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Commissioner of Customs, Central Excise and Service Tax (CC and CE and ST), Noida vs. M/s Interarch Building Products Pvt. Ltd.

Civil Appeal · 2023 INSC 476Decided 2 May 2023
Civil Appeal No. 11330 of 2018
M.R. Shah · Krishna Murari · M.R. Shah with Justice Manoj Misra

Background

The respondent company manufactured and erected prefabricated steel buildings, paying service tax under the head "Commercial or Industrial Construction Service" while separately claiming CENVAT credit on excise duty paid on its building materials. The tax department found this activity was really a "Works Contract Service" (a composite contract combining goods and services), for which special valuation rules (Rule 2A of the Service Tax Determination of Value Rules, 2006, or an optional Composition Scheme) apply and which do not permit claiming CENVAT credit on the goods component. The department issued show-cause notices disallowing roughly Rs. 112 crore of CENVAT credit and demanding recovery of short-paid tax; the CESTAT tribunal ruled in the company's favour, holding it could pay tax on the whole contract value and still claim full CENVAT credit, prompting the Revenue's appeal to the Supreme Court.

Decision Breakdown

The Supreme Court held that the CESTAT was wrong. Where a contract is genuinely a "works contract" involving both goods and services, the assessee must value and pay service tax only on the service component as computed under Rule 2A (or opt for the Composition Scheme), and cannot pay tax on the entire composite contract value while also claiming CENVAT credit on the goods/input side, since that would make Rule 2A and the Composition Scheme redundant. The Court set aside the CESTAT's order but remitted the matter back to the Tribunal to re-compute the tax demand correctly under Rule 2A (since the company had not opted for the Composition Scheme) and to separately decide the unresolved question of whether an extended limitation period could be invoked, directing this be completed within three months. The appeal was allowed with no order as to costs, and demand for one limited period (January-May 2007) was held unsustainable.

Lesson Learnt

A business performing a genuine "works contract" (mixing goods supply with construction/erection services) cannot pay service tax on the full composite value and separately claim input tax credit on the goods portion. It must follow the statutory valuation rules (Rule 2A) or elect the Composition Scheme, and cannot pick whichever combination is most beneficial outside the framework the law provides.

Official source (sci.gov.in)View Judgment (PDF)

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