TMI Blog2013 (11) TMI 1004X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. It is procedural and a matter of calculation. Merely because no rules are framed for computation, it does not follow that no tax is leviable. The notifications in question are in alternative and optional. An assessee may take advantage or benefit of the notifications, but cannot be compelled to pay service tax on the proportion or value of a composite contract as per the notification. This is because the formula framed by way of delegated legislation is presumptuous and based on assumption. However, if an assessee wants to take benefit of the notification, he must comply and adhere to the terms and conditions stipulated as per the notification. An assessee to claim benefit or advantage as per a notification must meet the preconditions or stipulations stated therein. An assessee cannot take benefit or advantage of a part of a notification but claim that the other part of the notification should be ignored and thus not acted upon. Notification has to be applied in entirety. Notification has to be read as a whole keeping in mind its objective and purpose. Notification may provide a convenient, hassle free and adopt a non-discretionary formula for computing value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to column 4 entries at S. No. 5, 7 and 10. In some writ petitions, assessment orders have been passed and appellate proceedings have been initiated. However, in Writ Petition No. 4107/2008 by G.D. Builders, Writ Petition No. 5046/08 by Unitech Limited, Writ Petition Nos. 401/2009, 4057/2010 6658/2010 by Simplex Infrastructure Ltd. and Writ Petition Nos. 4187/2008 and 5646/2010 filed by Vistar Construction Pvt. Ltd., show cause notices have been issued and the proceedings are still pending before the original authority. In Writ Petition No. 4127/2008 filed by Clarion Properties Ltd. and Writ Petition No. 4658/2008 filed by Vipul Limited, notice for appearance of furnishing of documents/reply has been given and even show cause notice has not been issued. Contentions of the Petitioners 2. Contentions of the petitioners can be crystallized as under:- (i) Service tax levied from time to time by Finance Act, 1994 and subsequent amendments is in exercise of power under residual entry 97 of List I of the Seventh Schedule of the Constitution of India. It is levied on taxable service as defined in Section 65(105) read with definition clauses. (ii) Service tax is applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice Tax (Determination of Value) Rules, 2006 determines value of services involved in works/composite contracts and it is levied @ 2%, enhanced to 4% with effect from 1st March, 2008. The said levy is not applicable to services covered under Section 65(105)(zzq) and (zzzh). (ix) There is a conflict between Section 65(105)(zzzza), (zzq) and (zzzh) and what is covered by Section 65(105)(zzzza) cannot be covered by Section 65(105)(zzq) and (zzzh). The two sets of provisions cannot co-exist. Subsequent legislation shows that the earlier legislation will not cover composite or works contract . (x) Section 66 is the charging section and provisions of Section 67 are the valuation provisions. Value of taxable services under Section 67 is the gross amount charged by the service provider for such services provided or to be provided . Service tax can be charged only for the specified taxable services as defined in sub-clauses of Section 65(105). Tax can be only on the value of services and not beyond. There is no provision for a notional value or to enable the authorities to reduce or subtract value of material or goods. The gross amount charged or the value of service cannot i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce tax on construction of complexes (residential complexes) under section 65(105)(zzzh) with effect from 16th June, 2005. The term construction of complexes was defined in Section 65(30a) as under:- construction of complex means- (a) construction of a new residential complex or a part thereof; or (b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal journey and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or (c) repair, alternation, renovation or restoration of, or similar services in relation to, residential complex; The expression residential complex was defined in Section 65(91a) but we need not refer to the said definition as it is not relevant. 6. Section 65(105)(zzzza) introduced service tax in respect of works contract service with effect from 1st June, 2007 by Finance Act, 2007 and reads as under:- Taxable service means any services provided or to be provided to any person, by any other person in relation to the execution of a works contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of India, in the Ministry of Finance, (Department of Revenue) No.12/2003-Service Tax, dated the 20th June, 2003 [G.S.R. 503 (E), dated the 20th June, 2003]; or (iii) the taxable services provided are only completion and finishing services in relation to building or civil structure, referred to in sub-clause (c) of clause (25b) of section 65 of the Finance Act, 1994. Explanation.- For the purposes of this notification, the gross amount charged shall include the value of goods and material supplied or provided or used by the provider of the commercial or industrial construction service for providing such service. 8. For the purpose of clarity, we record that clauses (ii) and (iii) of the proviso were added by way of amendment notification No.19/2005-ST dated 7th June, 2005. What is subject matter of challenge before us are two pronged; the explanation and clause (iii) of the proviso. The effect of clause (iii) to the proviso was/is that benefit of the said notification would not be available in case the service provider was providing completion and finishing services in relation to building or civil structure referred to in sub-clause (c) of clause (25b) of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of the description specified in column (3) of the Table below and specified in the relevant sub-clauses of clause (105) of section 65 of the Finance Act, specified in the corresponding entry in column (2) of the said Table, from so much of the service tax leviable thereon under section 66 of the said Finance Act, as is in excess of the service tax calculated on a value which is equivalent to a percentage specified in the corresponding entry in column (5) of the said Table, of the gross amount charged by such service provider for providing the said taxable service, subject to the relevant conditions specified in the corresponding entry in column (4) of the Table aforesaid: Table S.No Sub-clause of clause (105) of Section 65 Description of taxable service Conditions Percentage (1) (2) (3) (4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, the expression food means a substantial and satisfying meal and the expression catering service shall be construed accordingly. 11. The challenge, as noticed above, is to the stipulations in column 4. Service Tax and Computation 12. Service tax is a value added tax which was/is imposed and levied by the Parliament by way of Finance Act, 1994. It was imposed in phases and presently it is imposed on all taxable services as defined, except for the negative list. 13. Section 65A states that classification of taxable services shall be determined in accordance with the said-clauses of clause (105) of section 65 and where for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected as follows :- (i) Specific description shall be preferred to more general description; (ii) Composite services consisting of a combination of different services which cannot be classified as per clause (i), shall be classified as if they consist of a service which gives them their essential character, in so far as this criteria is applicable; (iii) Where a service cannot be classified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. (4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. Explanation. For the purposes of this section, (a) consideration includes any amount that is payable for the taxable services provided or to be provided; (b) money includes any currency, cheque, promissory note, letter of credit, draft, pay order, travelers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value (Omitted by Finance Act 2012 w.e.f. 1st July 2012) (c) gross amount charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment. With effect from 19th April, 2006, Service Tax (Determination of Value) Rules, 2006 have become applicable. Discussion 16. Before be delve further into the questions, we would like to reproduce the statements made by the counsel as recorded in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strial and commercial complexes. In the second stage, service tax was imposed on residential complexes of 12 or more residential units and in the third stage, service tax was imposed on works contracts of any nature except for the exclusion in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. Each provision or levy has its own scope and ambit, while the first two provisions were primarily specific and targeted, the third inclusion i.e. works contract is very broad and wide term and will include within its ambit and scope construction of industrial and commercial complex or construction of residential complexes as specified. Introduction and imposition of service tax on works contract by Finance Act, 2007 does not mean that we have to read down, the scope and ambit of the provisions enacted levy tax on contracts relating to commercial and industrial construction service or construction of (residential) complexes services as specified by Finance Act 2004 and Finance Act 2005 respectively. The new levy imposed by Finance Act 2007 does not indicate or show that works contract relating to construction of industrial and commercial complexes or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (viii) Value added tax is a general tax as well as destination based consumption tax leviable on services provided within the country. (ix) The principle of equivalence is in-built into the concept of service tax. (x) The activity undertaken in a transaction can have two components, namely, activity undertaken by a person pertaining to his performance and skill and, secondly the person who avails the benefit of the said performance and skill. In the said context, the two concepts, namely, activity and the service provider and service recipient gain significance. 20. In Tamil Nadu Kalyana Mandapam Asscn. vs. UOI and Ors. (2004) 267 ITR 9 (SC), challenge was made and rejected by the Supreme Court on imposition of service tax on Kalyan Mandapam or Mandap keepers who provided furniture, fixtures, floor coverage etc for organizing social or business functions. The tax on service was defined as any service provided to a client by a mandap keeper in relation to use of mandap in any manner, including facilities provided to the client in relation to such use and also the service, if rendered, as a caterer. The Supreme Court made reference to the 46th amendment i.e. Article 366 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication, erection, installation, fitting out, improvement, modification of any moveable or immovable property. It was observed that the definition was not restricted to works contract as commonly understood i.e. contract to do work on behalf of somebody else. It was further observed that the definition makes no distinction between contract for residential flat or commercial unit and would, therefore, include construction of commercial units. As long as the agreement was entered into before the construction was complete , it would be a works contract (we are not required to interpret and construe the expression complete in the present case). Thus the definition clauses in the Act for applying section 65(105)(zzq) and (zzzh) have to be given full effect. 22. Affirming the judgment in the case of Raheja Development (supra), the Supreme Court in its recent decision Larsen Toubro Limited versus State of Karnataka, Civil Appeal No.8672/2013 elucidated the effect of Article 366 (29A) as conferring power on the States to tax works contract by taxing transfer of property in goods whether as goods, or in the form of goods involved in the execution of works contracts . The expressi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to a third party either as goods or in some other form. (ii) XXXXX (iii) Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term works contract in Article 366 (29- A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term works contract . (iv) Building contracts are species of the works contract. (v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished. (vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax contemplated by Article 366 (29-A)(b) is the value of the goods involved in execution of works contract . Since the taxable event is the transfer of property in goods, the said transfer takes place when the goods are incorporated in the works, the value of goods, which can constitute the measure for the levy has to be the value of goods at the time of incorporation of the goods in the works. 24. Similarly in Mahim Patram (P) Ltd. vs. Union of India and Ors. (2007) 3 SCC 668, the Supreme Court referred to the decision of Gannon Dunkerley and Co. vs. State of Rajasthan (Supra) and observed:- 5. It was, however, held while laying down that in the absence of law by Parliament so providing, it was not permissible for the State Legislatures to impose such a tax; it did not mean that the legislative power of the State could not be exercised till the enactment of a law under sub-clause (b) of clause (3) of Article 286 by Parliament, observing: (Gannon Dunkerley case [(1993) 1 SCC 364] , SCC pp. 390-91, para 39) It only means that in the event of a law having been made by Parliament under Article 286(3)(b) the exercise of the legislative power of the State under Entry 54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the extent it is relatable to supply of labour and services; (g) other similar expenses relatable to supply of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services. The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. 26. It was further observed that in deference to the aforesaid judgment in Gannon Dunkerley and Co. vs. State of Rajasthan (Supra), Parliament had made certain amendments but no rule was framed in regard to manner in which the sale price of such transfer could be calculated and it was therefore held:- 27. We are, however, not oblivious of the decision of this Court wherein the measure or value to which the rate will be applied for computing the tax liability is considered to be one of the components of tax. (See Govind Saran Ganga Saran v.CST [1985 Supp SCC 205 : 1985 SCC (Tax) 447] , SCC para 6.) But then measure or value to which rate would be applied is one thing, but how the turnover would be determined is another. Computation provisions may bear a relationship with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said provision would, thus, be applied in respect of transfer of property in goods involved in the execution of works contract. The 1956 Act provides for grant of exemptions and various provisions e.g. proviso appended to Sections 6(1) and 6(2) of the Act. (Emphasis Supplied) 27. Thereafter reference was made to the provisions of U.P. Trade Tax Act, 1948 and the Central Sales Tax Act 1956, whether there exist guidelines for determination of the turnover for the purpose of levy of tax, as works contracts had been brought within the purview of sale. It was observed that Central Sales Tax (U.P.) Rules 1957 was applicable. Clause 3 of Art 286 of the Constitution has also been amended to allow the Parliament to specify by law restrictions and conditions with regards to the system of levy of rates and other incidence of tax on transfer of goods involved in the execution of works contract. It has been highlighted in the Mahim Patram s case (Supra) as follows:- 15. Clause (3) of Article 286 of the Constitution was also amended to enable Parliament to specify by law restrictions and conditions in regard to the system of levy rates and other incidents of the tax on the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is deemed to be a sale or purchase of goods. The concept of catering, admittedly, includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering. Mr Mohan Parasaran, learned Senior Counsel for the appellant submitted that the High Court before applying the aspect theory laid down by this Court in the case ofFederation of Hotel and Restaurant Assn. of India v. Union of India [(1989) 3 SCC 634 : AIR 1990 SC 1637] ought to have appreciated that in that matter Article 366(29-A)(f) of the Constitution was not considered which is of vital importance to the present matter and that the High Court ought to have differentiated the two matters. In reply, our attention was invited to paras 31 and 32 of the judgment of the High Court in which service aspect was distinguished from the supply aspect. In our view, reliance placed by the High Court on Federation of Hotel and Restaurant [(1989) 3 SCC 634 : AIR 1990 SC 1637] and, in particular, on the aspect theory is, therefore, apposite and should be upheld by this Court. In view of this, the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The service tax is made by Parliament under the above residuary powers. The impugned Act was challenged on the ground that it infringed on the State's power to levy tax on luxury vide Entry 62 of the State List. 29. In All India Federation of Tax Practioners Ors. Vs. Union of India Vol. 7 (2007) 7 SCC 527, the Supreme Court upheld levy of service tax on Chartered Accountants and Architects. It was observed that there was no distinction of consumption of goods and consumption of service as both satisfy human needs. Service is an economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution by the 86th amendment. Service tax was a value added tax or a general tax which applies to all commercial activities involving production of goods and provision of services. Reference was made to the principles of equivalence and it was observed: 35. For each contract, tax is levied under the Finance Acts, 1994 and 1998. Tax cannot be levied under that Act without service being provided whereas a professional tax under Entry 60 is a tax on his status. It is the tax on the status of a cost accountant or a chartered accountant. As lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities, but it is not a charge on business, but on a consumer. It is an economic concept on the principle of equivalence in the sense that consumption of goods and consumption of services are similar. Therefore, it is a tax on activity i.e. the value which is added or the value addition which is made by a person providing services. Sometimes, the dividing line between the sale and service may be very thin, especially in cases where value addition is to the goods manufactured, produced or sold, but there is distinction between the two. Service tax is a tax on activity whereas sales tax is a tax on sale of goods or things. Referring to Article 366 (29A), it was observed: Scope of Article 366(29-A) 49. If one examines Article 366(29-A) carefully, one finds that clause (29-A) provides for an inclusive definition and has two limbs. The first limb says that the tax on sale or purchase of goods includes a tax on transactions specified in sub-clauses (a) to (f). The second limb provides that such transfer, delivery or supply of goods referred to in the first limb shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of legislative competence. (P. 26) 31. The contention of the petitioners that the impugned notifications override the statutory provisions contained in Section 65(105), which defines the term taxable service , Section 66, which it is claimed is a charging section, and Section 67, the valuation provisions of the Finance Act, 1994, has to be rejected. We have, as already stated above, rejected the argument of the petitioners on bifurcation/vivisect and held that as per the provisions of Section 65(105)(zzq) and (zzzh), service tax is payable and chargeable on the service element of the contract for construction of industrial and commercial complexes and contract for construction of complexes as specified and in case of a composite contract, the service element should be bifurcated and ascertained and then taxed. The contention that the petitioners are paying sales tax or VAT on material in relation to execution of the contract under composite contracts for construction of industrial/commercial complexes and construction contracts as specified under Section 65(105) (zzq) and (zzzh) therefore fails. The contention that there was/is no valid levy or the charging section is not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goods which are transferred in the course of execution of a works contract may be declared goods ; they may be goods which are liable to be taxed under the Central Sales Tax Act, 1956; the goods so transferred may also be taxable under different Schedules to the Kerala Act which prescribe different rates. In such a situation, it is held, levying tax on the entire value of the contract means levy of tax contrary to the provisions of the Central Sales Tax Act and the Kerala General Sales Tax Act. It also means, the Court held, taking the non-taxable components of works contract, e.g., labour and services etc. For all these reasons, it is held, the said sub-sections are clearly beyond the legislative competence of the State Legislature. With great respect, we are unable to agree. The first feature to be noticed is that the alternate method of taxation provided by sub-section (7) or (7-A) of Section 7 is optional. The sub-sections expressly provide that the method of taxation provided thereunder is applicable only to a contractor who elects to be governed by the said alternate method of taxation. There is no compulsion upon any contractor to opt for the method of taxation provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section (7), the contractor pays two per cent of the total value of the contract by way of tax and he is done with all the above-mentioned botheration. The rate of two per cent prescribed by sub-section (7) is far lower than the rates in Schedules 1, 2 and 5 referred to in Section 5(1)(iv)(a). In short, sub-sections (7) and (7-A) evolve a rough and ready method of assessment of tax and leave it to the contractor either to opt for it or be governed by the normal method. (Emphasis supplied) 33. When the charging provisions are attracted, question of computation or measure to compute tax would arise and value of taxable service has to be determined. There is a well settled distinction between subject matter or object of tax; and the measure or computation of the tax imposed. The distinction between the two has to be kept in mind (see Gujarat Ambuja Cements Ltd. vs. Union of India AIR 2005 SC 3020). 34. A Division Bench of Andhra Pradesh High Court in Nagarjuna Construction Company Ltd. Vs. Union of India, (2010) 19 STR 321 (AP) had examined the three provisions which are subject matter of the present writ petition including 2007 Rules enacted under Section 94 of the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the composite contracts can be made subject matter of service tax. Aspect doctrine is applied for bifurcating/vivisect the composite contract (2) Service tax can be levied on the service component of any contract involving service with sale of goods etc. Computation of service component is a matter of detail and not a matter relating to validity of imposition of service tax. It is procedural and a matter of calculation. Merely because no rules are framed for computation, it does not follow that no tax is leviable. (3) The notifications in question are in alternative and optional. An assessee may take advantage or benefit of the notifications, but cannot be compelled to pay service tax on the proportion or value of a composite contract as per the notification. This is because the formula framed by way of delegated legislation is presumptuous and based on assumption. (4) However, if an assessee wants to take benefit of the notification, he must comply and adhere to the terms and conditions stipulated as per the notification. (5) An assessee to claim benefit or advantage as per a notification must meet the preconditions or stipulations stated therein. An assessee cannot ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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