Summary
A works-contract assessee could not elect to pay service tax on the entire goods-and-services value under section 67 and thereby claim CENVAT credit on the whole amount. Valuation had to follow Rule 2A unless the applicable composition option was exercised. The Court rejected the pre-June 2007 demand and remitted the later demands for recomputation and determination of limitation, rather than restoring every demand outright.
Issues
- Whether section 67 permitted a third valuation method using the full contract value and corresponding input credit.
- Consequences for the pre-June 2007 period and unresolved limitation and computation questions.
Provisions considered
- Section 67; Section 65(105)(zzzza), Finance Act, 1994Section 67 did not authorise treating the goods portion of a composite works contract as taxable services to support the claimed credit method. (¶¶ 4.7, 8-10)
- Rule 2A, Service Tax (Determination of Value) Rules, 2006Required works-contract service valuation under this rule where the assessee had not opted for composition. (¶¶ 4.4, 8.4-10.1)
- Rule 3(1), Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007The optional composition method did not make Rule 2A optional in favour of the assessee’s proposed full-value method. (¶¶ 4.5, 8.7-8.9)
Held
- For the composite works contracts in question, sales tax or VAT attached to the goods element and service tax to the service element. Rule 2A supplied the valuation mechanism separating those components. The services rendered fell within the works-contract regime from 1 June 2007. (¶ 8.1-8.6)
- The words subject to section 67 did not permit ignoring Rule 2A and paying service tax on the full contract value, including goods, while taking the claimed CENVAT credit. The available composition option was an alternative within the statutory scheme, not a basis for inventing that third method. Credit had to follow the correct service valuation and applicable rules. (¶ 8.7-10)
- The demand for January to May 2007 was unsustainable. For the subsequent period, because composition had not been opted for, the demands required recomputation under Rule 2A. The Tribunal had also not decided the extended-limitation issue, which remained open on remand. (¶¶ 9.1, 10, 10.1)
- The Tribunal order was set aside and the matter remitted only for limitation and recomputation, to be completed within three months. The Court did not affirm all quantified demands, interest and penalties without that further exercise. (¶ 10.1)
Result
Revenue’s appeal allowed without costs; CESTAT order set aside. January–May 2007 demand rejected; remand limited to limitation and recomputation under Rule 2A within three months.