SEPTEMBER 28, 2010
By Pradeep Jain, Preeti Parihar, Rajani Thanvi, CAs
TRYING to put all its ducks in one row, the CBEC has issued Circular no. 128/10/2010-ST dt. 24.8.2010. The Board may say that by issuing this circular, it has settled the ambiguities pertaining to ongoing contracts. But reality is far distant. The tycoons of reality sector are not going to leave their ‘option' so easily. This article is an attempt to look into the path of the ongoing contracts as on 1.6.2007.
BACKGROUND
Service tax on works contracts services are always in a misty in the history of service tax. Initially service tax was levied on the works contracts w.e.f. 1 st June, 2007 by inserting sub clause no. (zzzza) of sub section 105 of section 65 in which it is provided that tax is leviable on services provided or to be provided in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. The service tax under works contract was to be levied if the material part in the contract is chargeable to VAT under the respective State's Sales Tax Act. The service tax was to be paid at the rate specified in section 66 of the Finance Act, 1994. Alternatively, the assessees were given an option to go for Composition scheme of works contract where the service tax @ 2% (excluding education cess and secondary and higher education cess) was payable on the composite value of works contract. The credit on inputs was not allowed. However, the credit of input services and capital goods could be availed in composition scheme. For implementing the composition scheme, Works contract (Composition Scheme for Payment of Service Tax) Rules, 2007 (hereinafter referred as the rules) were notified vide notification no. 32/2007-ST dated 22.05.2007. Subsequently this rate was enhanced to 4% vide notification no. 7/2008 dated 1 st March, 2008.
THE ROOT OF LITIGATION
Since the composition scheme under works contract was too attractive with a nominal effective rate of 2.06% alongwith benefit of Cenvat Credit on input services and capital goods, most of the reality sector wished to shift over to works contract. The assessees even wanted to change the classification of their ongoing contracts (registered under the commercial or industrial construction or construction of complex service). So where was the obstacle? The rule 3 of the composition scheme rules was the cup of litigation. Rule 3 of these rules reads as follows:-
“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.”
As such, the rule 3 says that the in order to opt for composition scheme, the assessee was to give intimation before paying the service tax and the option so exercised was applicable for the whole contract and could not be withdrawn in mid way. The use of the clause that the option will be exercised prior to payment of service tax on such works contract was the root of the litigation. The department and the assessees, as always, were of the divergent views regarding the ongoing contracts. The departmental officials said that the option is to be exercised at the beginning of contract before paying the service tax. But the assessees were of the view that since there was no option available at the beginning of the contract, how come the option be exercised. As such, the beginning of the contract will be the date of implementation of the new levy, i.e. 1.6.2007. As such, the assessees carrying on contracts under commercial construction or construction of complex service will be allowed to switch over and opt for the composition scheme. However, this attempt of the assessees was hold down by the Board by issuing circular no. Circular No.98/1/2008-ST dt 4.1.2008.
CIRCULAR NO.98/1/2008-ST DT 4.1.2008
In this circular clarification was given in respect of the contracts already running as on 1.6.2007 under the category of Erection Commissioning or Commercial construction or construction of complex service. It was clarified that a single composite contract cannot be vivisected into two different taxable services depending upon time/receipt of consideration - prior to 1.6.2007 and afterwards. Based upon this, it was thus clarified that the service providers are not entitled to change the classification of the single composite service for the purpose of payment of service tax on or after 1.6.2007. Thus, simply held, they are not entitled to avail the benefit under the composition scheme.
AP HIGH COURT JUDGMENT
Recently, the validity of above circular is being affirmed by hon'ble Andhra Pradesh High Court in the case of M/s Nagarjuna Construction Company Limited vs. Government of India (2010-TIOL-403-HC-AP-ST) in which it is held as follows:-
“Service Tax – Works Contract – Benefit of composition scheme not available prior to 01.06.2007: a service provider who paid service tax prior to 01.06.2007 for the taxable services such as erection, commission or installing services, commercial or industrial construction services or construction of complex services, as the case may be, is not entitled to avail the composition scheme under the 2007 Rules : ANDHRA PRADESH HIGH COURT;”
Thus, the above decision restricts the benefit of composition scheme to the service providers who had already paid service tax prior to 1.6.2007 under some other head like commercial construction, erection commissioning or construction of complex service. In other words, the switchover facility from these services to works contract was not extended by the hon'ble High Court.
RECENT BOARD CIRCULAR
The summations of aforementioned circular no. 98/1/2008 and decision of AP High Court has been squarely affirmed by the recent Circular no. 128/10/2010-ST dated 24 th August, 2010 issued by the Board. The questions examined in this circular were –
While prior to the said date services like Construction; Erection, commissioning or installation; Repair services were classifiable under respective taxable services even if they were in the nature of works contract, whether the classification of these activities would undergo a change?
Whether in such cases of continuing contracts, the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 under Notification No. 32/2007-ST dated 22/05/2007 would be applicable?
While examining these questions it is clarified that rule 3 (3) says that the option under this rule is to be exercised before payment of service tax in respect of a particular works contract. As such, in the case of ongoing contracts, where the service tax has already been paid prior to 1.6.2007; this condition is not satisfied and as such no portion of that contract would be eligible for composition scheme. On the other hand, if no payment of service tax has been made till 1.6.2007, the condition of rule 3(3) is satisfied and as such, the composition scheme can be availed by the service provider.
AUTHORS' SIGHT
Though, right from the beginning, whether it is the circular no. 98/1/2008 or it is decision in the case of Nagarjun Construction or circular no. 128/10/2010, there has been constant views in case of ongoing projects. The Board has constantly clarified that in case of ongoing projects as on 1.6.2007, the option of composition scheme is not available if any service tax pertaining to it has been paid prior to this date. However, while issuing the clarification, perhaps the Board has forgot the no. of decisions given by the various appellate authorities wherein it is held that no service tax is leviable on the works contract prior to 1.6.2007. In other words, works contract is not taxable prior to this date. So, if the service providers were paying the service tax under some other category but on that assignment, the works contract gives the most appropriate classification; then shall we assume, that this assignment was not taxable earlier? Yes – says most of the judicial pronouncements.
Aligning the above, where any new levy is brought into effect, as on the date it is applicable, the service providers are expected to be prompt in taking the registration and paying the service tax, irrespective of the fact that the contract was ongoing or a part of the service has already been provided. For eg., if there is a contract for a continuous providing of service for one year. Suppose six months have already elapsed and then these services are made taxable. No doubt will be raised at all by the Revenue that the consideration received and service provided for the remaining six months will be chargeable to service tax irrespective of the fact that part of the service is already been provided. Then, why this generally followed principle is not made applicable to works contract? Perhaps, it's because the works contract is the most-watched levy of the reality sector and most of the service providers have opted for the same. Where there is more honey, there are more ants. Anyhow, while issuing the circulars the Board has not taken into account a no. of decisions holding the view that the service tax was not leviable prior to 1.6.2007. In other words, where the services fall into the category of works contract, service tax was not applicable on such contracts before this date. As such, the ongoing contracts also attract the service tax as from 1.6.2007. So, the benefit of composition scheme should be extended to them. If we take the view of critics that the ongoing contracts should be taxed under the old category inspite of the fact that they are in nature of works contract; then one should think why the government introduced works contract. Undisputedly the intention of government was to simplify the things for reality sector. Further, if the intention of government was to keep the ongoing contracts intact the language of rule 3(3) would have been drafted in some other way. They should not have correlated the option to the receipt of consideration.
Moving further in this direction, remember the Credit Card services. Prior to Finance Act, 2006, these services were included in the definition of Banking and other financial services. The credit of entire service tax charged was allowed on these services irrespective of the fact that these services are used both in providing the exempted as well as taxable services. This was by virtue of rule 6(5) of the Cenvat Credit Rules, 2004 wherein banking and financial services were specifically included. Later on the credit card services were removed from the definition of banking services and a separate classification was given to them under section 65 (33a) of the Finance Act, 1994 which includes “credit card, debit card, charge card or other payment card service”. Prior to year 2006, 100% credit was allowed on these services which were brought to the 20% credit bracket as soon as the new classification came into effect. So, the moral of this story is that whenever a new levy is brought, if it is depriving the assessees of some benefit, it will be accepted by department with wide arms (just like debit card story). Whereas, if the new levy is given some benefit to the assessees, department will try its level best to hold down the same (just like the composition scheme). Hence proved!
BEFORE BIDDING BYE
While inserting the composition scheme, the intention of the government was to make the things easier for the reality sector assessees. But the coin has fallen on the other side. The continuous clarifications against the spirit of the works contract composition scheme which have been issued in respect of the ongoing contracts have reduced the faith in the service providers.
They are forced to think again on their decision of switching over to the works contract scheme. Whatever be the outcome of this game of ongoing contracts, the sufferers will be the service providers only, no one else…
