Supreme Court declares service tax levy on contractors ultra vires

The Supreme Court held that the challenged notifications and circulars under the Finance Act, 1994, regarding service tax levy on contractors were ultra vires. Relying on the precedent set in Commissioner, Central Excise and Customs, Kerala vs. Larsen and Toubro Limited, the Court clarified that the Finance Act, 1994, did not provide for taxing indivisible composite works contracts. The High Court deemed the impugned circulars and instructions irrelevant, directing adherence to the Supreme Court's decision. The writ petition was allowed, granting members of the petitioner association the right to rely on the Larsen and Toubro Limited judgment.

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Issues:
Challenge to Notifications and Circulars under Finance Act, 1994 regarding service tax levy on contractors working with Delhi Jal Board.

Analysis:
The writ petition challenged Notification No.12/2003-ST, Notification No.19/2003-ST, Column No.5 of Notification No.1/2006-ST, Circular No.62/11/2003-ST, and Instruction No.137/73/07-CX4 as ultra vires provisions of subclause (zzd) of Clause 105, read with Clause (39a) of Chapter-V of the Finance Act, 1994. The petitioner also sought quashing of Section 65(105) (zzd) and 65(39a) of the Finance Act, 1994, alleging inconsistency with the constitutional scheme for service tax levy in India.

The petitioner association contended that the issue raised aligns with a Supreme Court decision in Commissioner, Central Excise and Customs, Kerala vs. Larsen and Toubro Limited, where the Court discussed the levy of service tax on indivisible works contracts pre-2007. The Supreme Court in Larsen and Toubro Limited clarified that the Finance Act, 1994, taxed only service contracts simpliciter, not composite works contracts, and emphasized the absence of provisions for taxing indivisible composite works contracts.

The Supreme Court's ruling in Larsen and Toubro Limited emphasized that the Finance Act, 1994, lacked provisions to levy and assess service tax on indivisible composite works contracts. The Court dismissed arguments suggesting the existence of a charge or machinery for such taxation, highlighting the absence of subterfuge in entering into composite works contracts comprising elements of goods transfer, labor, and services.

Regarding specific notifications, the Supreme Court noted that since the levy of service tax was found to be non-existent, any exemptions granted under such notifications were irrelevant. The Court directed that judgments referring to these exemptions be disregarded due to the non-existence of the service tax levy itself.

The High Court held that the law as pronounced by the Supreme Court in Larsen and Toubro Limited is binding precedent under Article 142 of the Constitution of India. Consequently, the impugned circulars, instructions, and subsequent enactments were deemed irrelevant and to be disregarded in light of the Supreme Court's ruling. The respondents were instructed to adhere to the Supreme Court's decision and apply the same in relevant cases. Members of the petitioner association were granted the right to rely on the Larsen and Toubro Limited judgment and take further legal action if necessary. Ultimately, the writ petition was allowed in accordance with the Supreme Court's decision in Larsen and Toubro Limited.

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