Taxation

Service Tax Not Leviable on Goods Component of Composite Works Contract in Case VAT Already Paid

In the case of Touchstone Infrastructure & Solutions Private Ltd. Vs. Commissioner of Central Taxes and Central Excise (CESTAT Chennai), it was decided that if VAT was already paid on the goods element of the composite works contract, then no service tax may be charged on that element again under Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006.

Facts of the case

On a works contract basis, the assessee’s company offered finishing services to numerous parties. This work included establishing an artificial ceiling, flooring, glazing, repairing partitions, and doing electrical work, among other things.

It charged a single fee for the whole contract rather than billing individually for the products and services part. It was required to pay service tax on all these services under the heading of works contract service, as well as to pay VAT on the goods element of these contracts.

According to the requirements of the Tamil Nadu Value Added Tax Act and Rules, the assessee paid VAT on the goods component equal to 70% of the total contract value of the goods and also paid service tax equal to 30% of the whole contract value.

The appellant paid VAT in accordance with Section 5 of the Tamil Nadu VAT Act, as well as Rule 8 (5) (d) of the Tamil Nadu VAT Rules, which state that in the event of a composite works contract, 30% of the total amount charged is considered the service component, and VAT is payable on the remaining 70%. The appellant discharged VAT in accordance with the law and paid service tax on 30% of the entire sum, which was accounted for as the service component.

The Revenue’s stance was that service tax on a works contract is leviable on the consideration received for the service component of the works contract if any such consideration is viewable in the contract/invoice separately; or else, service tax must be paid under the “Works Contract (Composition Scheme for Payment of Service Tax) Rules of 2007” until 30.06.2012. Hence, the Revenue claimed that because the assessee did not separately invoice for the service and goods elements of the works contract, it was required to adopt the composition scheme and pay service tax accordingly for the period up to 30.06.2012.

After the date of 01.07.2012, the value of the service element of a composite works contract must be determined in accordance with Rule 2A (ii) of the Service Tax (Determination of Value) Rules, 2006, as modified. As a result, there are two time periods in question: up to and after June 30, 2012.

Revenue argued that because the assessee could not determine the true worth of the goods supplied, it should have paid service tax under the composition system. After asking for details from the assessee and reviewing the records, a show-cause notice dated 21.12.2016 was given to the assessee, demanding rupees 1,51,82,658 in differential service tax. In the said show-cause notice, it was also recommended to charge interest under Section 75 and impose the penalties under Sections 76, 77, and 78 of the Finance Act of 1994.

On the flip side, the appellant’s contention is that the composition scheme was provided to the appellant as a choice and cannot be forced upon it. In the event of works contracts, Revenue cannot pick any option for the appellant, who is free to pay either according to the Composition Scheme or otherwise. It has given service tax on the service component of the works contract as well as VAT on the goods component of the contract. To divide the amount charged for a ‘composite works contract’ into products and services, it must adhere to the rule outlined in the Tamil Nadu VAT Act^[1], which states that 30% of the value can only be collected as a service component. Once the remaining 70% of the VAT has been paid, service tax cannot be levied on that amount for the same amount of time.

Decision taken

It was determined that because VAT had been paid on the goods element of the composite works contract, hence, no service tax may be charged on that element again by virtue of Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006.

The demand for the period after July 1, 2012, had to be set aside by Revenue as well. Because the demand for service tax did not survive, neither did the demand for interest under Section 75 nor the enforcement of penalties under Sections 76, 77, and 78.

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