Service tax cannot be levied on indivisible works contracts entered prior to 01 June 2007

We are sharing with you an important judgement of the Hon’ble Supreme Court in the case of Commissioner of Central Excise and Customs, Kerala and Others Vs. Larsen and Toubro Ltd. and Others [2015-TIOL-187-SC-ST] on the following issue:

Issue:

Whether Service tax can be levied on indivisible Works Contracts prior to its introduction on June 1, 2007?

Facts & Background:

In the case of Larsen and Toubro Ltd, Kehems Engg Pvt Ltd Vs. CST, Delhi/ CCE & ST, Indore/ CCE/ Rajkot and CCE & ST, Indore Vs. Kehems Engineering Pvt Ltd. [2015-TIOL-527-CESTAT-DEL-LB], the Five Member Bench of the Hon’ble CESTAT, Delhi by a majority of 3 to 2 held 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 Commercial or Industrial Construction Service (“CICS”), Construction of Complex Service (“COCS”), or Erection, Commissioning or Installation Service (“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.

In the above stated case, the two Hon’ble Judicial Members relying upon decisions in the case of CST Vs. Turbotech Precision Engineering Pvt Ltd.[2010 (18) S.T.R 545 (Kar)] and Strategic Engineering Pvt. Ltd. Vs. CCE [2011 (24) S.T.R 387 (Mad)] held that Works Contract Service was not a taxable service prior to June 1, 2007 as CICS, COCS and 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 ContractService 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 Vs. Union of India and Another [(2013) 32 STR 673 (Del.)] (“GD Builders Case”) 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 grounds.

However, on the other hand three Hon’ble Technical Members relying upon the decision in GD Builders Case,C.C.E. Vs. B.S.B.K. Pvt. Ltd. [2010 (253) ELT 522] and YFC Projects (P.) Ltd. Vs. Union of India [(2014) 44 GST 334/43 taxmann.com 219 (Delhi)] (“YFC Case”), held that in GD Builders Case and YFC Case, the Hon'ble Delhi High Court has considered the very same matter and held that Works Contract can be vivisected and discernible taxable service elements could be subjected to Service tax prior to June 1, 2007. This Tribunal being sub-ordinate to both the Apex Court and the High Court would be bound by the above mentioned decisions. In other words, the ratio decidendi of the GD Builders Case stands uncontroverted as of now and therefore, the same is binding on all sub-ordinate Courts including this Tribunal.

Accordingly, the matter travelled up to the Hon’ble Supreme Court wherein group of appeals were filed both by the Revenue and the Assessees.

Held:

The Hon’ble Apex Court after elaborate discussion of the various provisions and judicial pronouncements held as under:

• A plain reading of the judgment in the case of Gannon Dunkerleyand Company and Others Vs. State of Rajasthan and Others [2002-TIOL-103-SC-CT-CB],clearly and unmistakably holds that unless the splitting of an indivisible Works Contract is done taking into account the eight heads of deduction, the charge to tax that would be made would otherwise contain, apart from other things, the entire cost of establishment, other expenses, and profit earned by the contractor and would transgress into forbidden territory namely into portion of such cost, expenses and profit as would be attributable in the Works contract to the transfer of property in goods in such contract;

• 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 our 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;

• The Delhi High Court judgment unfortunately misread the judgment of this Court in the case of Mahim Patram Private Ltd. Vs. Union of India [2007-TIOL-23-SC-CT], 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 Hon’ble Apex Court 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

Our Comments:

Levy of Service tax on Turnkey Contracts prior to introduction of Works Contract Services under the Finance Act w.e.f. June 1, 2007 has been a long tale of litigation since past years. With this landmark judgment of the Hon’ble Supreme Court, the haze surrounding the issue will now get clear with the Hon’ble Apex Court delivering final verdict by ruling that no Service tax can be levied on Works Contract in prior to June 1, 2007 .

On the principle of prudence, it is astonishing to see this matter travelling till the Hon’ble Supreme Court to decide whether a tax introduced on June 1, 2007 can be made applicable to certain services existing prior to that date. Nonetheless, the Hon’ble Apex Court has re-affirmed what the Hon’ble Justice Shri. Raghuram delivered in the Delhi Tribunal Verdict by stating that “Harvesting revenue, by levy and collection of taxes qua legislation by Parliament must therefore clearly avoid encroachment into the field(s) authorized to States; and vice-versa.”

Further, the Hon’ble Justice Raghuram in his speech at FAPCCI, Hyderabad on January 17, 2015 has said that something is pathologically, terminally and seriously wrong with our Departmental adjudication.

Until and unless the Department stops raising such futile issues, there cannot be an end to unproductive litigations in the Country.