In a recent ruling in the case of CCE v. Lumino Industries Limited STA No. 76795 of 2017, the Hon’ble CESTAT Kolkata has set aside the appeal filed by the department against the order of the Principal Commissioner, ST Kolkata and has held that the Service Tax is payable only on the service component of the turnkey contract.
The Hon’ble CESTAT, by relying on the earlier judgement of Hyderabad Tribunal in the case of CCE Vs Pragati Edifice Pvt. Ltd. 2019 (31) GSTL 241 (Tri- Hyd), has reiterated the principle that valuation mechanism provided by the Rule 2A of the Service Tax (Determination of Value) Rules, 2006 is optional and not mandatory. The Hon’ble CESTAT has further held that the department cannot force the assessee to opt for the valuation mechanism provided by the Rule 2A (Supra).
Brief Facts of the Case:
Assessee Case
M/s Lumino Industries Limited (henceforth “Assessee”) inter alia has been engaged in the provision of Erection, Commissioning and Installation Services, Works Contract Services and Goods Transport Agency Services and are engaged in execution of turnkey contracts for various power distribution authorities in relation to various rural electrification projects awarded to them.
Assessee had entered into two separate and delineated contracts with State Electricity Distribution Companies. one contract was for the erection, testing and commissioning of installations and service connections to prospective consumers (BPL) for Rural Electricity Infrastructure and Household Electrification (Service Contract) and Second contract was for the supply and delivery of materials/equipments for Rural Electricity Infrastructure and Household Electrification Supply Contract. Service Tax was paid by the Assessee on the full value of service contract relating to Erection, Commissioning & Installation Service at full rate applicable. The same was reflected by the Assessee in the Service Tax returns. Further, the Assessee was paying applicable VAT on the supply portion and the same was duly shown in the Sales Tax returns.
Department’s Case
Department issued a Show cause cum demand notice demanding service tax from the Assessee on the whole of the contract by treating the said services as provision of works contract service. The aforesaid demand had been raised on account of the assessees option to not to pay as per valuation mechanism provided under Rule 2A (Supra).
Order of Principal Commissioner in favour of Assessee
The Principal Commissioner dropped the whole demand and held that though the services in question would qualify as a works contract service, however the SCN had curtailed the option regarding quantification of tax liability available to the Assessee in terms of the statutory provisions by not giving them the option of deduction of value of goods as envisaged in the Valuation Rules and only providing them the option of abatement.
Appeal of the Department
The Department filed an appeal against the order of the Principal Commissioner on the ground that the Adjudicating authority has merely dropped the demand on the ground that the SCN has not provided option of valuation for works contract service to the Respondent. Since the classification of the service as per the SCN had been accepted by the Adjudicating authority then dropping of demand on the ground that proper valuation has not been considered by the department while issuing the SCN was bad in law and hence the demand should have been confirmed as the Assessee had mis declared their classification of services.
Ruling of the Hon’ble CESTAT
The Hon’ble CESTAT after analyzing the statutory provisions, various case laws and facts of the case held that: (i) Valuation mechanism provided by Rule 2A (Supra) is optional and cannot be forced upon by the Department on the assessee; (ii) Once the service tax has been paid on the service component of the turnkey contract at the full rate, then the department cannot demand the payment of service tax on the supply component as per valuation mechanism provided in Rule 2A (Supra), by treating the two contracts as one inseparable works contract service.
The matter has been argued by Shri Puneet Agrawal (Advocate), Partner at ALA Legal Advocate & Solicitors.
Read the order of Hon’ble CESTAT at CCE v Lumino_CESTAT Kolkata
Yuvraj is an advocate and has completed his B.A. LL.B(Hons) from RGNUL-Punjab. He is a practicing advocate and has been involved in matters pertaining to GST and other indirect taxes as well as Direct Tax. He is active in Writ Courts and has involvement in a few landmark judgments like Pitambra Books Pvt. Ltd. V. Union of India (W.P.C. No. 627 of 2020), and represented Sales Tax Bar Association (Delhi) to resolve GST issues and glitches.