Recently in the case of Larsen & Toubro and others1, the Apex Court had occasion to examine that whether imposition of service tax on composite works contract was valid under various sub-clauses of S. 65(105) as existed prior to 1-7-2012. The Hon’ble Delhi High Court in G. D. Builder’s Case2 had held that service tax was leviable on service portion of a composite contract involving material and services even if the rules were not framed for computation of tax. In Larsen and Toubro’s case the ratio of G. D. Builder’s case was challenged and the Hon’ble Supreme Court in para 34 of the judgment referring to Mahim Patram Pvt. Ltd vs. UOI3 held that, “the Delhi High Court judgment unfortunately misread the aforesaid judgment of this Court to arrive at the conclusion that it was an authority for the proportion that a tax is leviable even if no rules are framed for assessment of such tax, which is wholly incorrect”. The conclusion reached by the Delhi High Court was held as wholly incorrect.
The core issue before the Hon’ble Supreme Court was that whether five taxable services, namely, ‘Consulting Engineer Service’ (sub-cl. g), ‘Erection Commission and Installation Service’ (sub-cl. zzh), ‘Technical Testing and Analysis Service’ (sub-cl. zzd), ‘Commercial or Industrial Construction Service’ (sub-cl. zzq) and ‘Construction or Complex Service’ (sub-cl. zzzh) were whether capable of imposing the charge on a composite contract, particularly when S. 67 target only value of taxable service i.e. “the gross amount charged by the service provider by such service provided by him”. The charging S. 66 seeks to levy charge of service tax on services defined in various sub–clauses of S. 65(105). The operating portion of S. 65(105) describe “taxable service” as “service provided or to be provided…………”. The combined reading of S. 65(105), S. 66 and S. 67 would unequivocally show that what is referred to in the law (Ch. V of Finance Act, 1994) is the taxability of the service contract simpliciter and not a composite works contract. In none of the relevant clauses, there was any provision to remove the property in goods transferred in the execution of works contract. In G. D. Builder’s case the Delhi High Court rejected the contention on the assessee holding that the provisions of the clauses (zzd), (zzq) and (zzzh) were applicable only to the service contracts and not to the composite works contract and the question of bifurcation of service element did not arise at all. The judgment of Delhi High Court in the impugned case is effectively overruled.
The Hon’ble Supreme Court found the findings of the Delhi High Court is misplaced that the term, ‘gross amount charged’ in S. 67 signifies the gross amount charged for the service portion and not the whole amount of the works contract as several deductions have to be made to arrive at the service portion from the indivisible works contract amount. The Court further observed that even in case of completion and finishing of service, the exemption for material portion was not allowed at all which means that the service tax was required to be paid on the entire portion including the material portion in the case of that service.
The argument of the revenue that the exemption notification4 providing for exemption of certain percentage of the contract value gave the enough sanctity to the levy was found illogical and irrelevant, thus, “whichever judgments which are in appeal before us and have referred to and dealt with such notifications will have to be disregarded. Since, the levy itself of service tax has been found to be non-existence, no question of any exemption would arise”. Therefore on the basis of the exemption notification, levy of service tax cannot be justified as valid as the ‘Erection, Commission and Installation Service’, ‘Commercial or Industrial Construction Service’ and ‘Construction or Complex Service’ as under the relevant provisions the levy of service tax is non-existence on composite works contract. The exemptions were only in respect of material portion, whereas the exemption u/s. 93 could be granted from the value of taxable service and not for material portion which was not a service at all. It is well settled that a notification cannot expand or enlarge the charging section. Further, the subsequent legislation, viz. the insertion of clause (zzzza) showed that the earlier legislation would not cover the composite works contract and the impugned exemption notification was ultra vires to the Act.
A view is expressed that from 1-6-2007 the levy of service tax is valid even under clauses (g), (zzd), (zzh), (zzq) & (zzzh). Such a view fails to appreciate that the judgment of the Hon’ble Supreme Court is that those clauses never gave power to the Government to tax other than the service element. Thus, the said judgment would hold good even after 1-6-2007 so far as the levy of service tax on composite works contract under those clauses is concerned. The power to levy service tax on service portion involved in composite works contract was assumed by the Government only from 1-6-2007 when the Parliament inserted sub-clause (zzzza) of clause (105) of S. 65 of the Finance Act, 1994 by the amendment made by the Finance Act, 2007 and provisions were made under the rules to compute value of taxable service under composite contract or to pay tax under composition scheme rules.
The fallout of the judgment
1. No service tax can be levied on composite works contract under sub-clauses (g), (zzd), (zzh), (zzq) & (zzzh) of S. 65(105), i.e. ‘Consulting Engineer Service’, ‘Technical Testing & Analysis Service’, ‘Erection, Commission and Installation Service’, ‘Commercial or Industrial Construction Service’ and ‘Construction or Complex Service’ at all, as these services refers only to pure service contracts.
2. S. 67 referring to valuation of service is applicable to pure services only and the exemption notifications with respect to material portion are of no consequence.
3. Service tax on construction of building where provision of material (transfer of property in goods) is also a part of the contract under sub-clauses (zzq) & (zzzh) is wholly outside the purview of the Finance Act, 1994. Thus, service tax on under-constructed sale of flats or units of immovable properties is also outside the purview of the law, being nothing but a specie of composite works contract as held by the Apex Court in K. Raheja Development Corporation’s5 case. With this judgment, all pending disputes of levy of service tax on under-constructed flats under sub clause (zzq) & (zzzh) of S. 65(105) may be resolved in assessee’s favour.
4. No service tax can be levied on completion and finishing contracts under sub-clauses (zzq) & (zzzh).
5. Free supply of material may not be covered under service tax as the exemption notification itself is invalid. The issue of leviability of service tax on free supply of material is pending in Supreme Court and it may be guided by this judgment.
6. The judgment can also have the repercussion on the Declared Service clause (b) of S. 66E from 1-7-2012, however, the same needs to be tested.
7. A question may arise of ability of claim of refund by the assessee who has paid service tax under the impugned clauses as existed prior to 1-7-2012. However, the refund depends on the factors like ‘unjust enrichment’ i.e. recovery of taxes from the buyers and the controversy as regards to time barring in refund claim which is not discussed here. However, in principle it is clear that under Article 265 of the Constitution of India no tax can be levied or collected expect with the authority of the law and this case may be regarded as perfect example of such unauthorised levy.
(Source: Article published in souvenir of National Tax Conference held at Varanasi on 10 & 11 October 2015)