Facts:
The appellant was engaged in executing various composite construction contracts and paid service tax taking abatement under Notification No. 1/2006-ST dated 1-3-2006 prior to 1-6-2007 under erection, commissioning or installation services, commercial or industrial construction services and construction of residential complex service. Works contract service was introduced with effect from 1-6-2007 and consequently, a composition scheme was introduced whereby service tax was payable @ 2% on the gross amount charged for works contract. The appellant classified the ongoing contracts as on 01.06.2007 under works contract service.
Circular No. 98/1/2008 dated 4-1-2008 clarified that classification of services was to be determined as per the nature of services and it cannot be vivisected into two different taxable services on the criteria of time of receipt of consideration. Based on this circular, a SCN notice was issued challenging such change in the classification and payment under the Composition Scheme.
The appellant contested the said Circular on the ground of being contrary to Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and section 65(105) (zzzza) of the Finance Act, 1994 and that this would result in keeping the similar contracts on different footing and that it could not override the statutory provisions.
According to revenue, the Circular was explanatory in nature which merely explained Rule 3(3) of the said Rules and that the appellant had challenged the Circular and not the provisions of Rule 3(3). Therefore, as per the provisions of Rule 3(3), the appellant cannot opt for the Composition Scheme. The revenue also contended that reclassification was not permissible and in view of Rule 3(3), the appellant did not enjoy the benefit of Composition Scheme.
Held:
• Circular No.98/1/2008-ST dated 4-1-2008 only explained the provisions of Rule 3(3) and it was not contrary to the Act or the Rules.
• Since the appellant had not challenged constitutional validity of Rule 3(3), the Honourable Supreme Court did not comment on the same.
• Even if the Circular were to be set aside, Rule 3(3) was operational and as per Rule 3(3), the assessees had the option to pay service tax under Composition Scheme before payment of service tax in respect of the works contract and the option so exercised was applicable to the entire works contract. Since the appellant had already paid service tax prior to 1-6-2007, Composition Scheme was not available to the appellant.
• Thus, the Supreme Court has upheld the decision of Andhra Pradesh High Court (2010 (19) STR 321 (AP).
