No service tax can be levied on indivisible Works Contracts prior to June 1, 2007

Supreme Court: The Bench
comprising of A.K. Sikri and R.F. Nariman JJ. held
that Works Contract Service was not a taxable service prior to June 1, 2007 as
services classifiable under Commercial or Industrial Construction Service (CICS),
Construction of Complex Service (COCS), or Erection, Commissioning or
Installation Service (ECIS) covers only such contracts/ transactions which
involves pure rendition of service(s), falling within the ambit of the
respective definitions and do not comprehend Works Contract Service within
their ambit. It was further held that the decision of the Hon’ble Delhi High
Court in case of G.D. Builders and Others
v. Union of India, 2013 SCC OnLine Del 4543, that a works contract can be
vivisected and discernible taxable service elements could be subjected to
Service tax prior to June 1, 2007 is erroneous on per incuriam and sub silentio

The main issue before the bench was that Service elements
in a composite/Indivisible works contract (involving transfer of property in
goods and rendition of services), where such services are classifiable under
CICS, COCS, or ECIS, are subject to levy of service tax even prior to insertion
of taxable service ‘Works Contract Service’ under Section 65(105) (zzzza) of
the Finance Act, 1994 (“the Finance Act”) i.e. prior to June 1, 2007?

The Bench after
elaborate discussion of the various provisions and judicial pronouncements held
that the works contract is a separate species of contract distinct from
contracts for services simpliciter recognized by the world of commerce and law
as such, and has to be taxed separately as such. A close look at the Finance
Act would show that the taxable services referred to in the charging Section
65(105) thereof would refer only to service contracts simpliciter and not to
composite works contracts. This is clear from the very language of Section
65(105) of the Finance Act which defines ‘taxable service’ as “any service
provided”. Under Section 67 of the Finance Act, the value of a taxable service
is the gross amount charged by the service provider for such service rendered
by him. This would unmistakably show that what is referred to in the charging
provision is the taxation of service contracts simpliciter and not composite
Works contracts, such as are contained on the facts of the present cases. While
introducing the concept of service tax on indivisible works contracts various
exclusions are also made such as Works contracts in respect of roads, airports,
airways-transport, bridges, tunnels, and dams. These infrastructure projects
have been excluded and continue to be excluded presumably because they are
conceived in the national interest. If the contention of the Revenue is accepted,
each of these excluded Works contracts could be taxed under the sub-heads of
Section 65(105) of the Finance Act, which was never the intention of
Parliament. In GD Builders case, it was
held that the levy of service tax in Section 65(105)(g), (zzd), (zzh), (zzq)
and (zzzh) of the Finance Act is good enough to tax indivisible composite works
contracts, but in view of the Court’s finding that the said Finance Act lays
down no charge or machinery to levy and assess service tax on indivisible
composite works contracts, such argument must fail.  This is also for the simpkle reason that
there is no subterfuge in entering into composite works contracts containing
elements both of transfer of property in goods as well as labour and services. The
Delhi High Court judgment (In GD Builders
case) unfortunately misread the judgment of Supreme Court in the case of Mahim Patram Private Ltd.v. Union of India,
[(2007) 3 SCC 668] to arrive at the conclusion that it was an authority for the
proposition that a tax is leviable even if no rules are framed for assessment
of such tax, which is wholly incorrect.

Thus, the SC in no ambiguous terms ruled that works contracts cannot
be taxed before June 1, 2007. Accordingly, the appeals filed by the Assessees
were allowed and appeals filed by the Revenue were dismissed. [Commissioner of Central Excise and Customs,
Kerala and Others v. Larsen and Toubro Ltd. and Others, 2015 SCC OnLine SC 738 decided on

Source: Legal news India

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