2015 (8) TMI 749 - SC - Service Tax

Works Contract - Levy of service tax prior to 1.6.2007 - Whether service tax can be levied on indivisible works contracts prior to the introduction on 1st June 2007 of the Finance Act 2007 which expressly makes such works contracts liable to service tax. - Held that - assessees are correct in their submission that a 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 1994 would show that the five taxable services referred to in the charging Section 65(105) would refer only to service contracts simpliciter and not to composite works contracts. This is clear from the very language of Section 65(105) which defines taxable service as any service provided . All the services referred to in the said sub-clauses are service contracts simpliciter without any other element in them such as for example a service contract which is a commissioning and installation or erection commissioning and installation contract. In fact the speech made by the Hon ble Finance Minister in moving the Bill to tax Composite Indivisible Works Contracts specifically stated - State Governments levy a tax on the transfer of property in goods involved in the execution of a works contract. The value of services in a works contract should attract service tax. Hence I propose to levy service tax on services involved in the execution of a works contract. However I also propose an optional composition scheme under which service tax will be levied at only 2 per cent of the total value of the works contract. Absence of valuation rules to determine the correct value - The Delhi High Court judgment in G.D. Builders 2013 (11) TMI 1004 - DELHI HIGH COURT unfortunately misread the Mahim Patram s judgment 2007 (2) TMI 73 - SUPREME COURT OF INDIA of this Court 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. The Patna Madras and Orissa High Courts have in fact either struck down machinery provisions or held machinery provisions to bring indivisible works contracts into the service tax net as inadequate. We need only state that 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. This is also for the simple 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. We have been informed by counsel for the revenue that several exemption notifications have been granted qua service tax levied by the 1994 Finance Act. We may only state that 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-existent no question of any exemption would arise. Works contract were not chargeable to service tax prior to 1.6.2007 - Decided in favor of assessee.

Summary

Issues Involved:
1. Whether service tax can be levied on indivisible works contracts prior to the introduction of the Finance Act, 2007.
2. The interpretation of the Constitution (46th Amendment) Act, 1983, particularly Article 366(29A)(b).
3. The applicability of the Finance Act, 1994, to indivisible works contracts.
4. The adequacy of machinery provisions for the assessment of service tax on indivisible works contracts.
5. The validity of the Delhi High Court's judgment in G.D. Builders v. UOI concerning service tax on works contracts.
6. The relevance of Mcdowell's case and Section 23 of the Indian Contract Act to indivisible works contracts.

Detailed Analysis:

1. Levy of Service Tax on Indivisible Works Contracts Prior to Finance Act, 2007:
The core issue was whether service tax could be levied on indivisible works contracts before the Finance Act, 2007. The court examined the historical context starting with the State of Madras v. Gannon Dunkerley & Co. (1959), which held that a building contract, being indivisible, did not constitute a sale of goods and thus could not be taxed by state legislatures. This was based on the premise that works contracts are composite and inseparable, involving both goods and services.

2. Interpretation of Article 366(29A)(b):
The Constitution (46th Amendment) Act, 1983, added Article 366(29A)(b), allowing states to tax the transfer of property in goods involved in the execution of works contracts. The Builders' Assn. of India v. Union of India (1989) upheld this amendment, enabling states to levy sales tax on the value of goods involved in works contracts. The court emphasized that the amendment created a legal fiction, splitting works contracts into separate contracts for goods and services.

3. Applicability of Finance Act, 1994, to Indivisible Works Contracts:
The Finance Act, 1994, introduced service tax on various services but did not explicitly cover indivisible works contracts. The court noted that the 1994 Act's charging sections referred only to service contracts simpliciter, not composite works contracts. The absence of specific provisions to segregate the service element from the goods element in works contracts rendered the levy of service tax on such contracts impermissible before the 2007 amendment.

4. Adequacy of Machinery Provisions for Assessment:
The court highlighted the necessity of clear machinery provisions for assessing service tax on works contracts. It referred to the second Gannon Dunkerley judgment (1993), which detailed the deductions required to segregate the value of goods from the service element in works contracts. The Finance Act, 1994, lacked such provisions, leading to potential unconstitutional taxation of goods elements within works contracts.

5. Validity of Delhi High Court's Judgment in G.D. Builders v. UOI:
The court found the Delhi High Court's judgment in G.D. Builders flawed. The High Court had incorrectly concluded that the Finance Act, 1994, provided for the taxation of indivisible works contracts. The Supreme Court emphasized that the High Court misinterpreted the absence of rules for computation of tax as non-detrimental to the levy of service tax, contrary to established principles requiring clear machinery provisions for tax assessment.

6. Relevance of Mcdowell's Case and Section 23 of the Indian Contract Act:
The revenue argued that post-1994 indivisible works contracts were designed to evade tax, invoking Mcdowell's case and Section 23 of the Indian Contract Act. The court rejected this argument, stating that the absence of a clear charge and machinery for service tax on such contracts precluded any finding of tax evasion. The court reiterated that entering into composite works contracts was not a subterfuge but a recognized commercial practice.

Conclusion:
The Supreme Court allowed the appeals of the assessees and dismissed the appeals of the revenue. It held that service tax could not be levied on indivisible works contracts before the Finance Act, 2007, due to the absence of specific provisions and machinery for segregating the service element from the goods element in such contracts. The court emphasized the need for clear legislative provisions to ensure constitutional validity in taxation.