Calcutta High Court | In a landmark judgment related to Works Contract Composition Scheme, a division bench comprising of T.S. Sivagnanam* and Hiranmay Bhattacharyya, JJ., held that rate of tax under Works Contract Composition Scheme will be 2% for all the projects where the option was exercised prior to change in rate of tax. Further since there is no statutory form prescribed, payment of tax and filing of return is sufficient compliance of exercise of option under the Scheme.
Factual Matrix
In the instant matter, the appellant signed several construction contracts on a turnkey basis during 2006-2007. The appellant exercised alternative option under the Works Contract (Composition Scheme) for Payment of Service Tax Rules, 2007 (the Scheme) and paid service tax at 2%. The appellant had submitted form ST-3 reporting returns covering the period from March 2008 to 2011-2012, showing the payment of the 2% service tax in relation of to the construction contract. Vide notification no. 7 of 2008 dated 30-01-2008, the service tax rate in relation to works contract was increased from 2% to 4% under the scheme.
On 17-04-2013, the respondent department issued show cause notice for insufficient payment of the service tax, since the appellant made use of the option to participate in the composition scheme on 26-03-2008 and the 2% payment amounts to tax evasion. Another show cause notice dated 21-10-2013 was issued alleging that the service tax was underpaid at the increased rate of 4.8% as communicated in the notification no. 10 of 2012 dated 17-03-2012 effective on 01-04-2012.
The writ court held that the appellant exercised the option on 26-03-2008 for the first time; therefore, the rate of tax shall be 4%.
The Appellant filed an appeal before this Court challenging the findings of the Writ Court.
Appellant’s Contention
The appellant contended that the composition scheme, which came into force on 01-06-2007, gives the provider of the service tax under the contract for work an option to pay the service tax in connection with the payment of an equivalent 2% of the levy for the contract for work gross amount. The appellant further contended that once the Service Provider exercised this option under the Composition Scheme, the Service Tax rates at the time of the option would apply for the entire term of the employment contract and the Service Provider cannot specify this schedule prior to the completion of said work contract and hence, any Tax rate change based on subsequent notice is prohibited and subject to the Promissory Prohibition Doctrine.
Respondent’s Contention
The respondent contended that the option to pay the service tax under the composition scheme must be exercised before paying the service tax and that the complainant who did not exercise the option before 26-03-2008 must pay for the service tax of 4% and not 2%. The respondent further contended that this underpayment was made intentionally to avoid payment of duty and therefore an extended limitation period can be invoked by them.
Writ Court’s Observation and Decision
The writ court answered the issues whether the notifications dated 01.03.2008 and 17.03.2012 can be given retrospective effect after an option is exercised and whether the appellant had exercised option under the said scheme.
The writ court held that though the competent authority had jurisdiction to amend the rate of tax, such amendment would not be applicable retrospectively and shall not affect the pending works contract.
The writ court observed that R. 3(3) of the scheme states that the option should be exercised prior to the payment of service tax and shall and such option shall remain applicable for the entire works contract, not permitted to be withdrawn until the completion of the said work. The writ court further observed that there is no prescribed mode for exercising such an option, but appellant had paid service tax at 2% which was duly received by the department prior to 01-03-2008. However, the expression “opts to pay service tax under the rules” cannot be construed and mean the filing of the return and the payment would sufficiently constitute the exercise of the option under the composition scheme.
The writ court held that the appellant having exercised the option for the first time only on 26-03-2008, the rate of tax payable shall be 4%.
Issue: Does the scheme contemplate a mode of exercising option and what would be the correct meaning that has to be assigned to the words “shall exercise option in respect of the works contract prior to payment of service tax”?
Rule 3 of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 (Notification No. 32/2007)
“3. (1) Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to two per cent. of the gross amount charged for the works contract.
(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.
(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.”
R. 3(1) of the scheme provides an option to pay service tax by paying an amount equivalent to 2% of the gross amount charged for the works contract instead of the rate specified in S. 66 of the Finance Act, 1994. R. 3(3) of the scheme states that a person who opts to pay service tax under the composition scheme shall exercise such option prior to payment of service tax 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.
Court’s Observation
The Court observed that a rule is read in its entirety to ascertain the true meaning and intention of the legislation is the cardinal principle of interpretation and therefore R. 3(3) of the scheme ought to be read in conjunction with R. 3(1) and not in isolation.
“If rule 3(1) and (3) and read in conjunction and harmoniously, the intention of the scheme is to give an option to the provider of taxable service to discharge his service tax liability by paying an amount equivalent to 2%. This being the substantive part of the scheme, sub rule (3) which is a machinery provision has to give life to the substantive part of the rule namely Rule 3(1) and that would mean that the option shall be exercised by paying amount equivalent to 2% of the gross amount charged for the works contract.”
The Court observed that there is no procedure laid down or statutory form for the exercise of such option under the composition scheme, then how can the respondent/department ask that the option should be exercised in a particular fashion and cannot be by conduct, that is by paying the service tax equivalent to 2% of the gross amount charged for the works contract.
The Court observed that the appellant filed the return in form ST3 for the period October 2007 to March 2008 and answered the question asked and information has been called for such as whether the assessee is liable to pay service tax on his taxable service as a service provider or a service receiver, whether they have availed benefit of any exemption notification, what is the return deals with the value of taxable service, service tax payable and gross amount charged.
The Court noticed that the appellant answered the question and indicated that they are liable to pay service tax as a service provider, they availed the benefit of notification no. 32 of 2007 which is the composition scheme and also provided the service tax rate wise breakup including that service tax had been paid at 2% under composition scheme. The appellant also provided proof of payment of tax along with the challan numbers.
The Court observed that no objection of any short payment of service tax was raised by the assessing officer while accepting the return submitted by the assessee therefore it cannot be said that the appellant failed to disclose that the appellant had availed the benefit under the composition scheme to the respondent department.
The Court cited T. Azhakesan v. State Tax Officer, 2021 SCC OnLine Mad 10505, a case related to the option be exercised by the dealer prior to payment of tax when there is no prescribed form for exercising such option and the Madras High Court decided the case in favour of the dealer.
Explaining the doctrine of substantial compliance, the Court cited CCE v. Hari Chand Shri Gopal, (2011) 1 SCC 236, where it was held that substantial compliance means actual compliance in respect to the substance essential to every reasonable objective of the statute and the court should determine whether the statute has been followed sufficiently so as to carry out the intent of the statute and accomplish the reasonable objective for which it was passed.
Relying on ABL Infrastructure (P) Ltd. v. CCE, 2015 (2) TMI 801-CESTAT Mumbai, the Court held that by the payment of tax under the scheme, filing the return and paying tax at the compounded rate of 2% is sufficient compliance of exercise of option under the scheme and therefore the same is permissible and acceptable under law.
Answering whether the extended period of limitation could have been invoked, the Court observed that in several decisions by the Supreme Court it was opined that every non-payment or non-levy of duty does not attract extended period and there must be a deliberate default; mere non-payment of duties is not equivalent to collision or wilful misstatement or suppression of facts.
The Court observed that the department is not empowered to invoke the extended period on the sole ground of omission as the same can be invoked only when that there is a deliberate intention to evade payment of tax. Moreover, no error was pointed out by the assessing officer while accepting the payment of tax and the query was raised by assessing officer based on already available records without any new or fresh tangible material, therefore invoking of extended period of limitation by the respondent department is thoroughly flawed and illegal.
Court’s Decision
The Court held that in the absence of any statutory form for exercise of option, the filing of the return, mentioning the relevant notification number and payment of tax at the compounded rate is sufficient compliance of exercise of option under the scheme.
Allowing the appeal, the Court set aside a portion of writ court’s order and held that the appellant had exercised the option prior to 01-03-2008 and therefore would be entitled to the compounded rate of tax at 2% for the relevant period.
The Court held that the appellant is not entitled to the compoundable rate this for the period from April 2012 to March 2013 and is required to pay tax at the enhanced rate along with the interest.
[Larsen & Toubro Ltd. v. Service Tax Commissionerate, 2022 SCC OnLine Cal 3850, decided on 06-12-2022]
Advocates who appeared in this case:
Mr. G. Dhara Maduri, Mr. P. Purushottam, Mr. Avra Mazumder, Mr. T. Shanmugam, Mr. Binayak Gupta and Mr. Suman Bhowmick, Counsel for the Appellant;
Mr. K.K. Maiti and Mr Tapan Bhanja, Counsel for CGST Authorities;
Mr. Prithu Dudhoria, Counsel for Union of India.
*Ritu Singh, Editorial Assistant has put this report together.
