No Service Tax Can Be Levied On Composite Works Contracts Prior To Introduction Of Finance Act 2007 – Supreme Court

The two-judge Bench of Justice MR Shah and Justice BV Nagarathna while holding so placed reliance on the judgment of the Apex Court in the case of Commissioner, Central Excise and Customs, Kerala Vs. Larsen and Toubro Limited, (2016) 1 SCC 170 where after considering the entire scheme of levy of service tax pre-2007 and post-2007, the Court specifically observed and held that on indivisible works contracts, for the period prior to the introduction of Finance Act, 2007, service tax was not leviable under Finance Act, 1994.

It was specifically observed and held that works contracts on which the service tax was levied under the Finance Act, 1994 are distinct from contracts of service.

Justice BV Nagarathna although concurred with the findings of Justice MR Shah but chose to give additional reasons for the conclusions and dealt with the submissions made by Ms. Divan ASG on merits.

Batch of appeals were preferred before the Supreme Court assailing the decision of the Revenue to levy Service Tax on the composite works contract prior to the introduction of the Finance Act, 2007.

ASG Madhavi Divan appeared for the Revenue and contended before the Apex Court that the decision of the Court in the case of Larsen and Toubro Limited (supra) holding that there was no service tax leviable on works contracts prior to the amendment by the Finance Act, 2007 needs to be re-considered.

In support of her submissions, Ms. Divan referred to legislative history of the service tax and also the definition of Works Contract and what can be said to be Works Contract and placed reliance on various precedents of the Apex Court in the light of her contentions.

ASG further argued that there was an elaborate mechanism for segregating the value of the goods component and the service component in a Works Contract. Therefore, it is the case on behalf of the Revenue that it cannot be said that there was no machinery provision to charge as such the service component in a Composite Works Contracts in order to make it excisable service tax.

Therefore, it is the case on behalf of the Revenue that the observations and the findings recorded by this Court in the case of Larsen and Toubro Limited (supra) that there was no service tax leviable on Works Contracts prior to the amendment by the Finance Act, 2007 is fundamentally erroneous and contrary to, and in the teeth of the well settled principles laid down by previous judgments, including the judgments passed by Larger Benches of this Court referred by Ms. Divan.

While Senior Advocate Arvind P. Datar appeared for some of the Assessees and contended that the issued involved in the appeals is squarely covered by the decision of the Court in the case of Larsen and Toubro Limited (supra).

The Apex Court while considering the prayer made on behalf of the Revenue to review and/or revisit the earlier decision of the Court in the case of Larsen and Toubro Limited (supra), referred to few decisions on the principle of stare decisis.

The Court placed reliance on Dr. Jaishri Laxmanrao Patil Vs. Chief Minister and Ors., (2021) 8 SCC 1 and Keshav Mills Co. Ltd. Vs. Commissioner of Income Tax, Bombay North, Ahmedabad, AIR 1965 SC 1636 where it was bserved and held that before reviewing and revising its earlier decision the Court must satisfy itself whether it is necessary to do so in the interest of public good or for any other compelling reason and the Court must endeavour to maintain certainty and continuity in the interpretation of the law in the country.

Further reliance was also placed on K. Ajit Babu and Ors. Vs. Union of India and Ors., (1997) 6 SCC 473, where the Apex Court emphasized on the aspect of consistency, certainty and uniformity in the field of judicial decisions as it sets a pattern upon which future conduct may be based. One of the basic principles of the administration of justice is that identical/similar cases should be decided alike.

The Bench then noted that judgment of the Court in the case of Larsen and Toubro Limited (supra) has stood the test of time and has never been doubted earlier and further observed –

"As observed hereinabove, the said decision has been followed consistently by this Court as well as by various High Courts and the Tribunals. Therefore, if the prayer made on behalf of the Revenue to reconsider and/or review the judgment of this Court in the case of Larsen and Toubro Limited (supra) is accepted, in that case, it will affect so many other assesses in whose favour the decisions have already been taken relying upon and/or following the decision of this Court in the case of Larsen and Toubro Limited (supra) and It may unsettle the law, which has been consistently followed since 2015 onwards. There are all possibilities of contradictory orders. Therefore, on the principle of stare decisis, we are of the firm view that the judgment of this Court in the case of Larsen and Toubro Limited (supra), neither needs to be revisited, nor referred to a Larger Bench of this Court as prayed, i.e., after a period of almost seven years and as observed hereinabove when no efforts were made to file any review application requesting to review the judgment on the grounds, which are now canvassed before this Court."

Therefore, the Court allowed the appeals filed against the decision of the Revenue to levy service tax on the Composite Works Contracts prior to introduction of the Finance Act, 2007 and quashed and set aside the impugned judgments of the relevant High Courts, however the Court dismissed the appeal of the Revenue against the judgment of the CESTAT, West Zonal Bench in view of the binding decision of the Court in the case of Larsen and Toubro Limited (supra).

Justice BV Nagarathna Analysis

Justice Nagarathna dealt with the submission put forth by ASG Madhavi Divan that the decision of the Apex Court in the case of Larsen and Toubro Limited (supra) needs reconsideration.

The Judge before adverting to the contention of Ms. Divan referred to the evolution, meaning and content of the expression works contract in the context of sales tax law and as well as under the service tax regime.

Justice Nagarathna in this context observed –

"…having regard to the definition of works contract being inserted w.e.f. 1st June, 2007 to the Finance Act, 1994 which seeks to impose service tax on the service aspect of a works contract. The reason for this exercise is because works contract by itself is not taxable. A works contract as defined by the amendment has two components, namely, a sale component and a service component. It is only when both the components are satisfied and coexist that a contract becomes a works contract as defined. Further, it is only on the service component of the works contract that the service tax is leviable w.e.f. 1st June, 2007."

Further, the Judge also referred to Section 65(105) (zzzza) of the Finance Act, 1994 which defined Works Contract.

Additionally, Justice Nagarathna referred to the case of Larsen and Toubro Limited (supra) where it was held that works contract is a separate species of contract distinct from contracts for service simpliciter recognised in the world of commerce and law as such and has to be taxed separately as such.

Further, various other precedents were referred to where it was held hat while introducing the concept of service tax on service element of indivisible works contract various exclusions are also made, such as, works contract in respect of roads, airport, airways transport, bridges, tunnels and dams, possibly in the national interest. The implication of the exclusion means that such contracts were never intended to be the subject­matter of the service tax.

It was also observed, "It was categorically observed that since the Finance Act, 1994 lays down no charge or machinery to levy and assess service tax on indivisible composite works contract, therefore, service tax was not existent at all under the Act and hence any exemption qua service tax "levied" did not arise at all."

Justice BV Nagarathna thus further held that the judgment in Larsen and Toubro Ltd. (supra) has been correctly decided and does not call for a reconsideration insofar as the period prior to 1st June 2007 is concerned.

Cause Title - M/s. Total Environment Building Systems Pvt. Ltd. & The Deputy Commissioner of Commercial Taxes & Ors.

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