Supreme Court: Assessee not Entitled to Claim Entire Contract Value for Service Tax on Works Contract

Supreme Court: Assessee not Entitled to Claim Entire Contract Value for Service Tax on Works Contract

The Supreme Court while quashing the order of Customs Excise & Service Tax Appellate Tribunal (CESTAT), ruled that the assessee is not entitled to take the total contract value which includes both goods and services and remit service tax on the value as works contract service.

The Apex Court held that the assessee has to pay the service tax on the value of services as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006 and avail the CENVAT Credit accordingly.

The division bench of Justice M.R. Shah and Justice Krishna Murari held that an assessee is liable to pay sales tax on the goods element and service tax on the availement of service/value of service rendered in relation to works contracts.

The short question which was posed for consideration before the Court was whether an assessee who is liable to pay service tax under works contract service has the legal right not to follow Rule 2A of the Service Tax (Determination of Value) Rules, 2006 nor the Composition Scheme on the ground that in terms of Section 67 of the Finance Act, 1994 an assessee is entitled to take the total contract value which includes both goods and services and remit service tax on the entire value as works contract service and in the process also entitled to avail the CENVAT Credit?

At the outset, the Court noted that as such services rendered by the respondent– assessee could be said to be ‘works contract service’ as per the Finance Act, 1994 with effect from 1 June, 2007 as per Section 64(54) read with Section 65(105) (zzzza).

By noting precedents, the Court held that with respect to the works contract an assessee is liable to sales tax on the goods element and the service tax on the availement of service/value of service rendered and the sales tax/tax on the element of goods transferred pursuant to the contract.

The Court observed, “Rule 2A is the specific provision for determination of value of taxable service in relation to services involved in the execution of a works contact shall be determined by the service provider in the manner provided under Rule 2A(1)(i) i.e., value of works contract service determined shall be equivalent to the gross amount charged for the works contract. As per explanation to Rule 2A gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the works contract.”

The bench clarified that post 1 July, 2012, the value of service portion in the execution of a works contract should be determined as per Rule 2A, which considers the gross amount charged for the works contract less the value of property of goods transferred in the execution of the works contract. It further clarified that that post 1 July, 2012 Rule 2A specifically provides that the taxable service shall not take CENVAT Credit of duty or cess paid on inputs used in or in relation to said works contract, under the provisions of CENVAT Credit Rules, 2004.

The respondent-assessee had argued that Rule 2A and even the Composition Scheme were subject to the provisions of section 67 of the Finance Act, 1994 and that the assessee had the option to pay service tax on the entire contract value.

However, the Court was of the view that if this submission were accepted, Rule 2A and the Composition Scheme would become otiose.

“As per the Scheme of the Act the determination of value of service portion in the execution of the works contract is to be made as per Rule 2A, however with an option to the assessee to avail the benefit of Composition Scheme. Therefore, either the assessee has to go for Composition Scheme or go for Determination of Value as per Rule 2A and the assessee has to pay service tax on the service element and can claim CENVAT Credit on the said amount only,” the Court held.

Accordingly, the Court allowed the appeals and quashed the impugned judgment and order passed by the CESTAT.