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Supreme Court
Reverses Judgment of
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the labour and service element on the other, which is taxable, by the Central
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 Rule 2A of the Service tax (Determination of Value) Rules
2006 provides a scheme for the valuation of a works
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Nangia & Co- The Newsflash : Supreme Court Reverses Judgment of Larger Bench to Hold that Indivisible/ Composite Turnkey Contracts not Liable to Service Tax Prior to June 2007 ”

Nangia & Co- The Newsflash : Supreme Court Reverses Judgment of Larger Bench to Hold that Indivisible/ Composite Turnkey Contracts not Liable to Service Tax Prior to June 2007 ”
Published on: Mar 3, 2016
Published in: Economy & Finance      
Source: www.slideshare.net


Transcripts - Nangia & Co- The Newsflash : Supreme Court Reverses Judgment of Larger Bench to Hold that Indivisible/ Composite Turnkey Contracts not Liable to Service Tax Prior to June 2007 ”

  • 1. New Delhi | Mumbai | Dehradun | Singapore www.nangia.com Supreme Court Reverses Judgment of Larger Bench to Hold that Indivisible/ Composite Turnkey Contracts not Liable to Service Tax Prior to June 2007 The majority judgment of the Larger Bench of the Central Excise and Service tax Appellate Tribunal, Delhi (‘CESTAT’) in M/s. Larsen and Tubro Limited v CST, Delhi had held that a composite contract, involving transfer of property in goods and rendition of services, could be vivisected and service components thereof subject to the levy of service tax, on classification of services under the taxable service categories of ‘Commercial or Industrial Construction service (‘CICS’), Construction of Complex Service (‘COCS’) or Erection, Commissioning or Installation service (‘ECIS’)’, prior to June 2007. The minority judgment of CESTAT, on the other hand, while ruling that components of a composite transaction amounting to supply of labour/ rendition of service(s) under a works contract were taxable under the Act w.e.f 1 June 2007, held that the same could not be classified under CICS, COCS or ECIS and made liable to service tax prior to June 2007. The issue whether service tax could be levied on indivisible works contracts prior to the introduction of the taxable service category of ‘Works Contract services’ (w.e.f 1 June 2007) under the Finance Act 1994 (‘Act’), which expressly makes such works contract liable to service tax thus went in appeal to the Supreme Court. Before the Supreme Court, the Revenue argued as follows:  The 46th Constitutional Amendment has itself divided works contracts by virtue of Article 366(29A)(b). After taking the ‘goods’ element from such contracts, what remains is the ‘labour and service’ element which has been subjected to tax by various entries in the Act;  The Act itself contains both the charge of tax as well as the machinery by which only the labour and service element in these indivisible contracts is taxable. The Act need not do what the Constitutional Amendment has already done – namely split the indivisible works contract into a separate contract of transfer of property in goods involved in the execution of the works contract on the one hand, which is taxable by the States, and the August, 2015 - Volume 9
  • 2. www.nangia.com the labour and service element on the other, which is taxable, by the Central Government;  The fact that the 2007 Finance Act Amendment has infact defined works contract for the first time and sought to split it and tax only the element of labour and service would make no difference because whatever elements of works contracts were taxable under the Act, would continue to be taxable and would be untouched by the said amendment. The assesse, on the other hand, contended as follows:  A works contract is a separate species known to the world of commerce and law as such. That being so, an indivisible works contract would have to be split into its constituent parts by necessary legislation which would then contain, post splitting, a charge to service tax together with the necessary machinery to enforce such charge;  Not only was there no such charge pre-2007 but there were no machinery provisions as well to bring indivisible works contracts under the service tax net. What was taxable under the Act were only cases of pure service in which there was no goods element involved. The Supreme Court while allowing the appeal of the assessee, inter-alia, observed/ ruled as follows:  Service tax charging section itself must lay down with specificity that the levy of service tax can only be on works contract, and the measure of tax can only be on that portion of works contract which contain a service element which is to be derived from the gross amount charged for the works contract less the value of property in goods transferred in the execution of the works contract. This not having been done by the Act, it is clear that any charge to tax under the five heads of the Act (i.e. consulting engineer services, CICS, COCS, EICS, technical testing and analysis services) would only be of service contracts simpliciter and not composite indivisible contracts.  Under the scheme of taxation under the Constitution of India, taxation entries are contained only in lists I and II of the 7th Schedule. This is for the reason that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There is no concurrent power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be struck down. In the present case, the dichotomy is between sales tax leviable by the States and service tax leviable by the Centre. When it comes to composite indivisible works contracts, such contracts can be taxed by Parliament as well as State legislatures. Parliament can only tax the service element contained in these contracts, and the States can only tax the transfer of property in goods element contained in these contracts. Thus, it becomes very important to segregate the two elements completely for if some element of transfer of property in goods remains when a service tax is levied, the said levy would be found to be constitutionally infirm.  The assessee is 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 as such and has to be taxed separately as such. The assesse’s argument that there is no charge to tax of works contract in the Act is correct.  A close look at the Act would show that the five taxable services referred to in the charging section 65(105) of the Act would refer only to service contracts simpliciter and not to composite works contracts. This is clear from the very language of section 65(105) of the Act 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. Further as per section 67 of the Act, the value of a taxable service is the gross amount charged by the service provider for such service rendered by him. This would unmistakably show that what is referred to in the charging section provision is the taxation of service contracts simpliciter and not composite contracts. It will also be noticed that no attempt to remove the non-service elements from the composite works contract has been made by any of the sections of the Act by deducting from the gross value of the works contract the value of property in goods transferred in the execution of a works contract.
  • 3.  Rule 2A of the Service tax (Determination of Value) Rules 2006 provides a scheme for the valuation of a works contract and it is this scheme alone which complies with the constitutional requirements in that it bifurcates a composite indivisible works contract and takes care to see that no element attributable to the property in goods transferred pursuant to such contract, enters into computation of service tax.  The Act lays down no charge or machinery to levy and assess service tax on indivisible composite works contract, prior to June 2007. This is also for the simple reason that there is no subterfuge in entering into composite works contracts containing elements of both transfer of property in goods as well as labour and services. [Source: Commissioner, Central Excise & Customs, Kerala v M/s. Larsen & Tubro Limited (Civil Appeal no. 6770 of 2004)] OUR OFFICES www.nangia.com nangia@nangia.com DELHI Suite - 4A, Plaza M-6, Jasola, New Delhi–110 025 Ph: +91-11-4737 1000, Fax: +91-11-4737 1010 MUMBAI 11th Floor, B Wing, Peninsula Business Park, Ganpatrao Kadam Marg, Lower Parel, Mumbai–400 013, India Ph: +91-22-6173 7000 Fax: +91-22-6173 7060 DEHRADUN 3rd Floor, NCR Plaza, New Cantt. Road, Dehradun–248 001 Ph: +91-135-274 7081, +91-135-274 7082 Fax: +91-135-2747080 SINGAPORE 24 Raffles Place, #25-04A Clifford Centre Singapore- 048621 11

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