The Supreme Court last month delivered a significant judgment in L&T Ltd & Others. This judgment overrules the decisions of the various benches of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) and high courts. The issue at hand was the levy of service tax on the service element in a composite works contract, prior to the introduction of taxable service of works contract on 1 June 2007. The court declared the law that service tax cannot be levied on the composite contract prior to 1 June 2007 since the taxable service of works contract was not yet on the statute book.
Previously, Delhi High Court in GD Builders & Others (2013) and the majority of the larger bench of the CESTAT (Delhi) in L&T Ltd & Others (2015) laid down that the composite contract could be vivisected and the service element taxed even prior to June 2007 in terms of the taxing entry for commercial or industrial construction service (CICS), construction of complex service (CCS) or erection, commissioning and installation service (ECIS).
The president of the CESTAT had referred the issue to the larger (five-member) bench owing to conflicting views between benches of the tribunal in Jyoti Ltd (2008), Indian Oil Tanking Ltd (2010) and BSBK Ltd (2010).
The Supreme Court noted that the taxable services of CICS, CCS or ECIS under which service elements in composite works contracts were sought to be taxed (prior to June 2007) denote entries to tax service contracts simplicitor but not indivisible composite contracts. The court observed that a works contract is a specific species of contract and cannot be equated with a pure service contract.
The court held that CICS, CCS and ECIS read with the charging provisions in section 66 of Finance Act, 1994, the valuation provisions in section 67, the valuation rules, 2006 (prior to insertion of rule 2A, with effect from 1 June 2007) and relevant exemption notifications did not authorize a levy of service tax on a works contract.
The court held that it is only since the insertion of sub-clause (zzzza) in section 65(105) introducing the taxing entry of works contract service with effect from 1 June 2007, complemented by the amended valuation rules, 2006 (inserting rule 2A), and the composition rules, 2007, that the requisite and appropriate statutory framework for charging, levy, collection and assessment of service tax, supported by appropriate computation/valuation machinery on a works contract stands incorporated in the statute book to enable the levy.
The court observed that while introducing the concept of service tax on indivisible works contracts various exclusions were also made such as works contracts in respect of roads, airports, airways transport, bridges, tunnels and dams. These infrastructure projects were and continue to be excluded presumably in view of the national interest. If a works contract could be taxed before June 2007, each of these exclusions should have been taxed under CICS, CCS and/or ECIS (as not specifically excluded from the ambit of these taxable categories).
The court found several infirmities in the decision in the GD Builders case. Firstly, Delhi High Court mistakenly concluded that the Mahim Patram case (2007) was an authority for the proposition that a tax is leviable even if no rules are framed for assessment of the tax. Further, the high court decision was contrary to the settled position in law that where there is no machinery for assessment, the law being vague, it would not be open to the assessing authority to arbitrarily assess to tax the subject.
Secondly, the GD Builders judgment was incorrect in its conclusion that the Finance Act, 1994, contained both the charge and machinery for levy and assessment of service tax on indivisible works contracts prior to 1 June 2007 as section 66 read with section 65(105) did not contemplate levy of service tax on indivisible composite contracts and section 67 did not provide for a valuation mechanism to arrive at the service element involved in a works contract for the purpose of tax assessment.
The Supreme Court has declared the law and provided much needed clarity on a controversial subject matter with a chequered past. It remains to be seen whether the tax authorities accept this judgment or decide to agitate the issue further by filing a review petition.
Be that as it may, the assessee who did not pay tax can surely heave a sigh of relief for now, while the assessee who may have paid the tax under protest may seek a refund, or assist the person who has borne the incidence of the tax.
Ranjeet Mahtani is an associate partner, Rajat Chhabra is a senior associate and Tadsare is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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