[Order per : T.K. Jayaraman, Member (T)]. - This appeal has been filed against Order-in-Original No. 47/2007, dated 6-2-2008 passed by the Commissioner of Central Excise, Customs and Service Tax, Cochin.
2. The appellants are engaged in (a) Commercial or Industrial Construction Service and (b) Construction of Complex Service (Residential). They were registered with the Service Tax department. They paid Service Tax after availing abatement of 67% of their gross receipts in terms of Notification No. 15/2004-S.T., dated 10-9-2004 in case of Commercial Construction Services and Notification No. 18/2005-S.T., dated 7-6-2005 and Notification No. 1/2006-S.T., dated 1-3-2006 in case of construction of residential complexes for the period from 1-10-2005 to 31-3-2006. Show cause notice dated 17-4-2007 was issued to the appellant on the ground that the cost of materials supplied was excluded for purpose of payment of Service Tax and the relevant Notifications viz., No. 15/2004-S.T., dated 10-9-2004 and No. 18/2005-S.T., dated 7-6-2005 do not provide; such exclusions. The Original Authority passed the impugned order confirming the proposals in the show cause notice. Penalties were imposed under Sections 76 and 77 of the Finance Act, 1994. Interest under demanded under Section 75 of the Finance Act, 1994. The appellants are highly aggrieved over the impugned order. The following grounds were urged.
(i) The appellant had wrongly paid Service Tax under the category of ‘construction of residential complex’ and ‘commercial or industrial construction service’. The appellant is a works contractor and is liable to Sales Tax under the Kerala General Sales Tax Act, 1957 or Kerala Value Added Tax Act under ‘works contract’ read with relevant entries in the 7th Schedule to the Indian Constitution. The appellant is assessed to Sales Tax/VAT as deemed sale/works contract as per Article 366 (29A) of the Constitution of India. It was submitted that works contract has been made liable for Service Tax only with effect from 1-6-2007 onwards vide Section 65(105)(zzzza). As the appellant has wrongly paid the Service Tax for the period prior to 1-6-2007, he should be given the refund of money paid by them and collected without authority of law for the period prior to 1-6-2007.
(ii) The Tribunal in the case of Diebold Systems (P) Ltd. v. CST- (Tri.-Chennai) held that a works contract involving supply of goods and materials and also erection, installation and commissioning services would be liable for Service Tax under new service category of ‘Works Contract’ w.e.f. 1-6-2007 and not ‘erection, installation and commissioning’ services as contended by the revenue. The ratio of the above decision would squarely apply to the facts of the appellant’s case.
(iii) The appellants pay Sales Tax. The contract which they inter alia executed are composite and indivisible contract and is a works contract as understood under the Sales Tax law read with Article 366 (29A) of the Constitution. The indivisible contract which the appellant executed cannot be vivisected for the purpose of levy of service tax as held by the Tribunal in the Daelim Industrial Co. Ltd. v. CCE - (T)= (Tribunal) maintained by the Supreme Court in (S.C.) (S.C.).
(iv) The Apex Court in the case of Bharat Sanchar Nigam v. UOI - (S.C.) held that a transaction cannot be simultaneously liable to Sales Tax and Service Tax.
(v) The impugned order is contrary to the decision of the Tribunal in the following cases.
♦ Larsen & Toubro Ltd. v. CCE - (Tribunal) = (T)
♦ Schenck Jensen & Nicholson Ltd. v. CCE - (T).
(vi) Further, the reliance was placed on the following decisions for urging the point that service element involved in the execution of works contract was made liable for Service Tax only w.e.f. 1-6-2007. Prior to the said date, there cannot be any question of levying Service Tax.
♦ Wallace Flour Mills Co. Ltd. v. CCE - (S.C.)
♦ CCE v. Vazir Sultan Tobacco Co. Ltd. - (S.C.)
♦ Ponds India Ltd. v. CCE - (S.C.).
(vii) When the levy of Service Tax was not applicable prior to 1-6-2007, the question of valuation does not arise.
(viii) Reliance was placed on the decision of the Madras High Court in the Larsen and Toubro Ltd. v. UOI - (Mad.) wherein it was held that on a reading of explanation to Sl. No. 7 of Notification No. 1/2006-S.T. equivalent to present Notification in this appeal, the Revenue was not correct in insisting on adding the value of goods and materials supplied by the customer. As the High Court has interpreted the explanation below the Notification in the above manner, a contrary order is untenable.
(ix) The addition of value of the materials supplied by the customer has no legal basis and, contrary to the valuation mechanism provided in Section 67 of the Act.
(x) Referring to the explanation under Notification No. 15/2004-S.T., dated 1-3-2005, it was submitted that the said explanation does not call for inclusion of value of materials supplied free of charge by the customer, who is not the provider of construction service but the recipient of construction service. The Notification only requires addition of all goods or materials used, provided or supplied by the service provider and therefore, elastic interpretation to suit Revenue considerations is uncalled for in law. The word used should be read alongside and with the words “supplied” or “provided” which precede the said word used. The rule of nosscitur a socis and ejusdem generis cannot be ignored while interpreting words occurring next to each other and the preceding word would give the same colour to the following word. Therefore, ‘supplied’ or ‘provided’ or ‘used’ would imply that the material supplied by or provided by or having been used by should be that of the construction service provider and not the recipient.
(xi) The explanation in the Notification cannot override the statutory mandate of Section 67, as Notification is delegation legislation made by the Executive which cannot override the mandate of parliamentary law.
(xii) The respondent has converted the abatement/exemption Notifications into a charging mechanism which is legally impermissible.
(xiii) Several case laws were cited to show that materials supplied free of cost cannot be considered for computing profit under Income Tax law and Sales Tax law.
(xiv) The finding of the respondent that in a works contract, even if the main contractor has paid tax that does not absolve the sub contractor from tax is a finding without basis and is not in consonance with the interpretation upheld by the Andhra Pradesh High Court in the case of Larsen & Turbo Ltd. v. State of Andhra Pradesh - 2006 (148) STC 616 (AP). The CBEC has been regularly in the context of other taxable services had been clarifying that there cannot be any ‘double taxation’ in cases where the services are rendered by a person through another person to the ultimate consumer, as long as the main person who has the contact with the customer is paying the service tax on the gross amount. Reliance was, placed on the following Circulars.
(i) TRU Letter F. No. 341/18/2004-TRU (Pt.), dated 17-12-2004
(ii) Circular No. 23/3/97-S.T., dated 13-10-1997
(iii) Master Circular No. 96/7/2007-S.T., dated 23-8-2007.
(xv) The decision of the Commissioner is contrary to Hon’ble Apex Court’s decision in the case of Bharat Sanchar Nigam Ltd. v. UOI - (S.C.) wherein it was held in Paras 81 and 85 that State Legislature though have the power to levy sales tax but this power does not allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of goods.
(xvi) In the light of the earlier submissions, the levy of Service Tax on services involved in the execution of works contract was made liable for Service Tax only with effect from 1-6-2007, therefore, they were not liable for payment of Service Tax prior to 1-6-2007. However, the Revenue has collected the Service Tax without the authority of law and the amount collected by the Government cannot be retained in terms of Constitutional mandate in Article 265. The following citations were relied on :
♦ Shiv Shanker Dal Mills v. State of Haryana - AIR 1980 SC 1937
♦ Aluminium Corporation of India Ltd. v. UOI & Ors. - 1978 (2) E.L.T. J452
♦ Sandvik Asia Ltd. v. CIT & Ors. - (S.C.) = (S.C.).
(xvii) In view of the above submissions, the penalty is not sustainable. No reasons have been adduced for imposing penalties under Sections 76 and 77. The leaned respondent has ignored the provisions of Section 80 of the Act, as per which no penalties under Sections 76 and 77 shall be imposed on the assessee for any failure, if the assessee proves that there was reasonable and sufficient cause for the said failure. In the present case, the assessee was under bona fide belief that sub-contractors are not required to pay service tax when the main contractor has paid the Service Tax.
3. The learned Joint CDR stated that in terms of the explanation to the Notification, the cost of the materials should be included even if they had been supplied by the service receivers. Further, she reiterated the impugned order.
4. We have gone through the records of the case carefully. It is seen that the appellants had registered under the category of ‘construction of residential complex’ and ‘commercial or industrial construction service.’ The point at issue in the show cause notice is with regard to the availment of Notification No. 15/2004 and 18/2005, in terms of which an abatement of 67% on taxable value was claimed and further, the inclusion of the value of the materials supplied by the service recipient. The Revenue has interpreted the explanation to the Notification to mean that the value of the materials supplied should be included. The said explanation is reproduced below.
Explanation : For the purposes of this Notification, the “gross amount charged” shall include the value of goods and materials supplied or provided or used by the provider of the construction service for providing such service.
The appellant has elaborately argued that the words ‘supplied’ or ‘provided’ or ‘used’ would only indicate the materials supplied by the construction service provider, who is the appellant and it would definitely not mean the value of the materials supplied by the recipient of the service. In support of the above contention, the decision of the Hon’ble High Court of Madras in the case of Larsen and Toubro Ltd. v. UOI (supra) was relied on. In the Larsen and Toubro Ltd. v. UOI (supra) case cited supra, the following observations have been made.
“2. It is contended by Mr. Arvind P. Datar, Senior Counsel that by taking queue from the explanation now added in Sl. No. 7 of the Notification No. 1/2006-S.T., dated 1-3-2006, the respondents are insisting that the value of the goods supplied and provided by the client of the assessee would also be included. On a reading of the explanation, this court is prima facie of the view that such an insistence is not in accordance with the explanation. To that extent there will be an interim order as prayed for. Notice.”
Even though it is only a stay order, the Hon’ble High Court has interpreted the explanation to mean that the value of the goods supplied and provided by the client cannot be included for calculating the Service Tax. Further, insisting on including the cost of materials supplied by the service receiver will be contrary to Section 67 of the Finance Act, according to which, the value of the taxable services shall be the gross amount charged by the service provider for such service. The cost of materials supplied by the service receiver would not be covered in terms of Section 67. Moreover the said Section provides for exclusion of cost of materials in respect of certain services. Another important legal contention taken by the appellant is that they had been registered under ‘Works Contract’ provisions for purposes of sales tax. They have produced the certification of registration. It is also stated that the works contract came into service tax net only with effect from 1-6-2007. The definition of works contract introduced from 1-6-2007 is as follows.
Works Contract Service
| Levied from | : | 1-6-2007 |
| Taxable Service | : | Services involved in execution of works contract |
| Assessee | : | Any person providing services in relation to works contract |
| Rate of tax | : | 12.36% (including Education Cess and Secondary Higher Education Cess) |
Definitions as per Section 65 of Finance Act, 1994 :
“Works contract” means a contract wherein,-
(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods; and
(ii) such contract is for the purposes of carrying out,
(a) erection, commissioning or installation of plant, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installation for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or
(c) construction of a new residential complex or a part thereof; or
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or
(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.’’
4.1 The period involved in the present case is from 1-10-2005 to 31-3-2006. Therefore, legally works contract cannot be liable to service tax prior to 1-6-2007. In such circumstances, no Service Tax is leviable in respect of the works contract carried out by the appellant during the relevant period. On this ground also the impugned order has no merits. Hence, the same is set aside and the appeal is allowed with consequential relief.
(Operative portion of this Order was pronounced in the open court on conclusion of hearing)