

Court's interpretation and reasoning: The Tribunal examined the nature of services rendered by the appellant, who converts bare skeletal commercial structures into fully functional showrooms by providing internal walls, partitions, HVAC, plumbing, flooring, ceiling, fire suppression, and other fit-outs. The Tribunal observed that these activities go beyond mere finishing and completion and amount to original works.

Key evidence and findings: Photographs of the premises before and after work, detailed description of the extensive work undertaken, and prior audit findings recognizing the appellant's services as original works.

Application of law to facts: Since the appellant's services qualify as original works, the correct valuation method under Rule 2A(ii)(A) entitles the appellant to 60% abatement, i.e., service tax payable on 40% of the contract price. The appellant had paid service tax accordingly.

Treatment of competing arguments: The Revenue contended that the services were only finishing and completion services, warranting service tax on 70% of contract value. The Tribunal rejected this, finding the Revenue's view inconsistent with the nature of work and prior audits.

Conclusions: The demand for short payment of service tax amounting to Rs. 3,41,99,857/- on this ground is unsustainable both on merits and limitation grounds. The appellant's classification as original works and payment of service tax on 40% of contract price is upheld.

(b) Demand of Service Tax under Reverse Charge Mechanism on Sub-Contractors' Services

Relevant legal framework and precedents: The reverse charge mechanism requires the recipient of specified services to pay service tax. The appellant had availed service tax credit on amounts paid to sub-contractors, who provided works contract services.

Court's interpretation and reasoning: The Tribunal noted that the appellant had paid service tax under reverse charge and availed the entire amount as CENVAT credit. It held that since the appellant had not evaded tax and the payment and credit were neutralizing, there was no justification for invoking extended limitation or demanding additional tax.

Key evidence and findings: Undisputed fact that the appellant's payment of service tax under reverse charge was fully credited as CENVAT credit.

Application of law to facts: The Tribunal found it unnecessary to decide the exact abatement applicable to sub-contractors' services since the tax paid was fully credited, making the demand revenue neutral.

Treatment of competing arguments: Revenue argued that liability to pay correct service tax under reverse charge exists irrespective of credit availability. Tribunal acknowledged this but emphasized the practical futility of the demand given the credit mechanism.

Conclusions: The demand of Rs. 19,51,873/- under reverse charge mechanism is set aside as it is revenue neutral and no evasion or suppression was established.

(c) Reversal of CENVAT Credit under Rule 6(3) of the CENVAT Credit Rules, 2004

Relevant legal framework and precedents: Rule 6(3) mandates reversal of proportionate CENVAT credit on common input services used partly for exempted services. The appellant provided both taxable and exempted services but did not reverse proportionate credit.

Court's interpretation and reasoning: The Tribunal accepted the Revenue's contention that proportionate reversal is mandatory. However, it restricted the demand to the normal period of limitation, rejecting invocation of extended limitation as the appellant had filed returns and no willful suppression was found.

Key evidence and findings: The appellant's admission of non-reversal, the nature of services (taxable and exempted), and the applicable provisions of Rule 6(3).

Application of law to facts: The appellant is liable to reverse proportionate CENVAT credit for exempted services under Rule 6(3) but only for the normal limitation period.

Treatment of competing arguments: The appellant argued that Explanation to Rule 3 of CCR exempts it from reversal if exemption notifications restrict credit. The Tribunal rejected this, holding that reversal is required when common input services are used for exempted output services.

Conclusions: Demand of Rs. 70,224/- for reversal of CENVAT credit is upheld but confined to the normal period of limitation. The matter is remanded for quantification accordingly.

(d) Demand Based on Reconciliation of Financial Accounts and ST-3 Returns

Relevant legal framework and precedents: Service tax liability is based on declared taxable value in statutory returns. Discrepancies between financial accounts and returns can lead to demands if taxable value is understated.

Court's interpretation and reasoning: The Tribunal observed that the appellant's financial accounts included revenue from both taxable and exempted services and other transactions. The ST-3 returns reflected taxable services separately. The Tribunal held that the figures in financial accounts cannot be mechanically adopted for service tax demand without establishing that they represent taxable service value.

Key evidence and findings: The appellant's submission that separate accounts were maintained for taxable and exempted services and that audited returns were submitted to the department.

Application of law to facts: Since the impugned order failed to establish that the higher figures in financial accounts represented taxable services, the demand based on reconciliation was not sustainable.

Treatment of competing arguments: Revenue relied on audit findings and reconciliation. The Tribunal found such approach insufficient without clear linkage to taxable service value.

Conclusions: Demand of Rs. 1,69,468/- based on reconciliation discrepancies is set aside.

(e) Penalties Imposed under Finance Act, 1994 and CENVAT Credit Rules, 2004

Relevant legal framework and precedents: Penalties under Sections 77, 78, 76 of the Finance Act, 1994 and Rule 15(3) of CCR, 2004 are imposed for contravention of provisions with willful intent to evade tax.

Court's interpretation and reasoning: Since the Tribunal set aside most demands except the limited reversal of CENVAT credit for the normal period, it found no justification for penalties which presuppose willful evasion or suppression.

Key evidence and findings: The appellant's consistent filing of returns, absence of fraud or suppression, and partial acceptance of appellant's contentions.

Application of law to facts: Penalties cannot be sustained without confirmed liability and proof of willful evasion.

Treatment of competing arguments: Revenue urged confirmation of penalties. Tribunal declined due to failure to uphold substantive demands.

Conclusions: All penalties imposed are set aside.

3. SIGNIFICANT HOLDINGS

"In our considered view, this has to be considered as original work and it cannot be called merely finishing or completion work. If they are considered as original works they will be covered by 2A(ii)(A) of the Valuation Rules and will be entitled to 60% abatement. Service Tax has to be paid only on 40% of the value which the appellant did."

"Undisputedly, every rupee paid by the appellant was also available to the appellant as CENVAT credit. Under these circumstances, it cannot be said the appellant had any intention to evade payment of service tax under reverse charge mechanism."

"If the books of accounts show higher figures than the statutory returns the actual figures can be considered for determining the service tax payable by the appellant. However, before considering the figures in the statutory returns and other records, what needs to be ascertained is whether the figures therein represent the value of the taxable services provided or not."

"Revenue is correct in contending that if common input services are used for providing both taxable and exempted services, proportionate amount of CENVAT credit must be reversed as per rule 6(3) of CCR."

"In view of the fact we have set aside the demand of most counts except the reversal of proportionate amount of CENVAT credit under rule 6(3) of CCR for the normal period, we find no justification to uphold the penalties imposed on the appellant."

The Tribunal's final determinations are:

• The appellant's services qualify as original works, entitling it to 60% abatement under Rule 2A(ii)(A), and the demand for short payment on this ground is rejected.
• The demand under reverse charge mechanism is set aside as revenue neutral due to availed CENVAT credit.
• The appellant is liable to reverse proportionate CENVAT credit under Rule 6(3) of CCR, but only for the normal period of limitation; the matter is remanded for quantification.
• The demand based on reconciliation discrepancies is rejected due to lack of evidence that financial accounts represent taxable service value.
• Penalties imposed are set aside as the substantive demands are not sustained except limited reversal of CENVAT credit.