CC and CE and ST, NOIDA vs M/s Interarch Building Products Pvt. Ltd.

REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.11330 of 2018

CC and CE and ST, NOIDA ...Appellant(s)

Versus

M/s Interarch Building Products Pvt. Ltd. ...Respondent(s)

JUDGMENT

M. R. Shah, J.

1. Feeling aggrieved and dissatisfied with the Signature Not Verified Digitally signed by R Natarajan Date: 2023.05.02 impugned judgment and order dated 16:43:17 IST Reason: Civil Appeal No.11330 of 2018 Page 1 of 64 2

09.11.2017 passed by the Customs, Excise and

Service Tax Appellate Tribunal, Regional Bench

at Allahabad (hereinafter referred to as ‘the

Appellate Tribunal’) by which the learned

Tribunal has allowed the said appeal preferred

by the respondent and has set aside the Order­

in­Original dated 31.03.2017 disallowing the

CENVAT Credit, the Revenue has preferred the

present appeal.

2. The facts leading to the present appeal in

nutshell are as under:

2.1 The respondent – assessee was engaged in the

business of manufacture, supply and erection

at the site of prefabricated/pre­engineered steel

buildings and parts thereof classifiable under

Civil Appeal No.11330 of 2018 Page 2 of 64 3

the relevant Headings/sub­headings of the

First Schedule to the Central Excise Tariff Act,

1985. The respondent was having centralized

registration for Service Tax with the Service Tax

Department for services under "Commercial or

Industrial Construction Service" and

"Construction Services" right from the

commencement of production. The goods

manufactured were cleared from the place of

manufacture on payment of central excise duty

on which CENVAT Credit was made by the

respondent. The unit at Greater Noida

registered as a Centralized Service Provider,

availed CENVAT Credit

(i) Excise duty paid by the units at the time of removal

(ii) duty paid on capital goods

Civil Appeal No.11330 of 2018 Page 3 of 64 4

(iii) service tax paid on input services.

They paid service tax on the gross amount of

contract for engineering, procurements supply,

construction, erection etc. under the category

"commercial or industrial constructions

services" as referred under Section 65(105)(zzq)

of the Finance Act, 1994 (hereinafter referred to

as ‘the Act, 1994’).

2.2 Based on specific intelligence that the

respondent had wrongly classified the services

rendered by them, availed inadmissible

CENVAT Credit and short paid the Service Tax

in cash. Department was of the view that the

services rendered by the respondent amounted

to Works Contract which were chargeable to

tax under sub clause [zzzza] of Section 65(105]

Civil Appeal No.11330 of 2018 Page 4 of 64 5

of the Finance Act, 1994. Therefore, according

to the Revenue on classifiable service under

‘works contract service’ the respondents availed

CENVAT Credit on Central Excise duty paid on

inputs.

2.3 Therefore, the Department issued a Show

Cause Notice alleging inter alia that the

respondent had utilized CENVAT Credit of

Rs.1,12,60,92,760/­ on building material

during June, 2007 to March, 2012 which was

inadmissible. It was alleged that the said

amount had been recovered as service tax from

the customer under Section 73(1) of the Act,

1994. It appeared to the Revenue that services

should have been classified under “Works

Civil Appeal No.11330 of 2018 Page 5 of 64 6

Contract Service”. It was mandatory for the

respondent to either follow Rule 2A of Service

Tax (Determination of Value) Rules, 2006 or

adopt Composition Scheme. The said Rule 2A

and Composition Scheme do not allow the

availment of CENVAT Credit on input.

Therefore, it appeared to the Revenue that the

CENVAT Credit of Rs.112,60,92,760/­ as

availed on input was inadmissible and

therefore, the said debit has resulted in short

payment of Service Tax.

2.4 The Show Cause Notice was related to the

period from June, 2007 to March, 2012. The

respondent was called upon to show cause as

to why the services being provided by them be

Civil Appeal No.11330 of 2018 Page 6 of 64 7

reclassified under "Works Contract Service" in

place of "Commercial or Industrial

Construction Services", inadmissible CENVAT

Credit of building material amounting to

Rs.112,60,92,760/­ be disallowed in terms of

Rules 2 & 3(1) of CENVAT Credit Rules, 2004;

an amount of Rs.22,37,01,811/­ on account of

short paid Service Tax towards the liability

debited from the inadmissible Cenvat Credit on

construction materials be recovered under

Section 73(1) of the Act, 1994; an amount of

Rs.90,23,90,907/­ alleged to have been

collected as cash in excess of the Service Tax

assessed/determined by passing the

inadmissible CENVAT Credit to their recipients

of taxable service be demanded under Section

Civil Appeal No.11330 of 2018 Page 7 of 64 8

73A of the Act, 1994 along with the appropriate

rate of interest under Sections 73B and 75 of

the Act and the penalties be imposed under

Sections 77 & 75 of the Act, 1994 read with

Rule 15(3) of CENVAT Credit Rules, 2004. By

Order dated 28.03.2004 the Adjudicating

Authority who disallowed the CENVAT Credit

amounting to Rs.1,12,60,92,760/­ confirmed

the amounts of Rs.22,37,01,811/­ being short

paid, confirmed the claim in the show cause

notice.

2.5 The department had issued further Show

Cause Notices/statement of demands for the

subsequent period also.

Civil Appeal No.11330 of 2018 Page 8 of 64 9

2.6 By order dated 18.11.2015, the learned

Tribunal set aside the adjudication order and

remanded the matter back to the adjudicating

authority with the direction that the tax

liability be re­determined after hearing the

respondent.

On remand the adjudicating authority passed a

fresh order dated 31.03.2017 and confirmed the

demands. The Commissioner held that the services

rendered by the respondent was classifiable as

‘Works Contract Service’ and rejected the availability

of CENVAT Credit amount and directed recovery

under Section 73A of the Act, 1994. The Order­in­

Original passed by the adjudicating authority was

the subject matter of the present appeal before the

Tribunal.

Civil Appeal No.11330 of 2018 Page 9 of 64 10

2.7 Before the Tribunal the Order­in­Original

passed by the Adjudicating Authority was

challenged on the following grounds:

(i) “The Id. Commissioner disallowed Cenvat credit availed on inputs in terms of Rule 2 & 3(1) of Cenvat Credit Rules, 2004 to the extent of Rs.1,12,60,92,760/­ in case of show cause notice dated 23.10.2012 and the amounts in case other 3 notices as specified above and that such order is not sustainable in law.

(ii) The provision of Rule 2A of Service Tax (Determination of Value) Rules, 2006, start with expression "subject to the provisions of Section 67" which means the provision prescribed under said Rule 2A, is subject to the provisions of Section 67 of the Finance Act, 1994.

(iii) Opening Para of Rule 3 of Composition Scheme reads as­ "Notwithstanding anything contained in Section 67 of the Act and Rule 2A of the Service Tax (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." It clearly indicates that it is one of the options given

Civil Appeal No.11330 of 2018 Page 10 of 64 11

to the Service Provider to discharge Service Tax liability in respect of Works Contract Service and it is not mandatory to adopt the said Rule under Composition Scheme for discharge of Service Tax liability.

(iv) Section 67 of the Finance Act, 1994 provides for arriving at assessable value which states "subject to the provisions of this Chapter, where Service Tax is chargeable on any taxable service with reference to its value, then such value shall in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provide by him." Therefore, the said provision which is fundamental in nature and is applicable to any taxable service.

(v) The demand towards Cenvat credit confirmed in case of show cause notice dated 23.10.2012 is substantially time barred.

(vi) In the impugned order, Id. Commissioner has distinguished the judgment of this Tribunal in the case of S.V. Jiwani (supra) and the grounds on which Id, Commissioner distinguished the judgment are invalid.”

Civil Appeal No.11330 of 2018 Page 11 of 64 12

2.8 By the impugned judgment and order the

learned Tribunal has allowed the appeal

preferred by the respondent and has set aside

the Order­in­Original passed by the

adjudicating authority by observing that the

composition scheme is optional and the

provisions of Rule 2A of the said Rules are

subject to provisions of Section 67 of the Act,

1994. The learned Tribunal has also observed

that it is clear from the provisions of sub­

section 4 of Section 67 of the Act, that where

value cannot be determined as provided under

sub­rule (1) to (3) of Section 67 of the Act, then

only the value is to be determined as provided

under the Rules. Therefore, the Tribunal held

that there is no question on applicability of

Civil Appeal No.11330 of 2018 Page 12 of 64 13

Rule 2A nor there was any question of forcibly

applying the option of Composition Scheme.

The learned Tribunal held that in both these

circumstances, the respondent was entitled to

CENVAT Credit on inputs.

2.9 Feeling aggrieved and dissatisfied with the

impugned judgment and order passed by the

learned Tribunal setting aside the Order­in­

Original, the Revenue has preferred the present

appeal.

3. Shri N. Venkataraman, learned ASG has

appeared on behalf of the Revenue and Shri V.

Raghuraman, learned Senior Counsel has

appeared on behalf of the respondent –

assessee.

Civil Appeal No.11330 of 2018 Page 13 of 64 14

4. Shri N. Venkataraman, learned ASG appearing

on behalf of the Revenue has made the

following submissions challenging the

correctness and legality of the impugned order

passed by the CESTAT:

(i) That the period under dispute is January,

2007 to March, 2014. He has submitted

that the definition of ‘works contract

service’ was brought into the Finance Act,

1994 w.e.f. 01.06.2007. Therefore, he has

fairly conceded the demand for the period

January, 2007 to 31.05.2007 shall not be

maintainable in light of the decision of

this Court in the case of Commissioner

of Central Excise vs. Larsen and

Toubro, (2016) 1 SCC 170 as well as

Civil Appeal No.11330 of 2018 Page 14 of 64 15 Total Environment Building Systems

Pvt. Ltd. vs. Deputy Commissioner of

Commercial Taxes, (2022) SCC Online

SC 953.

4.1 It is submitted that therefore the demand for

the period January, 2007 to May, 2007 is not

sustainable and therefore to that extent the

demand should go.

4.2 It is submitted that however, for the period

commencing 01.06.2007 to 31.03.2014 the

demands are sustainable and the Orders­in­

Original need to be restored.

4.3 Shri N. Venkataraman, learned ASG has taken

us to the relevant provisions of the Act, 1994

more particularly Chapter 5 and the definition

Civil Appeal No.11330 of 2018 Page 15 of 64 16

of ‘works contract’ and the definition of ‘taxable

service’ contained in Section 64(54) and Section

65(105)(zzzza) respectively. It is submitted that

post 01.07.2012, the Finance Act, 1994

underwent major amendments by the insertion

of both negative list and declared services. It is

submitted that Section 66E was introduced for

the first time which defined declared services.

He has taken us to sub­clause (h) of Section

66E of the Act.

4.4 It is submitted that the Service Tax

(Determination of Value) Rules, 2006 came into

force w.e.f. 19.04.2006 vide Notification

No.12/2006 – Service Tax. Rule 2A has been

inserted vide notification 29/2007 dated

Civil Appeal No.11330 of 2018 Page 16 of 64 17

22.05.2007 w.e.f. 01.06.2007 which reads as

under, which has been amended periodically:

“Prior to 01.07.2012 it reads as under:

2A. Determination of value of services involved in the execution of a works contract:

(1) Subject to the provisions of section 67, the value of taxable service in relation to services involved in the execution of a works contract (hereinafter referred to as works contract service), referred to in sub­ clause (zzzza) of clause (105) of section 65 of the Act, shall be determined by the service provider in the following manner:­

(i) Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.

Explanation.­ For the purposes of this rule,­

(a) 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

Civil Appeal No.11330 of 2018 Page 17 of 64 18

goods involved in the execution of the said works contract;

(b) value of works contract service shall include,­

(i) labour charges for execution of the works;

(ii) amount paid to a sub­contractor for labour and services;

(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

(v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services;

(ix) Where Value Added Tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted

Civil Appeal No.11330 of 2018 Page 18 of 64 19

for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under clause (i).”

4.5 It is submitted that vide notification 32/2007 –

ST dated 22.04.2007 the Central Government

in exercise of its powers conferred by Sections

93 and 94 of the Act, 1994 introduced the

Works Contract (Composition Scheme for

Payment of Service Tax) Rules, 2007. Rule 3(1)

of the said Rules reads as under:

“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

Civil Appeal No.11330 of 2018 Page 19 of 64 20

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.

Explanation. ­ For the purposes of this rule, gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.”

4.6 It is submitted that the sub­rules came to be

amended vide Notification No.23/2009 – ST

dated 07.07.2009 and further amended by

Notification 1/2011 – ST dated 01.03.2011.

4.7 It is submitted that Section 67 of the Act, 1994

deals with valuation of taxable services reads

as under:

Civil Appeal No.11330 of 2018 Page 20 of 64 21

“67. Valuation of taxable services for charging Service Tax ­1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall, ­

(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration;

(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.

Civil Appeal No.11330 of 2018 Page 21 of 64 22 (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.

(4) Subject to the provisions of sub­ sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.

Explanation­For the purposes of this section, ­

(a) "consideration" includes

(i) any amount that is payable for the taxable services provided or to be provided;

(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed.

(iii) Any amount retained by the lottery distributor or selling agent from gross sale amount of lottery tickets in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at

Civil Appeal No.11330 of 2018 Page 22 of 64 23

which the distributor or selling agent gets such ticket.

(c) "gross amount charged" includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and 2[book adjustment, and any amount credited or debited, as the case may be, to any account, whether called "Suspense account" or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.]]”

4.8 It is submitted that the Central Board of Excise

and Customs vide letter dated 22.05.2007 issued

clarifications regarding various amendments

brought out Vide Finance Act, 2007. It is submitted

that paras 9.1 to 9.7 which are relevant read as

under:

“9.1 Works contract is a composite contract for supply of goods and services. A composite works contract

Civil Appeal No.11330 of 2018 Page 23 of 64 24

is vivisected and, ­(i) VAT/sales tax is leviable on transfer of property in goods involved in the execution of works contract [Art.366 (29A)(b) of the Constitution of India], and

(ii) Service tax will be leviable on services provided in relation to the execution of works contract.

9.2 Service tax is chargeable on the gross amount charged by the service provider for the taxable services provided (Section 67). In the case of works contract, the taxable value of services is to be determined by vivisecting the composite works contract. Rule 2A of Service Tax (Determination of Value) Rules, 2006 [Notification No.29/2007­Service tax, dated 22.05.2007], provides that value of works contract service shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. Thus, wherever the service provider maintains records, the value of services shall be the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of works contract.

Civil Appeal No.11330 of 2018 Page 24 of 64 25

9.3 Wherever VAT/sales tax on transfer of property in goods involved in the execution of works contract is paid on actual value, the same value is also taken for the purpose of determining the value of works contract service. In other cases, value of works contract service shall be determined based on the actual. It has also been explained that value of works contract service shall include:

(i) labour charges for execution of the works; (ii) amount paid to a sub­ contractor for labour and services; (iii) charges for planning, designing and architect’s fees; (iv) charges for obtaining on hir or otherwise, machinery and tools uses for the execution of the works contract; (v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract, the property in which is not transferred in the course of execution of works contract; (vi) cost of establishment of the contract relatable to supply of labour and services; (vii) other similar expenses relatable to supply of labour and services; and (viii) profit earned by the service provider relatable to supply of labour and service;

9.4 If the gross amount charged for the works contract is inclusive of VAT

Civil Appeal No.11330 of 2018 Page 25 of 64 26

or sales tax, the value for the purposes of service tax shall be computed as follows: [Gross amount charged – (value of transfer of property in goods involved in the execution of works contract and VAT or sales tax paid, if any, on the said transfer of property in goods involved in the execution of said works contract)]. 9.5 As a trade facilitation measure and also for ease of administrative convenience, the service provider has been given an option to adopt the composition scheme for payment of service tax on works contract service. The Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 has accordingly been notified vide Notification No.32/2007­ Service Tax, dated 22.05.2007. 9.6 The scheme provides that the service provider shall have an option to pay an amount equivalent to 2% of the gross amount charged for the works contract instead of paying service tax at the rate specified in section 66. Gross amount charged for the works contract shall not include VAT or sales tax paid on transfer of property in goods involved in the execution of the said works contract. The provider of taxable service opting to pay service tax under the said

Civil Appeal No.11330 of 2018 Page 26 of 64 27

composition scheme is not entitled to take CENVAT Credit of duty on inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

9.7 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 cannot be withdrawn until the completion of the said works contract.”

4.9 Relying upon the above provisions, rules and

regulations and the circulars, it is submitted

that works contract is contract involving supply

of goods and services together. A composite

works contract gets vivisected into transfer of

property into goods liable to sales tax/VAT in

terms of Article 366 (29A)(b) of the Constitution

of India and the service portion liable to service

Civil Appeal No.11330 of 2018 Page 27 of 64 28

tax w.e.f. 01.06.2007. Reliance is placed on

the decision of this Court in the case of Larsen

and Toubro (supra) (paragraphs 14 to 16). 4.10 It is submitted that the ratio of this Court in

Larsen and Toubro (supra) would be that the

list of service elements as found in Gannon

Dunkerly and Co. vs. State of Rajasthan,

(1993) 1 SCC 364 case will suffer service tax

and the goods portion would suffer VAT or

sales tax.

4.11.It is submitted that the Constitutional Bench of

this Court in the case of Gannon Dunkerly

and Co. (supra) while dealing with the

measure of tax vide para 47 had provided a list

Civil Appeal No.11330 of 2018 Page 28 of 64 29

of exclusions from the cost of valuation of

goods and as to what would constitute the

service elements. He has heavily relied upon

para 47 of the said decision. It is submitted

that this Court observed in para 47 in the case

of Gannon Dunkerly and Co. (supra) as

under:

“47. ….. The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover—

(a) Labour charges for execution of the works;

(b) amount paid to a sub­contractor for labour and services;

(c) charges for planning, designing and architect's fees;

(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;

Civil Appeal No.11330 of 2018 Page 29 of 64 30 (e) cost of consumables such as water, electricity, fuel, etc. used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and

(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;

(g) other similar expenses relatable to supply of labour and services;

(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.

The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.”

4.12 It is submitted that the above service elements

have found a statutory recognition as the same

stood incorporated as part of Rule 2A of the

Service Tax (Determination of Value) Rules,

2006 w.e.f. 01.06.2007.

Civil Appeal No.11330 of 2018 Page 30 of 64 31 4.13 It is submitted that consequently this Court

while dealing with the decision of Larsen and

Toubro (supra) had specifically addressed this

issue by bringing the similarity of the service

elements as mentioned in Constitution Bench’s

decision in Gannon Dunkerly (supra) and

framed as Rule 2A of the Valuation Rules,

2006. Reliance is placed on paras 25 and 26 of

the said judgment.

4.14 It is submitted that the decision of this Court

rendered in Larsen and Toubro (supra) came

up for reconsideration in the batch of matter in

the case of Total Environment Building

Systems Pvt. Ltd. (supra) wherein this Court

vide para 28 rejected the request to refer the

Civil Appeal No.11330 of 2018 Page 31 of 64 32

matter to the larger Bench by observing in

paragraph 28 which reads as under:

“28. While appreciating the prayer/submission made on behalf of the Revenue to re­consider the binding decision of this Court in the case of Larsen and Toubro Limited (supra) and to refer the matter to the Larger Bench, few facts are required to be taken into consideration, which are as under:—

(i) The decision of this Court in the case of Larsen and Toubro Limited (supra) has been delivered/passed in the year 2015, in which, it is specifically observed and held that on indivisible works contracts for the period pre­Finance Act, 2007, the service tax was not leviable;

(ii) After considering the entire scheme and the levy of service tax pre­Finance Act, 2007 and after giving cogent reasons, a conscious decision has been taken by this Court holding that the service tax was not leviable pre­Finance Act, 2007 on indivisible/Composite Works Contracts;

(iii) While holding that for the period pre­ Finance Act, 2007, on indivisible/Composite Works Contracts, the service tax is not leviable, number of decisions have been dealt with and

Civil Appeal No.11330 of 2018 Page 32 of 64 33

considered by this Court in the aforesaid decision;

(iv) That subsequently, the decision of this court in the case of Larsen and Toubro Limited (supra) has been followed and considered by this Court in the case of Commissioner of Service Tax and Ors. Bhayana Builders Pvt. Ld. And Ors, (2018) 3 SCC 782,;

(v) That after the decision of this Court in the case of Larsen and Toubro Limited (supra) rendered in the year 2015, the said decision has been consistently followed by various High Courts and the Tribunals;

(vi) The decisions of the various High Courts and the Tribunals, which were passed after following the decision of this Court in the case of Larsen and Toubro Limited (supra) have attained finality and in many cases, the Revenue has not challenged the said decisions;

(vii) No efforts were made by the Revenue to file any review application to review and/or recall the judgment and order passed by this Court in the case of Larsen and Toubro Limited (supra). If the Revenue was so serious in their view that decision of this Court in the case of Larsen and Toubro Limited (supra) requires re­ consideration, Revenue ought to have filed

Civil Appeal No.11330 of 2018 Page 33 of 64 34

the review application at that stage and/or even thereafter. No such review application has been filed even as on today.

(viii) Merely because in the subsequent cases, the amount of tax involved may be higher, cannot be a ground to pray for reconsideration of the earlier binding decision, which has been consistently followed by various High Courts and the Tribunals in the entire country.”

4.15 It is submitted that therefore what is taxed

under Section 65(105)(zzzza) which later

became Section 66E(h) of the Finance Act,

1994 is the service portion in the execution of

works contract. That Section 67(1) makes it

abundantly clear that service tax is chargeable

only on the taxable service with reference to its

value. It is submitted that this Court in the

case of Larsen and Toubro (supra) as

reiterated in Total Environment Building Civil Appeal No.11330 of 2018 Page 34 of 64 35

(supra) has made it clear that the goods value

in the nature of transfer of property of goods

would suffer sales tax/VAT and the service

components or elements would suffer service

tax w.e.f. 01.06.2007 by virtue of the definition

of taxable service under Section 65(105)(zzzza)

and later as Section 66E(h) as a declared

service post 01.07.2012.

4.16 It is submitted that the incorporation of taxable

service w.e.f. 01.06.2007 also resulted in the

introduction of Rule 2A in the Valuation Rules,

2006 clearly identifying the service elements or

components which would constitute the value

for determination and payment of service tax.

These components again were retained even

Civil Appeal No.11330 of 2018 Page 35 of 64 36

after the insertion of Section 66E(h) post

01.07.2012.

4.17 It is submitted that this Court in the case of

Larsen and Toubro (supra) vide para 25 had

referred to Rule 2A of the Valuation Rules,

2006 and its purport by holding that the said

Rule goes on to say that the service component

of the works contract is to include the 8

elements laid down in the second Gannon

Dunkerly’s case and the value attributable to

the service in the works contract would be the

service elements in such contracts as this

scheme alone would comply with the

constitutional requirements as it seeks to

bifurcate a composite indivisible works contract

Civil Appeal No.11330 of 2018 Page 36 of 64 37

and takes care to see that no element is

attributable to the property in goods

transferred pursuant to such contract enters

into the computation of the service tax. It is

submitted that therefore the purport of Rule 2A

of the valuation rules is only to bring the

elements of service tax as that alone would

meet the constitutional requirements and no

elements attributable to the property in goods

should enter in the computation of service tax. It is, therefore, the entire contention of the

respondent ­ assessee that they have a legal

right to pay tax even on the goods portion as

service tax and also take input credit on the

duty paid on the goods is clearly contrary to

para 25 of the Larsen and Toubro (supra)

Civil Appeal No.11330 of 2018 Page 37 of 64 38

judgment and Rule 2A of the Valuation Rules,

2006.

4.18 Now so far as the composition scheme is

concerned, it is submitted that the assessee

falling under the definition of ‘works contract

service’ from 01.06.2007 has to discharge

service tax liability either under Rule 2A of the

valuation rules only on the service components

without taking any CENVAT Credit on the

input goods or go for the option of a

composition scheme in which case the rates of

tax specified at various points of time should

have been complied with on the total contract

value. It is submitted that the invented

method of the respondent – assessee by

seeking to pay service tax on entire contract

Civil Appeal No.11330 of 2018 Page 38 of 64 39

value after taking the CENVAT Credit on the

input goods is clearly unsustainable in law.

The contention that Rule 2A is subject to

Section 67 which according to the respondent –

assessee permits payment of tax on the

contract value including the goods runs

counter to the scheme of works contract

service. It is submitted that the what would

constitute as goods under Article 366 (29A)(b)

of the Constitution cannot be construed as a

taxable service and as a value of taxable

service.

4.19 It is submitted that Finance Act, 1994 read

with the Rules permit only 2 options either to

pay service tax on the service elements as

Civil Appeal No.11330 of 2018 Page 39 of 64 40

envisaged under Rule 2A of the Valuation

Rules, 2006 without taking the CENVAT Credit

on input goods or opt for composition. It is

submitted that the third variant of paying

service tax on the total contract value including

goods and correspondingly availing CENVAT

Credit on the input is not only misconceived

but also legally untenable besides a

Constitutional bar.

4.20 Now so far as the reliance is placed upon the

decision of this Court in the case of

Commissioner of Service Tax and Ors.

Bhayana Builders Pvt. Ld. and Ors, (2018) 3

SCC 782 is concerned, it is submitted that on

facts it has no relevance. It is submitted that

Civil Appeal No.11330 of 2018 Page 40 of 64 41

on the contrary the decision of this Court in

the case of Larsen and Toubro (supra) would

apply. It is submitted that even the circular

dated 22.05.2005 makes it amply clear as to

how a works contract service needs to be taxed

and vide para 9.2 referred to Rule 2A of the

Valuation Rules, 2006 to affirm that the value

of works contract service shall be equivalent to

the gross amount charged for the works

contract less the value of transfer of property in

goods involved in the execution of the said

contract and vide para 9.3 rings out the

elements of services which matches exactly

with the elements laid down by this Court in

the case of Gannon Dunkerly (supra).

Civil Appeal No.11330 of 2018 Page 41 of 64 42

5. Making above submissions it is prayed to allow

the present appeal.

6. Present appeal is vehemently opposed by Shri

V. Raghuraman, learned Senior Counsel

appearing on behalf of the respondent –

assessee.

6.1 While opposing the present appeal and in

support of the impugned order passed by the

CESTAT, learned counsel appearing on behalf

of the respondent has made the following

submissions:

(i) That the composition scheme is optional

as per Rule 3(1) of the Composition Rules;

(ii) Provisions of Rule 2A of the Valuation

Rules are subject to the provisions of

Section 67 of the Finance Act, 1994;

(iii) Once the provisions of Section 67 of the

Finance Act, 1994 have been complied

Civil Appeal No.11330 of 2018 Page 42 of 64 43

with, neither the question of applicability

of Rule 2A of the Valuation Rules arise

nor was there any question of forcibly

applying option of Composition Scheme

on the assessee;

(iv) Even if the services of the respondent are

considered as classifiable under ‘works

contract service’ after 1st June, 2007, as

claimed by the Revenue, the further

claims of the Revenue that there were only

two options as above for valuation of the

works contract service namely the

composition rules and the Rule 2A of the

Valuation Rules available to the assessee

and consequential non­admissibility of

CENVAT Credit has no merit.

Civil Appeal No.11330 of 2018 Page 43 of 64 44 (v) It is submitted that in case of ‘works

contract service’ also, the assessment can

be done under the provisions of Section

67 of the Finance Act, 1994 and that

valuation methods prescribed under Rule

2A or composition scheme are merely

options provided to the assessee;

(vi) Therefore, the benefit of CENVAT Credit

on inputs cannot be denied to the

respondents in absence of any specific bar

or prohibition in the CENVAT Credit

Rules, 2004 or the Finance Act, 1994.

6.2 It is further submitted by learned counsel

appearing on behalf of the respondent that

while passing the impugned order the learned

Tribunal has rightly followed its earlier decision

Civil Appeal No.11330 of 2018 Page 44 of 64 45

in the case of CCE vs. S.V. Jiwani, 2014 (35)

STR 351 affirmed by the Bombay High Court

which is squarely applicable. It is submitted

that in the said case it was held that the

composition rules and Rule 2A of the Valuation

Rules are merely options provided to the

service provider to discharge of service tax

liability vis­à­vis options available in Section 67

of the Finance Act, 1994.

6.3 It is further submitted that Rule 2A of the

Valuation Rules begins with the words ‘subject

to provisions of Section 67’. It is submitted

that this would mean that Rule 2A would apply

only when value of the service involved in

execution of the works contract could not be

determined under Section 67 of the Act.

Civil Appeal No.11330 of 2018 Page 45 of 64 46

6.4 It is further submitted by learned counsel

appearing on behalf of the respondent –

assessee that prior to 01.07.2012 the assessee

had three options:

(i) Follow the tenets of Section 67 and pay tax

on the full value and take input tax credit.

(ii) Rule 2A of the Valuation Rules: to pay

service tax at the full applicable rate on the

taxable value as determined in terms of Rule

2A of the Valuation Rules. No bar to avail

CENVAT Credit on inputs.

(iii) Composition Rules: To pay service tax @ 2.06% (increased to 4.12% w.e.f.

01.03.2008) on the gross amount charged for the Contract, in terms of the Composition Rules. Cenvat credit on inputs would be inadmissible.

Civil Appeal No.11330 of 2018 Page 46 of 64 47

6.5 After 01.07.2012 the assessee had three

options:

(i) Follow the tenets of Section 67 and pay tax on

the full value and take input tax credit.

(ii) Rule 2A(i): To determine the taxable value of

service after deducting the actual value of the

material involved.

(iii) Rule 2(ii): To pay service tax on specified

percentage of the total amount charged for

the works contract.

6.6 It is submitted therefore under the above

scheme the assessee had the option to pay the

service tax at full value on the entire amount

charged towards providing construction service

Civil Appeal No.11330 of 2018 Page 47 of 64 48

or works contract services under the provisions

of Section 67 of the Finance Act, 1994.

6.7 It is submitted that in this case the assessee

would be eligible to full CENVAT Credit and

input, input services and capital goods under

CENVAT Credit Rules, 2004 OR to pay service

tax under the head construction services by

opting for abatements specified in Notification

under 15/2004 – HT, as amended from time to

time or replaced with new notification; OR to

pay service tax under the head ‘works contract

services’ either in terms of Rule 2A of the

Valuation Rules or in terms of the Composition

Rules.

6.8 It is further submitted that the words used in

Rule 2A ‘subject to Section 67’ conveys the

Civil Appeal No.11330 of 2018 Page 48 of 64 49

clear idea that the valuation done under

Section 67 is supreme and the rules are

subject to the Act.

6.9 It is submitted that therefore the composition

rules are completely optional for the assessee

to exercise the assessee can opt for Section 67. 6.10 It is submitted that taking CENVAT duty on

inputs is barred only if one opts for

Composition Rules and not if tax is paid at

normal prevailing rates on full gross value of

contract under Section 67.

6.11 It is further prayed on behalf of the respondent

that in case the appeal be allowed on merits,

the Tribunal has not rendered any finding on

extended period of limitation and/or other

issues and therefore the matters may be

remanded back to the Tribunal.

Civil Appeal No.11330 of 2018 Page 49 of 64 50

7 Heard learned counsel for the respective parties at

length.

8 The short question which is posed for consideration

before this Court is as to 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?

8.1 At the outset, it is required to be noted that as

such services rendered by the respondent –

Civil Appeal No.11330 of 2018 Page 50 of 64 51

assessee can be said to be ‘works contract

service’ as per the Finance Act, 1994 w.e.f.

01.06.2007 as per Section 64(54) read with

Section 65(105)(zzzza).

8.2 As per the law laid down by this Court in the

case of Larsen and Toubro (supra) and

Gannon Dunkerly and Co. (supra) and the

subsequent decision in the case of Total

Environment Building Systems Pvt. Ltd.

(supra) with respect to the works contract an

assessee is liable to sales tax on the goods

element and the service tax on the availment of

service/value of service rendered.

8.3 In the case of Gannon Dunkerly and Co.

(supra) while dealing with measure of tax in

Civil Appeal No.11330 of 2018 Page 51 of 64 52

para 47 this Court had provided a list of

exclusions from the cost of valuation of goods

and as to what would constitute the service

elements. As per the law laid down by this

Court in the aforesaid decision the following

are to be excluded from the cost of valuation of

the goods.

“47. ….. The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover—

(a) Labour charges for execution of the works;

(b) amount paid to a sub­contractor for labour and services;

(c) charges for planning, designing and architect's fees;

(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;

(e) cost of consumables such as water, electricity, fuel, etc. used in the

Civil Appeal No.11330 of 2018 Page 52 of 64 53

execution of the works contract the property in which is not transferred in the course of execution of a works contract; and

(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;

(g) other similar expenses relatable to supply of labour and services;

(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.

The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.”

8.4 It is required to be noted that thereafter the above

service elements have found a statutory

recognition as part of Rule 2A of the Service Tax

(Determination of Value) Rules, 2006 w.e.f.

01.06.2007 which has been referred to

hereinabove. The applicability of Rule 2A has been

dealt with and considered by this Court in extenso

in the case of Larsen and Toubro (supra).

Civil Appeal No.11330 of 2018 Page 53 of 64 54

Therefore, as per the law laid down by this

Court in the case of ‘works contract service’ an

assessee is liable to pay the service tax on the

service element/value of the service rendered

and the sales tax/tax on the element of goods

transferred pursuant to the contract.

8.5 In light of the above now the next main

question posed for consideration before this

Court is required to be considered namely

whether despite Rule 2A of the Service Tax

(Determination of Value) Rules, 2006 and the

Composite Scheme still the assessee is entitled

to take the total contract value which includes

both goods and services in terms of Section 67

of the Act, 1994 and remit service tax on the

entire value as works contract service and the

Civil Appeal No.11330 of 2018 Page 54 of 64 55

assessee is also entitled to avail CENVAT

Credit?

8.6 Rule 2A applicable prior to 01.07.2012 is

reproduced hereinabove. It is to be noted that

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

Civil Appeal No.11330 of 2018 Page 55 of 64 56

involved in the execution of the works contract.

The position is made more clear post

01.07.2012. Post 01.07.2012 as per Rule 2A

value of service portion in the execution of a

works contract shall be determined taking into

consideration the value of service portion in the

execution of a works contract equivalent to the

gross amount charged for the works contract

less the value of property of goods transferred

in the execution of the said works contract.

Therefore, as such the things which were

already there as per the decision of this Court

in the case of Gannon Dunkerly and Co.

(supra) and Rule 2A earlier has been made

explicitly clear.

Civil Appeal No.11330 of 2018 Page 56 of 64 57

8.7 However, as per the Composition Scheme vide

notification 32/2007 – ST dated 22.04.2007 by

which works contract (Composition Scheme for

payment of Service Tax) Rules, 2007 came to

be introduced, as per Rule 3(1) and

notwithstanding anything contained in Section

67 of the Act and Rule 2A of the Rules, 2006,

the person liable to pay service tax in relation

to works contract service shall have the option

to discharge the service tax at the rate specified

in Section 67 of the Act, by paying an amount

equivalent to 2% of the gross amount charged

for the works contract. Explanation specifically

provides that gross amount charged for the

works contract shall not include the VAT or

sales tax, as the case may be paid on transfer

Civil Appeal No.11330 of 2018 Page 57 of 64 58

of property in goods involved in the execution

of the said works contract. At this stage, it is

required to be noted that post 01.07.2012 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.

8.8 It is the case on behalf of the respondent –

assessee that as in Rule 2A and even in the

Composition Scheme the word used are subject

to the provisions of Section 67 the assessee

had an option to pay the service tax on the

entire contract value i.e. on gross amount

charged by the service provider and that Rule

2A is not compulsory and the Composition

Civil Appeal No.11330 of 2018 Page 58 of 64 59

Scheme is optional. However, the aforesaid has

no substance. If the submission on behalf of

the assessee is accepted in that case Rule 2A

and the Composition Scheme shall become

otiose.

8.9 With respect to the ‘works contract service’

and/or the Composition Works Contract the

valuation has to be made as per Rule 2A of the

Valuation Rules, 2006. Even as per the

Composition Scheme vide Notification 32/2007

dated 22.04.2007 an assessee has an option to

discharge the 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

equivalent to 2% of the gross amount charged

Civil Appeal No.11330 of 2018 Page 59 of 64 60

for the works contract. It is to be noted that

Rule 3(1) provides notwithstanding anything

contained in Section 67 of the Act and Rule 2A

of the Service (Determination of Value) Rules,

2006. Therefore, 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.

Civil Appeal No.11330 of 2018 Page 60 of 64 61

9 In view of the above the impugned judgment

and order passed by the CESTAT taking the

contrary view is unsustainable by which it is

held that the 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’ and the assessee is

also entitled to avail the CENVAT Credit on the

same.

9.1 However, at the same time the service tax

needs to be paid in terms of Rule 2A of Service

Tax (Determination of Value) Rules, 2006 and

since the assessee has not opted for

composition scheme, the matter is to be

remitted back for re­computation of the

demands in terms of Rule 2A. As the issue

Civil Appeal No.11330 of 2018 Page 61 of 64 62

with respect to the extended period of

limitation has also not been decided by

CESTAT the matter is to be remanded to the

CESTAT to decide the issue of limitation. 10 In view of the above and for the reason stated

above, the present appeal succeeds. The

impugned judgment and order passed by the

CESTAT is hereby quashed and set aside and it

is held 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 and, in the

process, also entitled to avail the CENVAT Credit

on the entire amount. It is observed and held

that the assessee has to pay the service tax on

the value of services as per Rule 2A of the

(Determination of Value) Rules, 2006 and

Civil Appeal No.11330 of 2018 Page 62 of 64 63

thereafter to avail the CENVAT Credit

accordingly. However, it is also observed and

held that demand for the period January 2007 to

May 2007 is unsustainable.

10.1 In that view of the matter now the service tax

needs to be computed in terms of Rule 2A of

the (Determination of Value) Rules, 2006 and

as the assessee has not opted for the

composition scheme, the matter is remitted

back to the CESTAT for re­computation of the

demands in terms of Rule 2A.

As observed hereinabove the Tribunal has

also not decided the issue of extended period of

limitation. Therefore, while quashing and

setting aside the impugned judgment and order

passed by the CESTAT, the matter is remitted

back to the CESTAT limited only to decide the

Civil Appeal No.11330 of 2018 Page 63 of 64 64

issue of limitation and re­computation of the

demands in terms of Rule 2A. The aforesaid

exercise be completed by the CESTAT on

remand within a period of three months from

the date of the present order.

Present appeal is accordingly allowed.

However, in the facts and circumstances of the

case there shall be no order as to costs.

……………………………J. (M. R. SHAH)

……………………………J. (KRISHNA MURARI) New Delhi, May 2, 2023

Civil Appeal No.11330 of 2018 Page 64 of 64