Change Over to Composition Scheme Allowed where Payment not Received in Service Tax Works Contract Cases before 1 Jun
2007
[Service
Tax Circular No. 128 dated 24th August 2010]
Subject: Service tax on on-going works contracts entered into prior to
01.06.2007.
It has been brought to the notice of the Board that the following confusions/disputes
prevail with respect to long term works contracts which were entered into prior
to 01.06.2007 (when the taxable service, namely, Works contract came into
effect) and were continued beyond that date:
(i) 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?
(ii) 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?
2. The matter has been examined.
As regards the classification, with effect from 01.06.2007 when the new service
‘Works Contract’ service was made effective, classification of aforesaid
services would undergo a change in case of long term contracts even though part
of the service was classified under the respective taxable service prior to
01.06.2007. This is because ‘works contract’ describes the nature of the
activity more specifically and, therefore, as per the provisions of section 65A
of the Finance Act, 1994, it would be the appropriate classification for the
part of the service provided after that date.
3. 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.
4. The Board’s previous Circular
No. 98/1/2008-ST dated 04.01.2008 and the ratio of judgement
of the High Court of Andhra Pradesh in the matter of M/s. Nagarjuna
Construction Company Limited vs. Government of India (2010 TIOL 403 HC AP ST)
are in line with the above interpretation.
F.No.354/141/2010-TRU