2013 (11) TMI 1004 - HC - Service Tax

Service Tax on Composite Construction Contracts Upheld Under 46th Amendment and Aspect Doctrine Validated

GD. Builders And Others Versus UOI And Another

The HC upheld the levy of service tax on the service component of composite contracts involving construction services, rejecting the challenge that ... Construction services - Challenge to the levy on the ground that the Parliament cannot impose service tax on material or goods used in execution of works/composite contract Central Sales Tax is payable and levied on material used in “works contract” with effect from 11th May, 2002 after amendment of the Central Sales Tax Act, 1956 vide Finance Act, 2002 - Power of levy service tax on “composite or works contracts” - validity of abatement of 67% - violation of Article 14 of the Constitution - Held that:- After 46th Amendment to the Constitution, composite contracts can be bifurcated to compute value of the goods sold/supplied in contracts for construction of buildings with labour and material. The service portion of the composite contracts can be made subject matter of service tax. Aspect doctrine is applied for bifurcating/vivisect the composite contract 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. 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 the service element in a composite contract. This curtails litigation, ambiguity, ensures clarity and consistency. A notification cannot be declared as invalid or ultra vires for this reason, provided it is optional. Authorities cannot compel and force an assessee to accept the notifications in question and pay tax accordingly, as seeking coverage under the notification is voluntary. An assessee can state that the service component of a composite contract should be computed in a fair and reasonable manner and accordingly taxed. The notifications meet the tests laid down under Section 93 and 94 of the Act because they relate to manner and mode of computation of service tax in a composite contract. The object and purpose is not to tax as non-service element or to include non-taxable part of the composite contracts. It has not been shown and established that the formula or the value prescribed in the notifications is absurd or irrational. The said notifications are not per se an arbitrary exercise and contrary to data or formula for computing service element. In taxation matters, classification should not be struck down as discriminatory unless there are strong and compelling reasons that show absurdity and, therefore, violation of Article 14 of the Constitution. All writ petitions dismissed - Decided against the assessee. ISSUES: Whether service tax can be levied on the entire value of composite or works contracts including the value of goods and materials used, or only on the service component thereof.Validity of exemption notifications granting abatement (67%) on the gross amount charged in relation to construction services under Section 93 of the Finance Act, 1994.Whether the Central Government has the power under residual entry 97 of List I of the Seventh Schedule to impose service tax on composite or works contracts that include goods and materials.Whether the explanation appended to the exemption notifications, including value of goods and materials in the gross amount charged, is ultra vires the Finance Act, 1994.Interpretation and application of Sections 65(105)(zzq), 65(105)(zzzh), and 65(105)(zzzza) of the Finance Act, 1994, relating to taxable services in construction and works contracts.Whether the notifications in question are mandatory or optional, and the implications of exercising or not exercising the option.Whether the valuation provisions under Section 67 permit inclusion of value of goods and materials supplied or used in the execution of taxable services for service tax computation.Whether the levy of service tax on composite contracts conflicts with the State's power to levy sales tax or value added tax on goods involved in such contracts.Whether the absence of detailed rules for bifurcation of service and goods components invalidates the levy of service tax on the service component.Whether the notifications violate Article 14 of the Constitution by being arbitrary or discriminatory. RULINGS / HOLDINGS: The service tax is leviable only on the 'service element' of composite or works contracts and not on the value of goods or materials used therein; the Central Government does not have power to impose service tax on goods under residual entry 97 of List I.The exemption notifications granting 67% abatement on the gross amount charged are valid, optional, and serve as a convenient method to compute the service component, and do not expand or enlarge the charging provisions of the Finance Act, 1994.The explanation in the notifications that the 'gross amount charged' includes the value of goods and materials supplied or used is not ultra vires, as the notifications are optional and do not compel assessees to pay tax on goods; assessees can compute and pay service tax on the actual service component.Sections 65(105)(zzq) and 65(105)(zzzh) impose service tax on construction services related to commercial/industrial and residential complexes respectively, and service tax is payable on the service element in composite contracts satisfying these provisions.Section 65(105)(zzzza) introduced service tax on works contract service from 1st June 2007, which is a broad levy including composite contracts; however, this does not negate the applicability of earlier provisions for construction services.The notifications under Section 93 are not mandatory but optional; an assessee may choose to avail the abatement formula or compute service tax on the service component by other methods.Section 67 requires valuation of taxable service as the gross amount charged for the service provided or to be provided, excluding value of goods; there is no provision for inclusion of goods value in the taxable service value.The levy of service tax on the service component does not infringe upon the State's power to levy sales tax or VAT on goods involved in composite contracts, consistent with Article 366(29A) and related jurisprudence.The absence of detailed rules for bifurcation does not invalidate the levy of service tax on the service component; the notifications provide an optional formula to avoid cumbersome assessments.The notifications are not arbitrary or discriminatory and do not violate Article 14 of the Constitution; classification and optional abatement methods are constitutionally valid. RATIONALE: The Court applied the legislative framework of the Finance Act, 1994 and its amendments, particularly Sections 65(105)(zzq), (zzzh), and (zzzza), along with Sections 66, 67, 93, and 94 concerning charging, valuation, and exemption of service tax.The Court relied on constitutional provisions, especially Article 246 (distribution of legislative powers) and Article 366(29A) (definition of sale including works contracts), to distinguish between service tax (Union List) and sales tax/VAT (State List).Precedents including the Full Bench decision in Home Solutions Retail (India) Ltd., Tamil Nadu Kalyana Mandapam Assn., K. Raheja Development Corpn., Larsen & Toubro Ltd., Gannon Dunkerley & Co., Mahim Patram (P) Ltd., and Supreme Court decisions on the nature of service tax and works contracts were extensively considered.The Court emphasized the principle that a notification cannot expand or enlarge the charging section or amend the statute but may provide procedural or valuation methods, provided they are optional and do not impose tax beyond the charging provisions.The aspect theory and legal fiction introduced by the Forty-sixth Amendment were applied to uphold bifurcation of composite contracts into taxable service and sale of goods components, permitting concurrent taxation by Union and States respectively.The Court distinguished the present case from precedents where notifications were struck down for taxing beyond the charging section, noting that the present notifications are consistent with the Finance Act and constitutional scheme.The Court recognized the practical difficulties in valuation and bifurcation of composite contracts and upheld the optional abatement notifications as a reasonable legislative response to such challenges.There was no dissenting or concurring opinion recorded.