2015 (3) TMI 748 - AT - Service Tax

Works Contracts Taxable under Service Tax Law Pre-2007, Tribunal Upholds Decision

M/s Larsen And Toubro Limited, M/s. Kehems Engg Pvt. Ltd. And Others Versus CST, Delhi/ CCE&ST, Indore/ CCE/ Rajkot and Others

The Tribunal held that service elements in a composite works contract classifiable under Commercial or Industrial Construction Service (CICS), ... Works contract service - taxability of service component before 1.6.2007 - Larger Bench decision - whether components of a composite transaction amounting to supply of labour/rendition of service(s), under a works contract ought to be classified only under Section 65(105)(zzzza) of the Finance Act, 1994 (the Act) - inserted by the Finance Act, 2007, w.e.f 01-06-2007; or are also comprehended within the ambit of existing (as on 01-06-2007) taxable services such as Commercial or Industrial Construction Service (CICS);Construction of Complex Service (COCS); or Erection, Commissioning or Installation Service (ECIS). Service elements in a composite (works) contract (involving transfer of property in goods and rendition of services), where such services are classifiable under 'Commercial or Industrial Construction'; 'Construction of Complex' or 'Erection, Commissioning or Installation' (as defined), are subject to levy of service tax even prior to (01.06.2007) insertion of sub-clause (zzzza) in Section 65(105) of the Finance Act, 1994. Issues Involved:1. Classification of taxable services under a works contract.2. Interpretation of relevant provisions of the Finance Act, 1994.3. Legislative competence and constitutional boundaries.4. Validity of service tax on works contracts prior to 01-06-2007.5. Adequacy of computation/valuation provisions.6. Binding nature of judicial precedents.Detailed Analysis:1. Classification of Taxable Services Under a Works Contract:The primary issue was whether components of a composite transaction under a works contract should be classified only under Section 65(105)(zzzza) of the Finance Act, 1994, or if they could also be classified under pre-existing taxable services such as Commercial or Industrial Construction Service (CICS), Construction of Complex Service (COCS), or Erection, Commissioning or Installation Service (ECIS). The Tribunal held that service elements in a composite (works) contract, where such services are classifiable under CICS, COCS, or ECIS, are subject to service tax even prior to the insertion of sub-clause (zzzza) in Section 65(105) of the Finance Act, 1994, on 01-06-2007.2. Interpretation of Relevant Provisions of the Finance Act, 1994:The Tribunal analyzed the definitions and scope of CICS, COCS, and ECIS, and the legislative intent behind the introduction of WCS. It was concluded that these services were distinct and extant services defined and enumerated to be taxable prior to the introduction of WCS. The Tribunal found that the legislative intent was to levy service tax on the service components of works contracts under these pre-existing categories.3. Legislative Competence and Constitutional Boundaries:The Tribunal emphasized the distinct and mutually exclusive fields of taxation assigned to the Union and the States under the Constitution. It was established that the Union's legislative field under Entry 97 of List I (residuary powers) is confined to areas not covered by the States' legislative field under Entry 54 of List II. The Tribunal concluded that the Union's legislative power to levy service tax on services in a works contract does not encroach upon the States' power to levy sales tax on the transfer of property in goods involved in such contracts.4. Validity of Service Tax on Works Contracts Prior to 01-06-2007:The Tribunal held that works contracts were taxable under the pre-existing categories of CICS, COCS, and ECIS even prior to the introduction of WCS on 01-06-2007. It rejected the argument that the absence of a specific provision for works contracts prior to this date rendered the levy invalid. The Tribunal found that the legislative and statutory framework in place was sufficient to levy service tax on the service components of works contracts.5. Adequacy of Computation/Valuation Provisions:The Tribunal addressed the argument that there were no adequate computation/valuation provisions for determining the value of service components in works contracts prior to 01-06-2007. It concluded that Section 67 of the Finance Act, 1994, provided a clear mechanism for determining the value of taxable services, and the absence of specific rules did not invalidate the levy. The Tribunal emphasized that the measure of tax should not affect the nature of taxation and that the value of goods involved in the execution of works contracts could be excluded through exemption notifications.6. Binding Nature of Judicial Precedents:The Tribunal considered the binding nature of the Delhi High Court's decision in G.D. Builders, which held that service elements in works contracts were taxable prior to 01-06-2007. The Tribunal found that this decision was not per incuriam and was binding. It also analyzed conflicting decisions from the Karnataka and Madras High Courts and concluded that these decisions did not impact the binding nature of the Delhi High Court's ruling.Conclusion:The Tribunal concluded that service elements in a composite works contract, where such services are classifiable under CICS, COCS, or ECIS, are subject to service tax even prior to the insertion of sub-clause (zzzza) in Section 65(105) of the Finance Act, 1994, on 01-06-2007. The Tribunal overruled the decision in C.C.E. vs. B.S.B.K. Pvt Ltd. to the extent it ruled that works contracts were not taxable prior to 01-06-2007.