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REPORTABLE  IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.   7933       OF 2012 (Arising out of S.L.P.(C) No.26260 of 2010)

M/S. NAGARJUNA CONSTN. CO. LTD.      …APPELLANT   

        VERSUS

GOVERNMENT OF INDIA & ANR. ....RESPONDENTS

J U D G M E N T

ANIL R. DAVE, J.

1. Leave granted.  

2. This appeal arises from the judgment and final order dated 7th June,  

2010, passed by the High Court  of  Andhra Pradesh in Writ  Petition No.  

6558/2008,  whereby  the  High  Court  dismissed  the  petition  filed  by  the  

appellant and upheld the validity of the Circular No. 98/1/2008-ST, dated  

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4.1.2008  (hereinafter  referred  to  as  ‘the  Impugned  Circular’)  issued  by  

respondent no. 1 herein.  

3. The appellant had executed various contracts which were in the nature  

of composite construction contracts. The appellant had paid Sales Tax/ VAT  

on those contracts under the Andhra Pradesh General Sales Tax Act, 1957,  

Andhra Pradesh Value Added Tax Act, 2005 and other State enactments.  

Service tax was imposed on various services which had come into effect  

from different dates. Prior to 1.6.07, the appellant had paid service tax under  

the following categories of taxable services, namely:

(a) Erection, commissioning or  installation service under Section 65(105)  

(zzd) of the Finance Act, 1994 (hereinafter referred to as ‘the Act’),

b)  Commercial  or  industrial  construction  service  under  Section  65(105)  

(zzq) of the Act,

c)  Construction  of  complex  (residential  complex)  service  under  Section  

65(105) (zzzh) of the Act.  

4. Sub-sections 39(a), 25(b) and 30(a) of Section 65 of the Act define the  

above mentioned services as under:

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“39(a):  erection,  commissioning  or  installation;  means  any  service  

provided by a commissioning and installation agency, in relation to,--  

(i)  erection,  commissioning  or  installation  of  plant  machinery,  

equipment or structures whether pre-fabricated or otherwise; or

(ii) installation of -

(a)  electrical  and  electronic  devices,  including  wirings  or  

fittings therefore; or

(b) plumbing, drain laying or other installations for transport of  

fluids; or

(c)  heating,  ventilation  or  air-conditioning  including  related  

pipe work, duct work and sheet metal work; or

(d) thermal insulation, sound insulation, fire proofing or water  

proofing; or

(e) lift and escalator, fire escape staircases or travelators; or

(f) such other similar services;”

This definition, with reference to the taxable service, is dealt with by Clause  

(zzd).

5. The  taxable  services  covered  by  Clause  (zzq)  (commercial  or  

industrial construction services) are defined in sub-section 25(b) of Section  

65 of the Act, which reads as under:  

“(25b): commercial or industrial construction service means-

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(a) construction of a new building or a civil structure or a part  

thereof; or  

(b) construction of pipeline or conduit; or

(c) completion and finishing services such as glazing, plastering,  

painting, floor or wall tiling, wall covering and wall papering,  

wood  and  metal  joinery  and  carpentry,  fencing  and  railing,  

construction of swimming pools, acoustic applications or fittings  

and  other  similar  services,  in  relation  to  building  or  civil  

structure; or

(d)  repair,  alteration,  renovation  or  restoration  of,  or  similar  

services  in  relation  to,  building  or  civil  structure,  pipeline  or  

conduit, which is-

(i) used, or to be used, primarily for; or

(ii) occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in,

commerce  or  industry,  or  work  intended  for  commerce  or  

industry,  but  does  not  include  such  services  provided  in  

respect  of  roads,  airports,  railways,  transport  terminals,  

bridges, tunnels and dams;”

6. The  taxable  services  covered  by  Clause  (zzzh)  (construction  of  

complex) are defined in sub-section 30 (a) of Section 65 of the Act, which  

reads as under:  

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“30(a): “construction of complex” means –

(a) construction of a new residential complex or a part thereof; or  

(b) completion and finishing services in relation to residential  

complex such as glazing,  plastering,  painting,  floor  and wall  

tiling, wall covering and wall papering, wood and metal joinery  

and carpentry, fencing and railing, construction of swimming  

pools,  acoustic  applications  or  fittings  and  other  similar  

services; or

(c)  repair,  alteration,  renovation  or  restoration  of,  or  similar  

services in relation to, residential complex.”

7. The  appellant,  while  paying  service  tax  prior  to  1.6.07  under  the  

above mentioned categories of taxable services, instead of paying full rate of  

service tax after availing of CENVAT credit of excise duties paid on inputs,  

had opted to claim the benefit of Notification No. 1/2006 –ST dated 1.3.06,  

whereby service tax was required to be paid only on 33% of the total value,  

subject  to  the  condition  of  non availment  of  CENVAT credit  on  inputs,  

capital goods and input services.  

8. With  effect  from 01.06.2007,  vide  Notification  No.  23/2007  dated  

22.05.2007, sub-section (105) of Section 65 of the Act was amended and  

Clause (zzzza) was introduced. This clause reads as follows:

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“(zzzza)  Taxable  service  means  any  service  provided  or  to  be  

provided  to  any  person,  by  any  other  person  in  relation  to  the  

execution of a works contract, excluding works contract in respect of  

roads,  airports,  railways,  transport  terminals,  bridges,  tunnels  and  

dams.  

Explanation:-- For the purposes of this sub-clause, “works contract”  

means a contract wherein, --

(i) transfer of property in goods involved in the execution of  

such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out, --

(a)  erection,  commissioning  or  installation  of  plant,  

machinery, equipment or structures, whether pre-fabricated  

or otherwise, installation of electrical and electronic devices,  

plumbing, drain laying or other installations for transport of  

fluids,  heating,  ventilation  or  air-conditioning  including  

related pipe work, duct work and sheet metal work, thermal  

insulation, sound insulation, fire proofing or water proofing,  

lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a  

part thereof, or of a pipeline or conduit,  primarily for the  

purposes of commerce or industry; or  

(c)  construction  of  a  new  residential  complex  or  a  part  

thereof; or  

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(d)  completion  and  finishing  services,  repair,  alteration,  

renovation or restoration of, or similar services, in relation to  

(b) and (c); or  

(e) turnkey projects including engineering, procurement and  

construction or commissioning (EPC) projects;”

9. Section  65A of  the  Act  provides  that  the  classification  of  taxable  

services shall  be determined according to the terms of the sub-clauses of  

Clause (105) of Section 65 of the Act and when, for any reason, a taxable  

service is, prima facie, classifiable under two or more sub-clauses of Clause  

(105) of Section 65 of the Act, the classification shall be effected as follows:

“(a) the sub-clause which provides the most specific description shall  

be preferred to sub-clauses providing a more general description;  

(b)  composite  services  consisting  of  a  combination  of  different  

services which cannot be classified in the manner specified in clause  

(a), shall be classified as if they consisted of a service which gives  

them their essential character, in so far as this criterion is applicable;

(c) When a service cannot be classified in the manner specified in  

clause  (a)  or  clause  (b)  it  shall  be  classified  under  the  sub-clause  

which  occurs  first  among  the  sub-clauses  which  equally  merit  

consideration.”

10. In exercise of the powers conferred under Sections 93 and 94 of the  

Act, the Central Government introduced the Works Contracts (Composition  

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Scheme for Payment of Service Tax) Rules, 2007 (hereinafter referred to as  

‘the 2007 Rules’). Under this scheme, an option of composition was offered  

@ 2% of the gross amount charged on the works contract.   Prior  to the  

composition,  the  effective  tax  rate  under  the  other  category  of  services  

would work out to be approximately 3.96% of the gross amount.  

11. Rule 3 of the 2007 Rules, being relevant, is extracted below:

“3. (1) 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 provided or to  

be provided, instead of paying service tax at the rate specified  

in Section 66 of the Act,  by paying an amount equivalent to  

four  per  cent  of  the  gross  amount  charged  for  the  works  

contract.

Explanation:--  For  the  purpose  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.

(2)  The provider  of  taxable  service  shall  not  take  CENVAT  

credit of duties or cess paid on any inputs, used in or in relation  

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to the said works contract, under the provisions of CENVAT  

Credit Rules, 2004.  

(3) 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  shall  not  be  

withdrawn until the completion of the said works contract.”

12. The  appellant  wanted  to  opt  for  the  afore-stated  scheme  but  the  

department, through the Impugned Circular had clarified 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.  

Vivisecting a single composite service and classifying the same under two  

different  taxable  services  depending  upon  the  time  of  receipt  of  the  

consideration is not legally sustainable.”

13. In view of the above, the appellant, who had paid service tax prior to  

01.06.07  for  the  taxable  services,  namely,  erection,  commissioning  or  

installation  service,  commercial  or  industrial  construction  service  or  

construction of complex service, was not entitled to change the classification  

of the single composite service for the purpose of payment of service tax on  

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or after 01.06.07 and hence, was not entitled to avail of the Composition  

Scheme.

14. In  view  of  the  fact  that  the  appellant  had  classified  the  ongoing  

contracts entered into prior to 1.6.2007 under the category of ‘works contract  

service’  and  had started  discharging  the  service  tax  liability  at  the  rates  

specified in the 2007 Rules, show cause notices were issued to the appellant  

for recovery of difference of service tax payable by it alongwith applicable  

interest and penalty.  

15. Aggrieved by the same, the appellant filed a Writ Petition before the  

High Court challenging the vires of the Impugned Circular. The High Court,  

while dismissing the petition, held that in respect of a works contract, where  

service tax had already been paid, no option to pay service tax under the  

Composition Scheme could be exercised. The High Court also held that the  

Impugned  Circular  (to  the  extent  it  was  challenged  i.e.,  in  relation  to  

Reference Code 097.03) was wholly in conformity with the provisions of  

Rule  3(3)  of  the  2007  Rules  and  that  the  Impugned  Circular  merely  

reiterated the eligibility criterion specified in Rule 3(3) of the 2007 Rules.  

As per the provisions of the afore-stated Rule, for claiming benefit of paying  

service tax at the rate of  4% of the gross amount charged for the works  

contract instead of paying service tax at the rate specified in Section 66 of  

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the Act, the appellant ought to have exercised its option before payment of  

service tax in respect of the works contract.  The appellant had not exercised  

its option before payment of service tax and the taxable services, which were  

falling within Clauses (zzd), (zzq) and (zzzh) of Section 65 (105) of the Act,  

were falling within the newly introduced Clause (zzzza) of Section 65(105)  

of the  Act.  In these circumstances, the petition was dismissed by the High  

Court.   

16. It is against the dismissal of the said petition that the present appeal  

has  been  filed  by  the  appellant.  The  learned  counsel  for  the  appellant  

submitted before us that upholding the view taken by the High Court would  

result in gross discrimination between assessees who had paid tax @3.96%  

prior to 1.6.2007, as opposed to the contractors who are similarly placed but  

did not pay any tax prior to 1.6.2007 and who would now be paying tax at a  

lower rate.  

17. The learned counsel  appearing for  the appellant  submitted  that  the  

Impugned Circular is contrary to the provisions of Rule 3 (3) of the 2007  

Rules and Section 65 (105) (zzzza) of the Act.  He submitted that by virtue  

of the Impugned Circular, the appellant and other similarly situated persons  

would be deprived of the benefit under the Rules.  He submitted that under  

Rule 3 (3) of the 2007 Rules, the appellant is entitled to opt for payment of  

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4% of the gross amount charged for the works contract but by virtue of the  

Impugned Circular, the appellant would not get an opportunity to avail of  

the option provided under Rule 3 (3) of the 2007 Rules.

18. Thereafter he submitted that by virtue of the Impugned Circular, the  

respondent authorities cannot take away the benefit given to the appellant  

under Rule 3 (3) of the 2007 Rules and therefore, the Impugned Circular is  

bad in law.

19. He thereafter submitted that Rule 3 (3) of the 2007 Rules cannot be  

interpreted in a way so as to deprive the persons who had already paid tax  

under the old provisions.  He submitted that the appellant had already started  

making payment @ 2% of the gross amount charged for the works contract  

at the relevant time and, therefore, the appellant cannot be constrained to  

change the method of payment of tax after 1st June, 2007.

20. In order to substantiate his submission  that a circular cannot override  

a statutory provision, he relied on the judgments delivered in the cases of  

Tata Teleservices Ltd. v.  Commissioner of Customs  2006 (1) SCC 746  

and Commissioner of Central Excise, Bolpur v.  Ratan Melting & Wire  

Industries   (2008) 231 ELT 22.  He, therefore, submitted that the Impugned  

Circular  is  bad  in  law  and  the  High  Court  committed  an  error  by  not  

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quashing the same and, therefore, the appeal deserves to be allowed and the  

Impugned Circular should be quashed.

21.  On the other hand, the learned Additional Solicitor General appearing  

for the respondents submitted that the view expressed by the High Court is  

just and proper.  He submitted that reclassification is always permitted and  

he further submitted that by virtue of the amended legal provisions, after 1st  

July,  2007,  the  classification  had  been  amended  and  by  virtue  of  the  

Impugned Circular the provisions of Rule 3(3) of the 2007 Rules have been  

explained.

22. He submitted that the Impugned Circular is explanatory in nature and  

the appellant had preferred to challenge the Impugned Circular and not the  

provisions of Rule 3 (3) of the 2007 Rules.  Even without giving effect to the  

Impugned Circular, the provisions of the amended Rules would remain and  

force  which  would  not  permit  the  appellant  to  change  the  method  with  

regard to payment of tax which was in vogue prior to 1st July, 2007.  He  

submitted that there was no dispute to the fact that the agreement with regard  

to the works contract had been entered into before 1st June, 2007 i.e. when  

the amended provision of Rule 3 (3) of the 2007 Rules was not in force.  As  

the appellant had already paid service tax before 1st June, 2007 on the basis  

which was  applicable  at  the  relevant  time  i.e.  before  1st June,  2007,  the  

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appellant is not entitled to opt for the scheme provided under the provisions  

of Rule 3 of the 2007 Rules.

23. He  lastly  emphasized  on  the  fact  that  reclassification  is  always  

permitted  and  the  State  has  a  right  to  reclassify  services  and  only  in  

pursuance of the said reclassification, the provisions of Rule 3 (3) of the  

2007 Rules would not apply to the case of the appellant.  He further added  

that not availing CENVAT credit is not a relevant issue.  He emphasized on  

the fact that because of the reclassification, in the light of Rule 3 (3) of the  

2007 Rules,  the  appellant  cannot  be  permitted  to  avail  of  the  benefit  of  

paying tax as per an option given under Rule 3 of the 2007 Rules.

24. We  have  heard  the  learned  advocates  and  have  considered  the  

contents of the impugned judgment and the provisions of the relevant rules.

25. In  our  opinion the  High Court  did  not  commit  any  mistake  while  

upholding validity of the Impugned Circular.

26. In our opinion the Impugned Circular has only explained the contents  

of Rule 3 (3) of the 2007 Rules so as to provide guidelines to the Revenue  

Officers.

27. On perusal of Rule 3 (3) of the 2007 Rules it is very clear that the  

assessee who wants to avail of the benefit under Rule 3 of the 2007 Rules  

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must opt to pay service tax in respect of a works contract before payment of  

service tax in respect of the works contract and the option so exercised is to  

be applied to the entire works contract and the assessee is not permitted to  

change the option till the said works contract is completed.

28. In the instant case it is an admitted fact that the appellant-assessee had  

already  paid  service  tax  on  the  basis  of  classification  of  works  contract  

which was in force prior to 1st July, 2007.  In the circumstances, it cannot be  

said that the appellant had exercised a particular option with regard to the  

mode of payment of tax after 1st July, 2007 with regard to reclassified works  

contract.  We are in agreement with the submissions made by the learned  

counsel appearing for the respondents that not availing of CENVAT credit is  

absolutely irrelevant in the instant case.

29. We do not accept the submission of the learned counsel appearing for  

the appellant that the Impugned Circular is discriminatory in nature.  Those  

who had paid tax as per the provisions and classification existing prior to Ist  

June, 2007 and those who opted for payment of tax under the provisions of  

Rule 3 of the 2007 Rules and paid tax before exercising the option belong to  

different classes and, therefore, it cannot be said that the Impugned Circular  

or the provisions of Rule 3(3) of the 2007 Rules are discriminatory.  

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30. The appellant has not challenged the validity of Rule 3 (3) of the 2007  

Rules and, therefore, we do not go into the said issue.  In our opinion, the  

Impugned Circular is  not  contrary to the Act or  the statutory rules made  

thereunder and the Impugned Circular only provides guidelines as to how  

the provisions of Rule 3 (3) of the 2007 Rules are to be interpreted.  Even if  

the Impugned Circular is set aside, the provisions of Rule 3 (3) of the 2007  

Rules would remain and that would not benefit the appellant.  In view of the  

above facts, we are of the view that the High Court did not commit any error  

while  upholding  the  Impugned  Circular  and,  therefore,  we  dismiss  the  

appeal with no order as to costs.   

…..……………......................J.  (D.K. JAIN)                     

 …...........................................J.  (ANIL R. DAVE)

New Delhi

November 09 , 2012

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