'If you cannot convince them, confuse them'. The CBEC seems to be working with this very motto when it comes to works contract service. More than half a dozen big and small clarifications and amendments have been issued since the introduction of this new taxable service in June 2007.
The most recent amendment was less than a week ago. Works contract is nothing but composite contract involving both the supply of materials and rendering of services. In a works contract, there is a transfer of materials from the contractor to the contractee. In order to specifically provide for a mechanism to tax the service component of a works contract, a new category of service was introduced with effect from 01.06.2007.
In 2008, the ministry vide its circular clarified that prior to 1-6-07, service provider classified the taxable service under erection, commissioning or installation service [section 65(105) (zzd)], commercial or industrial construction service [section 65(105)(zzq)] or construction of complex service [section 65(105)(zzzh)], as the case may be, and paid service tax accordingly. In case of ongoing contracts for the service, a part of service tax liability corresponding to payment received was discharged and the balance amount of service tax is required to be paid on or after 1-6-07, depending upon receipt of payment. It is evident that classification of a taxable service is determined based on the nature of service provided whereas liability to pay service tax is related to receipt of consideration.
Thus a service provider who paid service tax prior to 1-6-07 for the taxable service, namely, erection, commissioning or installation service, commercial or industrial construction service or construction of complex service, as the case may be, is not entitled to change the classification of the single composite service for the purpose of payment of service tax on or after 1-6-07 and hence, is not entitled to avail the composition scheme.
On 7.6.2010 this circular was challenged in AP high court in the matter of M/s Nagarjuna Construction Company Limited vs. Government of India STO 2010 AP 299, wherein it was held that on a true and fair construction of Rule 3(3) of the Composite Scheme Rules, it is clear that where in respect of a works contract service tax has been paid, no option to pay service tax under the composition scheme could be exercised.
The court further held that there is no ambiguity in this provision. The entitlement to avail the benefits of the composition scheme is only after an option is exercised under Rule 3(3) of the 2007 Rules and this provision specifically enjoins a disqualification for exercise of such option where service tax had been paid in respect of a works contract.
To put it succinctly, where service tax has been paid in respect of a works contract, the eligibility to exercise an option to avail the benefits of the composition scheme under the 2007 Rules is excluded. The matter was once again examined by the CBEC. Recently, the ministry vide Circular 128/10/2010-S.T. dated 24.08.2010 on works contract on as to whether benefit of composition scheme is available prior to 01.06.2007 for ongoing work contract projects or otherwise.
As regards applicability of composition scheme, the material fact would be whether such a contract satisfies rule 3 (3) of the works contract (composition scheme for payment of service tax) Rules, 2007. This provision casts an obligation for exercising an option to choose the scheme prior to payment of service tax in respect of a particular works contract. Once such an option is made, it is applicable for the entire contract and cannot be altered. Therefore, in case a contract where the provision of service commenced prior to 01.06.2007 and any payment of Service Tax was made under the respective taxable service before 01.06.2007, the said condition under rule 3(3) was not satisfied and thus no portion of that contract would be eligible for composition scheme.
On the other hand, even if the provision of service commenced before 01.06.2007, but no payment of service tax was made till the taxpayer opted for the composition scheme after its coming into effect from 01.06.2007, such contracts would be eligible for opting of the composition scheme. This ongoing process of issuing clarification has created a fresh doubt and confusion, as to whether, the returns filed prior to issue of the recent circular will be subjected to reassessment and re-scrutinised as divergent practices have been prevailing throughout the country, compelling ministry to intervene time and again.