When the Rich Receive Law and the Poor Receive Advice: L&T, Works Contracts, and the Failure of First-Stage Adjudication

People visit the rich with gifts; to the poor they gift advice. In tax adjudication, the distinction is subtler but far more consequential: the rich receive law at the correct stage, while the poor are advised to seek it in appeal.

Few areas illustrate this better than the treatment of works contracts prior to 01.06.2007.

The legal position today is not debatable. It stands conclusively settled by the Supreme Court in Larsen & Toubro Ltd. v. State of Karnataka. The Court recognised that a composite works contract is a distinct, indivisible species, which cannot be artificially split and taxed under pre-existing service categories such as 'commercial construction service' or 'erection, commissioning and installation service.' The taxable entry for 'works contract service' itself was introduced only with effect from 01.06.2007. The implication is direct and inescapable: prior to that date, composite works contracts were not amenable to service tax under the Finance Act, 1994.

This is not an interpretational nuance. It is a binding declaration of law.

Yet, in the field, adjudication tells a different story.

Show cause notices continue to be issued for pre-2007 periods on the old logic of classification. Orders continue to confirm demands by invoking suppression, extended period, and penalties. The reasoning often ignores or sidesteps the ratio of L&T, as though the judgment exists only for appellate forums.

Why does this happen?

Because the application of law is no longer automatic; it is triggered by capacity.

A well-advised assessee cites L&T at the earliest stage. Contracts are placed on record, the composite nature is demonstrated, and the authority is confronted with a clear legal bar. The adjudicating officer, aware that the matter will be tested in appeal, proceeds with caution. Demands are dropped, or at least diluted.

The ordinary assessee stands differently placed. He may not know L&T. He may not understand the distinction between a composite contract and a service contract. He may not appreciate the significance of 01.06.2007. What he receives instead is familiar advice:

'Pay and close the matter.'

'Litigation will be expensive.'

'You can always take it in appeal.'

Thus, even where the law is settled, its benefit is deferred-and deferral, in taxation, is often indistinguishable from denial.

This reveals a deeper institutional problem.

Adjudication under tax statutes is not a mere extension of departmental action. It is a quasi-judicial function, carrying with it an obligation to apply binding precedent faithfully and uniformly. The authority is not expected to defend the show cause notice; it is expected to test it against the law as it stands on the date of decision.

The failure to apply L&T at the adjudication stage is therefore not a minor lapse. It is a departure from judicial discipline.

The consequences are systemic.

First, it converts adjudication into a transit stage, where correctness is postponed to appellate forums. For the affluent, this is an inconvenience. For the ordinary assessee, it is a barrier. Appeals involve cost, time, and uncertainty. An unsustainable demand, when confirmed at the first stage, becomes an enforceable burden, irrespective of its eventual fate.

Second, it distorts the very purpose of precedent. A Supreme Court judgment is meant to settle the law across the system, not merely at its apex. When field formations continue to proceed as though the issue is open, the hierarchy of courts is respected in form but diluted in effect.

Third, it undermines voluntary compliance. When citizens perceive that legality depends on their ability to litigate, the moral authority of the tax system weakens. Compliance becomes tactical, not principled.

The irony is striking. The introduction of the works contract service in 2007 was itself an acknowledgment of legislative limitation prior to that date. The Supreme Court, in L&T, merely articulated what the statute implied. Yet, despite legislative change and judicial clarity, the field continues to revisit settled ground-selectively applying the law depending on who stands before it.

This brings us back to the opening contrast.

The rich receive the benefit of L&T at the stage where it matters most-before the demand crystallises.

The poor are told that L&T is available-if they can reach the appellate forum.

Advice, in such circumstances, is not neutral. It becomes a substitute for justice.

What then is required?

Not new law, but discipline in applying existing law.

Adjudicating authorities must internalise that:

• A binding precedent of the Supreme Court is not optional.
• A demand contrary to such precedent is unsustainable at inception.
• The absence of elaborate representation by the assessee does not dilute the authority's duty to apply the correct law.

The legitimacy of tax administration rests not merely on collection, but on fair and consistent adjudication. The first stage is not procedural-it is foundational. If justice is denied there, its restoration in appeal is partial and delayed.

In the final analysis, the strength of a tax system is measured not by how it treats the powerful litigant, but by how it treats the unrepresented assessee standing alone before authority. If settled law like L&T does not protect him at that stage, then adjudication has reduced itself to form without substance.

People may continue to visit the rich with gifts. That is the way of society.

But if the State, in its adjudicatory function, begins to distribute law in the same unequal measure, it ceases to be an arbiter-and becomes merely another participant in inequality.

And in taxation, that is a cost far greater than any loss of revenue.

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By Adv. G. Jayaprakash (Former Central Excise Officer)