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 grounds.

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 20-08-2015


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