1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.11330 of 2018

CC and CE and ST, NOIDA   ...Appellant(s)

Versus

M/s Interarch Building Products 

Pvt. Ltd.                                      ...Respondent(s)

J U D G M E N T

M. R. Shah, J.

1.Feeling   aggrieved   and   dissatisfied   with   the

impugned   judgment   and   order   dated

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09.11.2017 passed by the Customs, Excise and

Service Tax Appellate Tribunal, Regional Bench

at   Allahabad   (hereinafter   referred   to   as   ‘the

Appellate   Tribunal’)   by   which   the   learned

Tribunal has allowed the said appeal preferred

by the respondent and has set aside the Order­

in­Original   dated   31.03.2017   disallowing   the

CENVAT Credit, the Revenue has preferred the

present appeal.

2.The   facts   leading   to   the   present   appeal   in

nutshell are as under:

2.1The respondent – assessee was engaged in the

business of manufacture, supply and erection

at the site of prefabricated/pre­engineered steel

buildings and parts thereof classifiable under

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the   relevant   Headings/sub­headings   of   the

First Schedule to the Central Excise Tariff Act,

1985.  The respondent was having centralized

registration for Service Tax with the Service Tax

Department for services under "Commercial or

Industrial   Construction   Service"   and

"Construction   Services"   right   from   the

commencement   of   production.     The   goods

manufactured were cleared from the place of

manufacture on payment of central excise duty

on   which   CENVAT   Credit   was   made   by   the

respondent.     The   unit   at   Greater   Noida

registered   as   a   Centralized   Service   Provider,

availed CENVAT Credit

(i) Excise duty paid by the units at the time of

removal

(ii) duty paid on capital goods 

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(iii) service tax paid on input services. 

They paid service tax on the gross amount of

contract for engineering, procurements supply,

construction, erection etc. under the category

"commercial   or   industrial   constructions

services" as referred under Section 65(105)(zzq)

of the Finance Act, 1994 (hereinafter referred to

as ‘the Act, 1994’). 

2.2Based   on   specific   intelligence   that   the

respondent had wrongly classified the services

rendered   by   them,   availed   inadmissible

CENVAT Credit and short paid the Service Tax

in cash.  Department was of the view that the

services rendered by the respondent amounted

to Works Contract which were chargeable to

tax under sub clause [zzzza] of Section 65(105]

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of the Finance Act, 1994.  Therefore, according

to the Revenue on classifiable service under

‘works contract service’ the respondents availed

CENVAT Credit on Central Excise duty paid on

inputs.

2.3Therefore,   the   Department   issued   a   Show

Cause   Notice   alleging  inter   alia  that   the

respondent   had   utilized   CENVAT   Credit   of

Rs.1,12,60,92,760/­   on   building   material

during June, 2007 to March, 2012 which was

inadmissible.     It   was   alleged   that   the   said

amount had been recovered as service tax from

the customer under Section 73(1) of the Act,

1994.  It appeared to the Revenue that services

should   have   been   classified   under   “Works

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Contract Service”.   It was mandatory for the

respondent to either follow Rule 2A of Service

Tax (Determination of Value) Rules, 2006 or

adopt Composition Scheme.  The said Rule 2A

and   Composition   Scheme   do   not   allow   the

availment   of   CENVAT   Credit   on   input.

Therefore, it appeared to the Revenue that the

CENVAT   Credit   of   Rs.112,60,92,760/­   as

availed   on   input   was   inadmissible   and

therefore, the said debit has resulted in short

payment of Service Tax.

2.4The   Show   Cause   Notice   was   related   to   the

period from June, 2007 to March, 2012.  The

respondent was called upon to show cause as

to why the services being provided by them be

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reclassified under "Works Contract Service" in

place   of   "Commercial   or   Industrial

Construction Services", inadmissible CENVAT

Credit   of   building   material   amounting   to

Rs.112,60,92,760/­ be disallowed in terms of

Rules 2 & 3(1) of CENVAT Credit Rules, 2004;

an amount of Rs.22,37,01,811/­ on account of

short   paid   Service   Tax   towards   the   liability

debited from the inadmissible Cenvat Credit on

construction   materials   be   recovered   under

Section 73(1) of the Act, 1994; an amount of

Rs.90,23,90,907/­   alleged   to   have   been

collected as cash in excess of the Service Tax

assessed/determined   by   passing   the

inadmissible CENVAT Credit to their recipients

of taxable service be demanded under Section

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73A of the Act, 1994 along with the appropriate

rate of interest under Sections 73B and 75 of

the Act and the penalties be imposed under

Sections 77 & 75 of the Act, 1994 read with

Rule 15(3) of CENVAT Credit Rules, 2004.  By

Order   dated   28.03.2004   the   Adjudicating

Authority who disallowed the CENVAT Credit

amounting   to   Rs.1,12,60,92,760/­   confirmed

the amounts of Rs.22,37,01,811/­ being short

paid, confirmed the claim in the show cause

notice.

2.5The   department   had   issued   further   Show

Cause Notices/statement of demands for the

subsequent period also.

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2.6By   order   dated   18.11.2015,   the   learned

Tribunal set aside the adjudication order and

remanded the matter back to the adjudicating

authority   with   the   direction   that   the   tax

liability   be   re­determined   after   hearing   the

respondent.

 On remand the adjudicating authority passed a 

fresh order dated 31.03.2017 and confirmed the 

demands.  The Commissioner held that the services 

rendered by the respondent was classifiable as 

‘Works Contract Service’ and rejected the availability

of CENVAT Credit amount and directed recovery 

under Section 73A of the Act, 1994.  The Order­in­

Original passed by the adjudicating authority was 

the subject matter of the present appeal before the 

Tribunal.

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2.7Before   the   Tribunal   the   Order­in­Original

passed   by   the   Adjudicating   Authority   was

challenged on the following grounds:

(i) “The Id. Commissioner disallowed Cenvat

credit availed on inputs in terms of Rule 2

& 3(1) of Cenvat Credit Rules, 2004 to the

extent of Rs.1,12,60,92,760/­ in case of

show cause notice dated 23.10.2012 and

the amounts in case other 3 notices as

specified above and that such order is not

sustainable in law. 

(ii)The provision of Rule 2A of Service Tax

(Determination   of   Value)   Rules,   2006,

start   with   expression   "subject   to   the

provisions of Section 67" which means the

provision prescribed under said Rule 2A,

is subject to the provisions of Section 67 of

the Finance Act, 1994. 

(iii)Opening   Para   of   Rule   3   of   Composition

Scheme   reads   as­   "Notwithstanding

anything contained in Section 67 of the

Act   and   Rule   2A   of   the   Service   Tax

(Determination of Value) Rules, 2006, the

person liable to pay Service Tax in relation

to Works Contract Service shall have the

option to discharge his Service Tax liability

on the Works Contract Service." It clearly

indicates that it is one of the options given

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to the Service Provider to discharge Service

Tax liability in respect of Works Contract

Service and it is not mandatory to adopt

the said Rule under Composition Scheme

for discharge of Service Tax liability. 

(iv)Section   67   of   the   Finance   Act,   1994

provides for arriving at assessable value

which states "subject to the provisions of

this   Chapter,   where   Service   Tax   is

chargeable   on   any   taxable   service   with

reference   to   its   value,   then   such   value

shall   in   a   case   where   the   provision   of

service is for a consideration in money, be

the gross amount charged by the service

provider for such service provided or to be

provide   by   him."   Therefore,   the   said

provision which is fundamental in nature

and is applicable to any taxable service. 

(v) The   demand   towards   Cenvat   credit

confirmed   in   case   of   show   cause   notice

dated   23.10.2012   is   substantially   time

barred. 

(vi)In the impugned order, Id. Commissioner

has   distinguished   the   judgment   of   this

Tribunal in the case of S.V. Jiwani (supra)

and   the   grounds   on   which   Id,

Commissioner distinguished the judgment

are invalid.”

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2.8By   the   impugned   judgment   and   order   the

learned   Tribunal   has   allowed   the   appeal

preferred by the respondent and has set aside

the   Order­in­Original   passed   by   the

adjudicating   authority   by   observing   that   the

composition   scheme   is   optional   and   the

provisions of Rule 2A of the said Rules are

subject to provisions of Section 67 of the Act,

1994.  The learned Tribunal has also observed

that   it   is   clear   from   the   provisions   of   sub­

section 4 of Section 67 of the Act, that where

value cannot be determined as provided under

sub­rule (1) to (3) of Section 67 of the Act, then

only the value is to be determined as provided

under the Rules.  Therefore, the Tribunal held

that there is no question on applicability of

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Rule 2A nor there was any question of forcibly

applying   the   option   of   Composition   Scheme.

The learned Tribunal held that in both these

circumstances, the respondent was entitled to

CENVAT Credit on inputs.

2.9Feeling   aggrieved   and   dissatisfied   with   the

impugned judgment and order passed by the

learned   Tribunal   setting   aside   the   Order­in­

Original, the Revenue has preferred the present

appeal.

3.Shri   N.   Venkataraman,   learned   ASG   has

appeared on behalf of the Revenue and Shri V.

Raghuraman,   learned   Senior   Counsel   has

appeared   on   behalf   of   the   respondent   –

assessee.

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4.Shri N. Venkataraman, learned ASG appearing

on   behalf   of   the   Revenue   has   made   the

following   submissions   challenging   the

correctness and legality of the impugned order

passed by the CESTAT:

(i)That the period under dispute is January,

2007 to March, 2014.  He has submitted

that   the   definition   of   ‘works   contract

service’ was brought into the Finance Act,

1994 w.e.f. 01.06.2007.  Therefore, he has

fairly conceded the demand for the period

January, 2007 to 31.05.2007 shall not be

maintainable in light of the decision of

this Court in the case of  Commissioner

of   Central   Excise   vs.   Larsen   and

Toubro, (2016) 1 SCC 170   as well as

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Total   Environment   Building   Systems

Pvt. Ltd. vs. Deputy Commissioner of

Commercial Taxes, (2022) SCC Online

SC 953. 

4.1It is submitted that therefore the demand for

the period January, 2007 to May, 2007 is not

sustainable and  therefore  to  that  extent  the

demand should go.

4.2  It is submitted that however, for the period

commencing   01.06.2007   to   31.03.2014   the

demands are sustainable and the Orders­in­

Original need to be restored.

4.3Shri N. Venkataraman, learned ASG has taken

us to the relevant provisions of the Act, 1994

more particularly Chapter 5 and the definition

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of ‘works contract’ and the definition of ‘taxable

service’ contained in Section 64(54) and Section

65(105)(zzzza) respectively.  It is submitted that

post   01.07.2012,   the   Finance   Act,   1994

underwent major amendments by the insertion

of both negative list and declared services.  It is

submitted that Section 66E was introduced for

the first time which defined declared services.

He has taken us to sub­clause (h) of Section

66E of the Act. 

4.4It   is   submitted   that   the   Service   Tax

(Determination of Value) Rules, 2006 came into

force   w.e.f.   19.04.2006   vide   Notification

No.12/2006 – Service Tax.  Rule 2A has been

inserted   vide   notification   29/2007   dated

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22.05.2007 w.e.f. 01.06.2007 which reads as

under, which has been amended periodically:

“Prior to 01.07.2012 it reads as under:

2A.   Determination   of   value   of

services involved in the execution of

a works contract: 

(1) Subject to the provisions of section 67,

the value of taxable service in relation to

services   involved   in   the   execution   of   a

works contract (hereinafter referred to as

works contract service), referred to in sub­

clause (zzzza) of clause (105) of section 65

of   the   Act,   shall   be   determined   by   the

service provider in the following manner:­ 

(i)   Value   of   works   contract   service

determined shall be equivalent to the gross

amount   charged   for   the   works   contract

less the value of transfer of property in

goods involved in the execution of the said

works contract. 

Explanation.­  For   the   purposes   of   this

rule,­ 

(a)   gross   amount  charged   for  the   works

contract   shall   not   include   Value   Added

Tax (VAT) or sales tax, as the case may be,

paid,   if   any,   on   transfer   of   property   in

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goods involved in the execution of the said

works contract; 

(b) value of works contract service shall

include,­ 

(i)   labour   charges   for   execution   of   the

works; 

(ii)  amount  paid   to  a  sub­contractor   for

labour and services; 

(iii)   charges   for   planning,   designing   and

architect’s fees; 

(iv)   charges   for   obtaining   on   hire   or

otherwise, machinery and tools used for

the execution of the works contract; 

(v)   cost   of   consumables   such   as   water,

electricity, fuel, used in the execution of

the works contract; 

(vi) cost of establishment of the contractor

relatable to supply of labour and services; 

(vii)   other   similar   expenses   relatable   to

supply of labour and services; and 

(viii) profit earned by the service provider

relatable to supply of labour and services; 

(ix) Where Value Added Tax or sales tax, as

the case may be, has been paid on the

actual   value   of   transfer   of   property   in

goods   involved   in   the   execution   of   the

works contract, then such value adopted

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for   the   purposes   of   payment   of   Value

Added Tax or sales tax, as the case may

be, shall be taken as the value of transfer

of   property   in   goods   involved   in   the

execution of the said works contract for

determining   the   value   of   works   contract

service under clause (i).”

4.5It is submitted that vide notification 32/2007 –

ST dated 22.04.2007 the Central Government

in exercise of its powers conferred by Sections

93  and  94  of  the  Act,  1994  introduced  the

Works   Contract   (Composition   Scheme   for

Payment of Service Tax) Rules, 2007.  Rule 3(1)

of the said Rules reads as under:

“3. (1)   Notwithstanding   anything

contained in section 67 of the Act and

rule 2A of the Service (Determination of

Value) Rules, 2006, the person liable to

pay   service   tax   in   relation   to   works

contract service shall have the option to

discharge his service tax liability on the

works contract service provided or to be

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provided, instead of paying service tax at

the rate specified in section 66 of the

Act, by paying an amount equivalent to

two   per   cent   of   the   gross   amount

charged for the works contract.

Explanation. ­ For the purposes of this

rule,   gross   amount   charged   for   the

works contract shall not include Value

Added Tax (VAT) or sales tax, as the case

may be, paid on transfer of property in

goods involved in the execution of the

said works contract.”

4.6It is submitted that the sub­rules came to be

amended   vide   Notification   No.23/2009  –   ST

dated   07.07.2009   and   further   amended   by

Notification 1/2011 – ST dated 01.03.2011.

4.7It is submitted that Section 67 of the Act, 1994

deals with valuation of taxable services reads

as under:

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“67.  Valuation of taxable services for

charging Service Tax ­1) Subject to the

provisions   of   this   Chapter,   service   tax

chargeable on any taxable service with

reference to its value shall, ­

(i)in a case where the provision of service is

for   a   consideration   in   money,   be   the

gross   amount   charged   by   the   service

provider for such service provided or to

be provided by him;

(ii)in a case where the provision of service is

for a consideration not wholly or partly

consisting of money, be such amount in

money, with the addition of service tax

charged,   is   equivalent   to   the

consideration;

(iii)in   a   case   where   the   provision   of

service is for a consideration which is not

ascertainable, be the amount as may be

determined in the prescribed manner.

(2) Where the gross amount charged by a

service provider, for the service provided

or to be provided is inclusive of service

tax  payable,  the   value  of  such taxable

service shall be such amount as, with the

addition of tax payable, is equal to the

gross amount charged.

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(3)   The   gross   amount   charged   for   the

taxable service shall include any amount

received   towards   the   taxable   service

before, during or after provision of such

service.

(4)   Subject   to   the   provisions   of   sub­

sections (1), (2) and (3), the value shall be

determined in such manner as may be

prescribed.

Explanation­For   the   purposes   of   this

section,   ­

(a) "consideration" includes 

(i)any amount that is payable for the

taxable   services   provided   or   to   be

provided;

(ii)any   reimbursable   expenditure   or

cost incurred by the service provider and

charged,   in   the   course   of   providing   or

agreeing   to   provide   a   taxable   service,

except   in   such   circumstances,   and

subject  to  such  conditions,   as  may  be

prescribed.

(iii)    Any amount retained by the lottery

distributor   or   selling   agent   from   gross

sale amount of lottery tickets in addition

to the fee or commission, if any, or, as

the case may be, the discount received,

that is to say, the difference in the face

value of lottery ticket and the price at

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which the distributor or selling agent gets

such ticket.  

 (c) "gross amount charged" includes payment

by cheque, credit card, deduction from

account   and   any   form   of   payment   by

issue   of   credit   notes   or   debit   notes

and 

2

[book adjustment, and any amount

credited or debited, as the case may be,

to any account, whether called "Suspense

account" or by any other name, in the

books of account of a person liable to pay

service   tax,   where   the   transaction   of

taxable   service   is   with   any   associated

enterprise.]]”

4.8It is submitted that the Central Board of Excise

and Customs vide letter dated 22.05.2007 issued

clarifications   regarding   various   amendments

brought out Vide Finance Act, 2007.  It is submitted

that paras 9.1 to 9.7 which are relevant read as

under:

“9.1   Works contract is a composite

contract   for   supply   of   goods   and

services.  A composite works contract

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is vivisected and, ­(i) VAT/sales tax is

leviable   on   transfer   of   property   in

goods   involved   in   the   execution   of

works contract [Art.366 (29A)(b) of the

Constitution of India], and 

(ii)Service tax will be leviable on services

provided in relation to the execution of

works contract.

9.2Service tax is chargeable on the

gross amount charged by the service

provider   for   the   taxable   services

provided (Section 67). In the case of

works contract,  the taxable value  of

services   is   to   be   determined   by

vivisecting   the   composite   works

contract.     Rule   2A   of   Service   Tax

(Determination of Value) Rules, 2006

[Notification   No.29/2007­Service   tax,

dated 22.05.2007], provides that value

of   works   contract   service   shall   be

equivalent   to   the   gross   amount

charged   for   the   works   contract   less

the   value   of   transfer   of   property   in

goods involved in the execution of the

said works contract.   Thus, wherever

the   service   provider   maintains

records, the value of services shall be

the   gross   amount   charged   for   the

works   contract   less   the   value   of

transfer of property in goods involved

in the execution of works contract.

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25

9.3     Wherever   VAT/sales   tax   on

transfer of property in goods involved

in the execution of works contract is

paid on actual value, the same value

is   also   taken   for   the   purpose   of

determining   the   value   of   works

contract service.  In other cases, value

of   works   contract   service   shall   be

determined based on the actual.     It

has also been explained that value of

works contract service shall include:

(i) labour charges for execution of the

works;   (ii)   amount   paid   to   a   sub­

contractor for labour and services; (iii)

charges   for   planning,   designing   and

architect’s   fees;   (iv)   charges   for

obtaining   on   hir   or   otherwise,

machinery   and   tools   uses   for   the

execution   of   the   works   contract;   (v)

cost   of   consumables   such  as   water,

electricity, fuel, used in the execution

of the works contract, the property in

which is not transferred in the course

of   execution   of   works   contract;   (vi)

cost of establishment of the contract

relatable   to   supply   of   labour   and

services; (vii)   other similar expenses

relatable   to   supply   of   labour   and

services; and (viii)  profit earned by the

service provider relatable to supply of

labour and service;

9.4 If the gross amount charged for

the works contract is inclusive of VAT

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26

or   sales   tax,   the   value   for   the

purposes   of   service   tax   shall   be

computed as follows: [Gross amount

charged – (value of transfer of property

in goods involved in the execution of

works contract and VAT or sales tax

paid, if any, on the said transfer of

property   in   goods   involved   in   the

execution of said works contract)].

9.5   As a trade facilitation measure

and   also   for   ease   of   administrative

convenience, the service provider has

been   given   an   option   to   adopt   the

composition   scheme   for   payment   of

service tax on works contract service.

The   Works   Contract   (Composition

Scheme   for   Payment   of   Service   Tax)

Rules,   2007   has   accordingly   been

notified vide Notification No.32/2007­

Service Tax, dated 22.05.2007.

9.6The   scheme   provides   that   the

service provider shall have an option

to pay an amount equivalent to 2% of

the   gross   amount   charged   for   the

works   contract   instead   of   paying

service   tax   at   the   rate   specified   in

section 66.  Gross amount charged for

the works contract shall not include

VAT or sales tax paid on transfer of

property   in   goods   involved   in   the

execution of the said works contract.

The provider of taxable service opting

to   pay   service   tax   under   the   said

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27

composition scheme is not entitled to

take CENVAT Credit of duty on inputs,

used in or in relation to the said works

contract,   under   the   provisions   of

CENVAT Credit Rules, 2004.

9.7     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 cannot be

withdrawn until the completion of the

said works contract.”

4.9Relying upon the above provisions, rules and

regulations and the circulars, it is submitted

that works contract is contract involving supply

of goods and services together.   A composite

works contract gets vivisected into transfer of

property into goods liable to sales tax/VAT in

terms of Article 366 (29A)(b) of the Constitution

of India and the service portion liable to service

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28

tax w.e.f. 01.06.2007.   Reliance is placed on

the decision of this Court in the case of Larsen

and Toubro (supra) (paragraphs 14 to 16).

4.10It is submitted that the ratio of this Court in

Larsen and Toubro (supra) would be that the

list of service elements as found in  Gannon

Dunkerly and Co. vs. State of Rajasthan,

(1993) 1 SCC 364 case will suffer service tax

and  the goods portion would  suffer VAT or

sales tax.

4.11.It is submitted that the Constitutional Bench of

this Court in the case of  Gannon Dunkerly

and   Co.   (supra)  while   dealing   with   the

measure of tax vide para 47 had provided a list

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29

of   exclusions   from   the   cost   of   valuation   of

goods   and   as   to   what   would   constitute   the

service elements.   He has heavily relied upon

para 47 of the said decision.   It is submitted

that this Court observed in para 47 in the case

of  Gannon   Dunkerly   and   Co.   (supra)  as

under:

“47. ….. The value of the goods involved

in the execution of a works contract will,

therefore, have to be determined by taking

into account the value of the entire works

contract   and   deducting   therefrom   the

charges towards labour and services which

would cover—

(a) Labour charges for execution of the works;

(b)   amount   paid   to   a   sub­contractor   for

labour and services;

(c)   charges   for   planning,   designing   and

architect's fees;

(d) charges for obtaining on hire or otherwise

machinery   and   tools   used   for   the

execution of the works contract;

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30

(e)   cost   of   consumables   such   as   water,

electricity, fuel, etc. used in the execution

of   the   works   contract   the   property   in

which is not transferred in the course of

execution of a works contract; and

(f) cost of establishment of the contractor to

the   extent   it   is   relatable   to   supply   of

labour and services;

(g) other similar expenses relatable to supply

of labour and services;

(h)   profit   earned   by   the   contractor   to   the

extent it is relatable to supply of labour

and services.

The   amounts   deductible   under   these

heads will have to be determined in the

light of the facts of a particular case on the

basis   of   the   material   produced   by   the

contractor.”

4.12 It is submitted that the above service elements

have found a statutory recognition as the same

stood incorporated as part of Rule 2A of the

Service   Tax   (Determination   of   Value)   Rules,

2006 w.e.f. 01.06.2007.

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31

4.13It is submitted that consequently this Court

while dealing with the decision of Larsen and

Toubro (supra) had specifically addressed this

issue by bringing the similarity of the service

elements as mentioned in Constitution Bench’s

decision   in  Gannon   Dunkerly   (supra)  and

framed   as   Rule   2A   of   the   Valuation   Rules,

2006.  Reliance is placed on paras 25 and 26 of

the said judgment.

4.14 It is submitted that the decision of this Court

rendered in Larsen and Toubro (supra) came

up for reconsideration in the batch of matter in

the   case   of  Total   Environment   Building

Systems Pvt. Ltd. (supra) wherein this Court

vide para 28 rejected the request to refer the

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32

matter   to   the   larger   Bench   by   observing   in

paragraph 28 which reads as under:

“28. While   appreciating   the

prayer/submission made on behalf of the

Revenue   to   re­consider   the   binding

decision of this Court in the case of Larsen

and Toubro Limited (supra) and to refer the

matter to the Larger Bench, few facts are

required   to   be   taken   into   consideration,

which are as under:—

(i) The decision of this Court in the case

of Larsen and Toubro Limited (supra) has

been delivered/passed in the year 2015, in

which, it is specifically observed and held

that on indivisible works contracts for the

period pre­Finance Act, 2007, the service

tax was not leviable;

(ii) After considering the entire scheme and

the   levy   of   service   tax   pre­Finance   Act,

2007 and after giving cogent reasons, a

conscious decision has been taken by this

Court holding that the service tax was not

leviable   pre­Finance   Act,   2007   on

indivisible/Composite Works Contracts;

(iii) While holding that for the period pre­

Finance   Act,   2007,   on

indivisible/Composite   Works   Contracts,

the service tax is not leviable, number of

decisions   have   been   dealt   with   and

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33

considered by this Court in the aforesaid

decision;

(iv) That subsequently, the decision of this

court   in   the   case   of Larsen   and   Toubro

Limited (supra)   has   been   followed   and

considered   by   this   Court   in   the   case

of Commissioner of Service Tax and Ors.

Bhayana   Builders   Pvt.   Ld.   And   Ors,

(2018) 3 SCC 782,;

(v) That after the decision of this Court in

the   case   of Larsen   and   Toubro

Limited (supra) rendered in the year 2015,

the   said   decision   has   been   consistently

followed by various High Courts and the

Tribunals;

(vi)   The   decisions   of   the   various   High

Courts   and   the   Tribunals,   which   were

passed after following the decision of this

Court   in  the   case   of Larsen   and  Toubro

Limited (supra) have attained finality and

in   many   cases,   the   Revenue   has   not

challenged the said decisions;

(vii) No efforts were made by the Revenue

to   file   any   review   application   to   review

and/or   recall   the   judgment   and   order

passed by this Court in the case of Larsen

and Toubro Limited (supra). If the Revenue

was so serious in their view that decision

of this  Court in the case  of Larsen and

Toubro   Limited (supra)   requires   re­

consideration, Revenue ought to have filed

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34

the review application at that stage and/or

even thereafter. No such review application

has been filed even as on today.

(viii)   Merely   because   in   the   subsequent

cases, the amount of tax involved may be

higher,   cannot   be   a   ground   to   pray   for

reconsideration   of   the   earlier   binding

decision,   which   has   been   consistently

followed by various High Courts and the

Tribunals in the entire country.”

4.15It is submitted that  therefore what  is taxed

under   Section   65(105)(zzzza)   which   later

became   Section   66E(h)   of   the   Finance   Act,

1994 is the service portion in the execution of

works contract. That Section 67(1) makes it

abundantly clear that service tax is chargeable

only on the taxable service with reference to its

value.   It is submitted that this Court in the

case   of  Larsen   and   Toubro   (supra)  as

reiterated   in  Total   Environment   Building

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(supra) has made it clear that the goods value

in the nature of transfer of property of goods

would   suffer   sales   tax/VAT   and   the   service

components or elements would suffer service

tax w.e.f. 01.06.2007 by virtue of the definition

of taxable service under Section 65(105)(zzzza)

and   later   as   Section   66E(h)   as   a   declared

service post 01.07.2012.

4.16It is submitted that the incorporation of taxable

service w.e.f. 01.06.2007 also resulted in the

introduction of Rule 2A in the Valuation Rules,

2006 clearly identifying the service elements or

components which would constitute the value

for determination and payment of service tax.

These   components   again   were   retained   even

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36

after   the   insertion   of   Section   66E(h)   post

01.07.2012.

4.17It is submitted that this Court in the case of

Larsen and Toubro (supra) vide para 25 had

referred   to   Rule   2A   of   the   Valuation   Rules,

2006 and its purport by holding that the said

Rule goes on to say that the service component

of   the   works   contract   is   to   include   the   8

elements   laid   down   in   the   second  Gannon

Dunkerly’s case and the value attributable to

the service in the works contract would be the

service   elements   in   such   contracts   as   this

scheme   alone   would   comply   with   the

constitutional   requirements   as   it   seeks   to

bifurcate a composite indivisible works contract

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and   takes   care   to   see   that   no   element   is

attributable   to   the   property   in   goods

transferred pursuant to such contract enters

into the computation of the service tax.   It is

submitted that therefore the purport of Rule 2A

of   the   valuation   rules   is   only   to   bring   the

elements  of service tax as that  alone would

meet the constitutional requirements and no

elements attributable to the property in goods

should enter in the computation of service tax.

It   is,   therefore,   the   entire   contention   of   the

respondent ­ assessee that they have a legal

right to pay tax even on the goods portion as

service tax and also take input credit on the

duty paid on the goods is clearly contrary to

para 25 of the  Larsen and Toubro (supra)

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judgment and Rule 2A of the Valuation Rules,

2006.

4.18Now   so   far   as   the   composition   scheme   is

concerned, it is submitted that the assessee

falling under the definition of ‘works contract

service’   from   01.06.2007   has   to   discharge

service tax liability either under Rule 2A of the

valuation rules only on the service components

without   taking   any   CENVAT   Credit   on   the

input   goods   or   go   for   the   option   of   a

composition scheme in which case the rates of

tax specified at various points of time should

have been complied with on the total contract

value.     It   is   submitted   that   the   invented

method   of   the   respondent   –   assessee   by

seeking to pay service tax on entire contract

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39

value after taking the CENVAT Credit on the

input  goods  is  clearly unsustainable in law.

The   contention   that   Rule   2A   is   subject   to

Section 67 which according to the respondent –

assessee   permits   payment   of   tax   on   the

contract   value   including   the   goods   runs

counter   to   the   scheme   of   works   contract

service.   It is submitted that the what would

constitute as goods under Article 366 (29A)(b)

of the Constitution cannot be construed as a

taxable   service   and   as   a   value   of   taxable

service. 

4.19It is submitted that Finance Act, 1994 read

with the Rules permit only 2 options either to

pay   service   tax   on   the   service   elements   as

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envisaged   under   Rule   2A   of   the   Valuation

Rules, 2006 without taking the CENVAT Credit

on input goods or opt for composition.   It is

submitted   that   the   third   variant   of   paying

service tax on the total contract value including

goods   and   correspondingly   availing   CENVAT

Credit on the input is not only misconceived

but   also   legally   untenable   besides   a

Constitutional bar.

4.20Now so far as the reliance is placed upon the

decision   of   this   Court   in   the   case   of

Commissioner   of   Service   Tax   and   Ors.

Bhayana Builders Pvt. Ld. and Ors, (2018) 3

SCC 782 is concerned, it is submitted that on

facts it has no relevance.  It is submitted that

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on the contrary the decision of this Court in

the case of Larsen and Toubro (supra) would

apply.   It is submitted that even the circular

dated 22.05.2005 makes it amply clear as to

how a works contract service needs to be taxed

and vide para 9.2 referred to Rule 2A of the

Valuation Rules, 2006 to affirm that the value

of works contract service shall be equivalent to

the   gross   amount   charged   for   the   works

contract less the value of transfer of property in

goods   involved   in   the   execution   of   the   said

contract   and   vide   para   9.3   rings   out   the

elements   of   services   which   matches   exactly

with the elements laid down by this Court in

the case of Gannon Dunkerly (supra).

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5.Making above submissions it is prayed to allow

the present appeal.

6.Present appeal is vehemently opposed by Shri

V.   Raghuraman,   learned   Senior   Counsel

appearing   on   behalf   of   the   respondent   –

assessee. 

6.1While   opposing   the   present   appeal   and   in

support of the impugned order passed by the

CESTAT, learned counsel appearing on behalf

of   the   respondent   has   made   the   following

submissions:

(i)That the composition scheme is optional

as per Rule 3(1) of the Composition Rules;

(ii)Provisions   of   Rule   2A   of   the   Valuation

Rules   are   subject   to   the   provisions   of

Section 67 of the Finance Act, 1994;

(iii)Once the provisions of Section 67 of the

Finance   Act,   1994   have   been   complied

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with, neither the question of applicability

of Rule 2A of the Valuation Rules arise

nor   was   there   any   question   of   forcibly

applying   option   of   Composition   Scheme

on the assessee;

(iv)Even if the services of the respondent are

considered   as   classifiable   under   ‘works

contract service’ after 1

st

  June, 2007, as

claimed   by   the   Revenue,   the   further

claims of the Revenue that there were only

two options as above for valuation of the

works   contract   service   namely   the

composition rules and the Rule 2A of the

Valuation Rules available to the assessee

and   consequential   non­admissibility   of

CENVAT Credit has no merit.

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(v)It   is   submitted   that   in   case   of   ‘works

contract service’ also, the assessment can

be done under the provisions of Section

67   of   the   Finance   Act,   1994   and   that

valuation methods prescribed under Rule

2A   or   composition   scheme   are   merely

options provided to the assessee;

(vi)Therefore, the benefit of CENVAT Credit

on   inputs   cannot   be   denied   to   the

respondents in absence of any specific bar

or   prohibition   in   the   CENVAT   Credit

Rules, 2004 or the Finance Act, 1994.

6.2It   is   further   submitted   by   learned   counsel

appearing   on   behalf   of   the   respondent   that

while passing the impugned order the learned

Tribunal has rightly followed its earlier decision

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in the case of CCE vs. S.V. Jiwani, 2014 (35)

STR 351 affirmed by the Bombay High Court

which is squarely applicable.   It is submitted

that   in   the   said   case   it   was   held   that   the

composition rules and Rule 2A of the Valuation

Rules   are   merely   options   provided   to   the

service   provider   to   discharge   of   service   tax

liability vis­

à­vis options available in Section 67

of the Finance Act, 1994.

6.3It   is   further   submitted   that   Rule   2A   of   the

Valuation Rules begins with the words ‘subject

to provisions of Section 67’.   It is submitted

that this would mean that Rule 2A would apply

only   when   value   of   the   service   involved   in

execution of the works contract could not be

determined under Section 67 of the Act.

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6.4   It   is   further   submitted   by   learned   counsel

appearing   on   behalf   of   the   respondent   –

assessee that prior to 01.07.2012 the assessee

had three options:

(i)Follow the tenets of Section 67 and pay tax

on the full value and take input tax credit.

(ii)Rule   2A   of   the   Valuation   Rules:   to   pay

service tax at the full applicable rate on the

taxable value as determined in terms of Rule

2A of the Valuation Rules.  No bar to avail

CENVAT Credit on inputs.

(iii)Composition   Rules:   To   pay   service   tax   @

2.06%   (increased   to   4.12%   w.e.f.

01.03.2008) on the gross amount charged

for the Contract, in terms of the Composition

Rules.   Cenvat credit on inputs would be

inadmissible.

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6.5After   01.07.2012   the   assessee   had   three

options:

(i)  Follow the tenets of Section 67 and pay tax on

the full value and take input tax credit.

(ii)   Rule 2A(i): To determine the taxable value of

service after deducting the actual value of the

material involved.

(iii)     Rule   2(ii):   To   pay   service   tax   on   specified

percentage of the total amount charged for

the works contract.

6.6It   is   submitted   therefore   under   the   above

scheme the assessee had the option to pay the

service tax at full value on the entire amount

charged towards providing construction service

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48

or works contract services under the provisions

of Section 67 of the Finance Act, 1994.

6.7 It is submitted that in this case the assessee

would be eligible to full CENVAT Credit and

input, input services and capital goods under

CENVAT Credit Rules, 2004 OR to pay service

tax under the head construction services by

opting for abatements specified in Notification

under 15/2004 – HT, as amended from time to

time or replaced with new notification; OR to

pay service tax under the head ‘works contract

services’   either   in   terms   of   Rule   2A   of   the

Valuation Rules or in terms of the Composition

Rules.

6.8It is further submitted that the words used in

Rule  2A   ‘subject   to  Section  67’   conveys  the

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clear   idea   that   the   valuation   done   under

Section   67   is   supreme   and   the   rules   are

subject to the Act.

6.9   It is submitted that therefore the composition

rules are completely optional for the assessee

to exercise the assessee can opt for Section 67.

6.10 It is submitted that taking CENVAT duty on

inputs   is   barred   only   if   one   opts   for

Composition Rules and not if tax is paid at

normal prevailing rates on full gross value of

contract under Section 67.

6.11 It is further prayed on behalf of the respondent

that in case the appeal be allowed on merits,

the Tribunal has not rendered any finding on

extended   period   of   limitation   and/or   other

issues   and   therefore   the   matters   may   be

remanded back to the Tribunal.

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50

7Heard learned counsel for the respective parties at

length.

8The short question which is posed for consideration

before this Court is as to whether an assessee

who   is   liable   to   pay   service   tax   under   works

contract service has the legal right not to follow

Rule   2A   of   the   Service   Tax   (Determination   of

Value) Rules, 2006 nor the Composition Scheme

on the ground that in terms of Section 67 of the

Finance Act, 1994 an assessee is entitled to take

the   total   contract   value   which   includes   both

goods and services and remit service tax on the

entire value as works contract service and in the

process also entitled to avail the CENVAT Credit?

8.1At the outset, it is required to be noted that as

such   services   rendered   by   the   respondent   –

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assessee   can   be   said   to   be   ‘works   contract

service’   as   per   the   Finance   Act,   1994   w.e.f.

01.06.2007   as   per   Section   64(54)   read   with

Section 65(105)(zzzza).

8.2As per the law laid down by this Court in the

case   of  Larsen   and   Toubro   (supra)  and

Gannon Dunkerly and Co. (supra)  and the

subsequent decision in the case of  Total

Environment   Building   Systems   Pvt.   Ltd.

(supra)  with respect to the works contract an

assessee is liable to sales tax on the goods

element and the service tax on the availment of

service/value of service rendered.

8.3In   the   case   of  Gannon   Dunkerly   and   Co.

(supra)  while dealing with measure of tax in

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para   47   this   Court   had   provided   a   list   of

exclusions from the cost of valuation of goods

and as to what would constitute the service

elements.   As per the law laid down by this

Court in the aforesaid decision the following

are to be excluded from the cost of valuation of

the goods.

“47. ….. The value of the goods involved

in   the   execution   of   a   works   contract

will, therefore, have to be determined by

taking   into   account   the   value   of   the

entire   works   contract   and   deducting

therefrom  the  charges  towards   labour

and services which would cover—

(a) Labour charges for execution of the

works;

(b) amount paid to a sub­contractor for

labour and services;

(c) charges for planning, designing and

architect's fees;

(d)   charges   for   obtaining   on   hire   or

otherwise machinery and tools used for

the execution of the works contract;

(e) cost of consumables such as water,

electricity,   fuel,   etc.   used   in   the

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execution   of   the   works   contract   the

property in which is not transferred in

the   course   of   execution   of   a   works

contract; and

(f)   cost   of   establishment   of   the

contractor to the extent it is relatable

to supply of labour and services;

(g) other similar expenses relatable to

supply of labour and services;

(h) profit earned by the contractor to

the extent it is relatable to supply of

labour and services.

The   amounts   deductible   under   these

heads will have to be determined in the

light of the facts of a particular case on

the basis of the material produced by

the contractor.”

8.4It is required to be noted that thereafter the above

service   elements   have   found   a   statutory

recognition as part of Rule 2A of the Service Tax

(Determination   of   Value)   Rules,   2006   w.e.f.

01.06.2007   which   has   been   referred   to

hereinabove.  The applicability of Rule 2A has been

dealt with and considered by this Court in extenso

in   the   case   of  Larsen   and   Toubro   (supra).

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Therefore, as per the law laid down by this

Court in the case of ‘works contract service’ an

assessee is liable to pay the service tax on the

service element/value of the service rendered

and the sales tax/tax on the element of goods

transferred pursuant to the contract.

8.5In   light   of   the   above   now   the   next   main

question   posed   for   consideration   before   this

Court   is   required   to   be   considered   namely

whether   despite   Rule  2A   of   the   Service   Tax

(Determination of Value) Rules, 2006 and the

Composite Scheme still the assessee is entitled

to take the total contract value which includes

both goods and services in terms of Section 67

of the Act, 1994 and remit service tax on the

entire value as works contract service and the

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assessee   is   also   entitled   to   avail   CENVAT

Credit?  

8.6Rule   2A   applicable   prior   to   01.07.2012   is

reproduced hereinabove.  It is to be noted that

Rule   2A   is   the   specific   provision   for

determination   of   value   of   taxable   service   in

relation to services involved in the execution of

a works contact shall be determined by the

service provider in the manner provided under

Rule 2A(1)(i) i.e. value of works contract service

determined   shall   be   equivalent   to   the   gross

amount charged for the works contract.  As per

explanation to Rule 2A gross amount charged

for the works contract shall not include Value

Added Tax (VAT) or sales tax, as the case may

be, paid, if any, on transfer of property in goods

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involved in the execution of the works contract.

The   position   is   made   more   clear   post

01.07.2012.   Post 01.07.2012 as per Rule 2A

value of service portion in the execution of a

works contract shall be determined taking into

consideration the value of service portion in the

execution of a works contract equivalent to the

gross amount charged for the works contract

less the value of property of goods transferred

in the execution of the said works contract.

Therefore,   as   such   the   things   which   were

already there as per the decision of this Court

in   the   case   of  Gannon   Dunkerly   and   Co.

(supra)  and Rule 2A earlier has been made

explicitly clear.

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8.7However, as per the Composition Scheme vide

notification 32/2007 – ST dated 22.04.2007 by

which works contract (Composition Scheme for

payment of Service Tax) Rules, 2007 came to

be   introduced,   as   per   Rule   3(1)   and

notwithstanding anything contained in Section

67 of the Act and Rule 2A of the Rules, 2006,

the person liable to pay service tax in relation

to works contract service shall have the option

to discharge the service tax at the rate specified

in Section 67 of the Act, by paying an amount

equivalent to 2% of the gross amount charged

for the works contract.  Explanation specifically

provides   that   gross   amount   charged   for   the

works contract shall not include the VAT or

sales tax, as the case may be paid on transfer

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of property in goods involved in the execution

of the said works contract.  At this stage, it is

required to be noted that post 01.07.2012 Rule

2A specifically provides that the taxable service

shall not take CENVAT Credit of duty or cess

paid on inputs used in or in relation to said

works   contract,   under   the   provisions   of

CENVAT Credit Rules, 2004.

8.8It is the case on behalf of the respondent –

assessee that as in Rule 2A and even in the

Composition Scheme the word used are subject

to the provisions of Section 67 the assessee

had an option to pay the service tax on the

entire   contract   value   i.e.   on   gross   amount

charged by the service provider and that Rule

2A   is   not   compulsory   and   the   Composition

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Scheme is optional.  However, the aforesaid has

no substance.  If the submission on behalf of

the assessee is accepted in that case Rule 2A

and   the   Composition   Scheme   shall   become

otiose. 

8.9With   respect   to   the   ‘works   contract   service’

and/or the Composition Works Contract  the

valuation has to be made as per Rule 2A of the

Valuation   Rules,   2006.     Even   as   per   the

Composition Scheme vide Notification 32/2007

dated 22.04.2007 an assessee has an option to

discharge the service tax liability on the works

contract   service   provided   or   to   be   provided,

instead   of   paying   service   tax   at   the   rate

specified in Section 66 of the Act by paying

equivalent to 2% of the gross amount charged

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for the works contract.  It is to be noted that

Rule   3(1)   provides   notwithstanding   anything

contained in Section 67 of the Act and Rule 2A

of the Service (Determination of Value) Rules,

2006.  Therefore, as per the Scheme of the Act

the determination of value of service portion in

the execution of the works contract is to be

made as per Rule 2A, however with an option

to   the   assessee   to   avail   the   benefit   of

Composition   Scheme.   Therefore,   either   the

assessee has to go for Composition Scheme or

go for Determination of Value as per Rule 2A

and the assessee has to pay service tax on the

service element and can claim CENVAT Credit

on the said amount only.

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9 In view of the above the impugned judgment

and order passed by the CESTAT taking the

contrary view is unsustainable by which it is

held that the assessee is entitled to take the

total contract value which includes both goods

and services and remit service tax on the entire

value as ‘works contract’ and the assessee is

also entitled to avail the CENVAT Credit on the

same.

9.1     However, at the same time the service tax

needs to be paid in terms of Rule 2A of Service

Tax (Determination of Value) Rules, 2006 and

since   the   assessee   has   not   opted   for

composition   scheme,   the   matter   is   to   be

remitted   back   for   re­computation   of   the

demands in terms of Rule 2A.   As the issue

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with   respect   to   the   extended   period   of

limitation   has   also   not   been   decided   by

CESTAT the matter is to be remanded to the

CESTAT to decide the issue of limitation. 

10In view of the above and for the reason stated

above,   the   present   appeal   succeeds.     The

impugned   judgment   and   order   passed   by   the

CESTAT is hereby quashed and set aside and it

is held that the assessee is not entitled to take

the   total   contract   value   which   includes   both

goods and services and remit service tax on the

value   as   works   contract   service   and,   in   the

process, also entitled to avail the CENVAT Credit

on the entire amount.   It is observed and held

that the assessee has to pay the service tax on

the   value   of   services   as   per   Rule   2A   of   the

(Determination   of   Value)   Rules,   2006   and

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thereafter   to   avail   the   CENVAT   Credit

accordingly.   However, it is also observed and

held that demand for the period January 2007 to

May 2007 is unsustainable.  

10.1In that view of the matter now the service tax

needs to be computed in terms of Rule 2A of

the (Determination of Value) Rules, 2006 and

as   the   assessee   has   not   opted   for   the

composition   scheme,   the   matter   is   remitted

back to the CESTAT for re­computation of the

demands in terms of Rule 2A.  

As observed hereinabove the Tribunal has

also not decided the issue of extended period of

limitation.     Therefore,   while   quashing   and

setting aside the impugned judgment and order

passed by the CESTAT, the matter is remitted

back to the CESTAT limited only to decide the

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issue of limitation and re­computation of the

demands in terms of Rule 2A.   The aforesaid

exercise   be   completed   by   the   CESTAT   on

remand within a period of three months from

the date of the present order.

Present   appeal   is   accordingly   allowed.

However, in the facts and circumstances of the

case there shall be no order as to costs. 

……………………………J.

                 (M. R. SHAH)

……………………………J.

                                     (KRISHNA MURARI)

New Delhi, 

May 2, 2023 

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