2022 (8) TMI 168 - SC - Service Tax

Appeals dismissed: Service tax on composite works contracts not leviable before Finance Act 2007 amendment introducing Section 65(105)(zzzza)

The SC dismissed appeals challenging service tax levy on composite works contracts prior to Finance Act 2007. The Court held that before the 2007 ... Service tax on composite/indivisible works contracts - definition of 'works contract' introduced by Finance Act, 2007 - levy and machinery for taxing service element of works contract - stare decisis and reconsideration of precedent - overruling of Delhi High Court in G.D. BuildersService tax on composite/indivisible works contracts - definition of 'works contract' introduced by Finance Act, 2007 - levy and machinery for taxing service element of works contract - Whether service tax was leviable on composite/indivisible works contracts for the period prior to the amendment of the Finance Act, 1994 (w.e.f. 1st June, 2007). - HELD THAT: - This Court examined the legislative scheme of the Finance Act, 1994 and the effect of the 2007 amendment which introduced a specific definition of 'works contract' and thereby made the service component of such contracts taxable w.e.f. 1st June, 2007. Relying on its earlier decision in Commissioner, Central Excise and Customs, Kerala v. Larsen & Toubro Ltd., the Court held that prior to the 2007 amendment there was no specific charging provision or machinery in the Finance Act, 1994 to tax the service element of indivisible/composite works contracts; the taxable categories then enumerated captured service contracts simpliciter and not composite indivisible works contracts. The Court further noted that the 2007 amendment was enacted to split composite works contracts so only the labour/service element would attract service tax thereafter. Consequently, service tax was not leviable on the service element of composite/indivisible works contracts for the period prior to 1st June, 2007. [Paras 5, 8, 13]Service tax was not leviable on composite/indivisible works contracts for the period prior to 1st June, 2007; the 2007 amendment brought such contracts within the service tax net prospectively.Stare decisis and reconsideration of precedent - service tax on composite/indivisible works contracts - Whether the decision in Larsen & Toubro Ltd. (holding non-leviability pre-2007) should be re-considered or referred to a Larger Bench. - HELD THAT: - The Revenue sought re-consideration and a reference to a Larger Bench. The Court analysed authorities on stare decisis, emphasizing the need for certainty, continuity and restraint in overruling precedent, and considered factors such as the passage of time since the Larsen & Toubro decision, its subsequent consistent application by this Court, High Courts and Tribunals, finality of numerous decisions following it, and the absence of any review application by the Revenue. Applying these principles, the Court concluded there were no compelling reasons to revisit Larsen & Toubro Ltd., and declined the request for reconsideration or reference to a Larger Bench. [Paras 10, 12]Prayer to re-consider or refer Larsen & Toubro Ltd. to a Larger Bench is refused; Larsen & Toubro Ltd. remains binding.Overruling of Delhi High Court in G.D. Builders - service tax on composite/indivisible works contracts - Disposal of the assorted civil appeals and the effect of the Larsen & Toubro decision on the appeals arising from various High Courts and Tribunals (including quashing of assessment orders that levied service tax pre-2007). - HELD THAT: - Applying the binding principle in Larsen & Toubro Ltd., the Court held the Delhi High Court's decision in G.D. Builders to be wholly incorrect and overruled it. Consequently, appeals which had been dismissed by High Courts or Tribunals on the view that service tax was leviable on indivisible/composite works contracts pre-2007 were allowed; the corresponding assessment orders and impugned judgments were quashed and set aside. The Court specifically allowed the listed civil appeals (including those arising from Karnataka, Delhi, Guwahati High Courts and CESTAT decisions) and directed that necessary consequences follow. Civil Appeal No. 6792 of 2010, filed by the Revenue against a CESTAT order, was dismissed. [Paras 13, 14]Appeals challenging levies of service tax on composite/indivisible works contracts for the period prior to 1st June, 2007 are allowed and the assessment orders are quashed; Civil Appeal No. 6792 of 2010 is dismissed.Final Conclusion: The Court affirmed that service tax was not leviable on composite/indivisible works contracts for the period prior to the insertion of the definition of 'works contract' by the Finance Act, 2007 (w.e.f. 1st June, 2007); refused the Revenue's request to re-consider the Larsen & Toubro precedent; overruled the Delhi High Court in G.D. Builders; allowed the listed appeals quashing pre-2007 service tax assessments on such works contracts and dismissed Civil Appeal No. 6792 of 2010. The core legal question considered by the Court was whether service tax could be levied on Composite Works Contracts prior to the amendment of the Finance Act, 1994 by the Finance Act, 2007, which introduced Section 65(105)(zzzza) specifically defining 'works contract' for service tax purposes.In addressing this question, the Court examined the legislative framework governing service tax and sales tax, the judicial precedents interpreting the nature of works contracts, and the interplay between service tax and sales tax on such contracts before and after the 2007 amendment.The Court analyzed the following key issues:Whether service tax was leviable on composite/indivisible works contracts prior to the 2007 amendment.The legal effect of the introduction of Section 65(105)(zzzza) in the Finance Act, 1994 by the Finance Act, 2007.The correctness and applicability of the earlier decision in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Limited, which held that service tax was not leviable on works contracts prior to 2007.The principle of stare decisis and whether the Larsen and Toubro decision should be reconsidered or referred to a Larger Bench.The status of conflicting judgments, particularly the Delhi High Court decision in G.D. Builders v. Union of India, which was overruled by the Supreme Court.Issue-wise Detailed Analysis:1. Levy of Service Tax on Composite Works Contracts Prior to 2007 AmendmentLegal Framework and Precedents: Service tax was introduced by the Finance Act, 1994, with Section 65 listing taxable services and Sections 66 to 68 providing the charge, valuation, and collection mechanisms. However, before the 2007 amendment, there was no specific charging provision or definition for works contracts under the service tax regime. The 46th Amendment to the Constitution introduced Article 366(29A), allowing States to levy sales tax on the transfer of property in goods involved in execution of works contracts, effectively deeming such transfers as sales for sales tax purposes.Judicial precedents such as Gannon Dunkerley I and II established that works contracts were composite and indivisible contracts involving both sale of goods and provision of services, but prior to the constitutional amendment, sales tax on such contracts was held unconstitutional as the contract was indivisible. Post-amendment, States could tax the deemed sale of goods in works contracts.The Supreme Court in Larsen and Toubro Limited (2016) held that prior to the 2007 amendment, service tax was not leviable on indivisible works contracts because the Finance Act, 1994 did not contain a charging section or machinery to tax the service element of such contracts. The taxable services enumerated in Section 65(105) referred only to pure service contracts simpliciter, not composite works contracts.Court's Interpretation and Reasoning: The Court emphasized that the definition of works contract introduced in 2007 requires two components: (i) transfer of property in goods involved in execution of the contract (taxable under sales tax laws), and (ii) the contract must be for specified purposes such as erection, construction, installation, etc. Service tax is leviable only on the service component of such contracts post-2007.Before 2007, since no such definition or charging provision existed, the service tax could not be levied on the service element of composite works contracts. The Court rejected the Revenue's contention that service tax was leviable prior to 2007 by virtue of existing provisions, holding that the Finance Act, 1994 did not provide for the necessary charge or machinery to tax works contracts.The Court also analyzed the Delhi High Court judgment in G.D. Builders, which had held otherwise, and found it to be wholly incorrect and contrary to the consistent line of Supreme Court authority, particularly the Larsen and Toubro decision.Key Evidence and Findings: The Court relied heavily on the legislative history, constitutional amendments, and prior Supreme Court judgments on works contracts and service tax. It noted that the 2007 amendment was a conscious legislative step to bring the service component of works contracts under the service tax net, which was absent earlier.The Court also observed that the Revenue had not filed any review petition against the Larsen and Toubro judgment since 2015, despite the passage of significant time and the presence of higher tax amounts involved in subsequent cases.Application of Law to Facts: The Court applied the principles laid down in Larsen and Toubro to the facts of the present appeals, which involved service tax assessments on composite works contracts prior to June 1, 2007. It held that since the service tax was not leviable on such contracts before the amendment, the impugned assessments and judgments upholding them were unsustainable.It also allowed appeals challenging the decisions of various High Courts and Tribunals that had relied on the incorrect G.D. Builders judgment.Treatment of Competing Arguments: The Revenue argued that the Larsen and Toubro decision should be reconsidered and referred to a Larger Bench, contending that service tax was leviable even prior to 2007 and that the 2007 amendment was clarificatory. The Revenue pointed to the existence of mechanisms to segregate service and goods components and relied on various Supreme Court precedents to support its view.The Court declined to reconsider Larsen and Toubro, emphasizing the principle of stare decisis, the need for certainty and consistency in law, and the absence of any review petition filed by the Revenue earlier. It held that mere increase in tax amounts involved did not justify disturbing settled law.The assessees supported the Larsen and Toubro ruling and submitted that the service tax was not leviable on composite works contracts before 2007. They also pointed out that the Revenue had accepted final decisions in many cases based on Larsen and Toubro, and that revisiting the issue would cause confusion and hardship.2. Principle of Stare Decisis and Reconsideration of Larsen and ToubroLegal Framework and Precedents: The Court extensively discussed the doctrine of stare decisis, citing Constitution Bench decisions such as Keshav Mills, Indra Sawhney, Dr. Jaishri Laxmanrao Patil, and Dr. Shah Faesal, which emphasize that the Court should not lightly overrule its earlier decisions unless there are compelling reasons in the interest of public good, or the earlier decision is manifestly erroneous or unworkable.The Court noted that Larsen and Toubro was a unanimous decision of a five-judge Bench, had stood the test of time since 2015, and had been consistently followed by various High Courts and Tribunals. The Court also noted that no review petition had been filed by the Revenue challenging the decision.Court's Interpretation and Reasoning: The Court held that revisiting Larsen and Toubro would unsettle settled law and adversely affect numerous assessees who had relied on the decision. It emphasized the importance of certainty, consistency, and continuity in judicial decisions, especially in tax matters affecting large numbers of taxpayers and government revenue.The Court rejected the Revenue's request to refer the matter to a Larger Bench for reconsideration, stating that the grounds raised were insufficient to disturb the binding precedent. It also observed that the Revenue's failure to seek review earlier weighed against reconsideration.Key Evidence and Findings: The Court referred to the legislative history, prior judgments, and the principle that the Court's decisions acquire reliance interest and should not be overturned lightly. It underscored that the Larsen and Toubro decision had been followed in subsequent judgments, including Bhayana Builders, reinforcing its binding nature.Application of Law to Facts: Applying the doctrine of stare decisis, the Court declined to revisit Larsen and Toubro, thereby affirming that service tax was not leviable on composite works contracts prior to June 1, 2007.Treatment of Competing Arguments: The Court acknowledged the Revenue's submissions but held that the passage of time, absence of review, and the need for legal certainty outweighed the Revenue's arguments. The Court also noted that the Revenue's contention that the 2007 amendment was clarificatory was incorrect.3. Status of Conflicting Decisions and Impact on Pending AppealsThe Court specifically addressed the Delhi High Court decision in G.D. Builders, which had held that service tax was leviable on works contracts prior to 2007. The Supreme Court overruled this decision as contrary to the law laid down in Larsen and Toubro.The Court disposed of pending appeals arising from or relying on the G.D. Builders decision by allowing them and setting aside the impugned judgments and assessment orders that had imposed service tax on composite works contracts prior to 2007.The Court also disposed of appeals filed by assessees and the Revenue in line with the Larsen and Toubro precedent, quashing service tax demands for the pre-2007 period.Significant Holdings:'A close look at the Finance Act, 1994 would show that the five taxable services referred to in the charging Section 65(105) would refer only to service contracts simpliciter and not to composite works contracts. This is clear from the very language of Section 65(105) which defines 'taxable service' as 'any service provided'. All the services referred to in the said subclauses are service contracts simpliciter without any other element in them... No attempt to remove the non-service elements from the composite works contracts has been made by any of the aforesaid sections by deducting from the gross value of the works contract the value of property in goods transferred in the execution of a works contract.''We find therefore that this judgment [G.D. Builders] is wholly incorrect in its conclusion that the Finance Act, 1994 contains both the charge and machinery for levy and assessment of service tax on indivisible works contracts.''Before reviewing and revising its earlier decision the Court must satisfy itself whether it is necessary to do so in the interest of public good or for any other compelling reason and the Court must endeavour to maintain certainty and continuity in the interpretation of the law in the country.''The doctrine of binding precedent is of utmost importance in the administration of our judicial system. It promotes certainty and consistency in judicial decisions. Judicial consistency promotes confidence in the system, therefore, there is this need for consistency in the enunciation of legal principles in the decisions of this Court.''The judgment in Larsen and Toubro Ltd. (supra) has stood the test of time and has never been doubted earlier. As observed hereinabove, the said decision has been followed consistently by this Court as well as by various High Courts and the Tribunals. Therefore, if the prayer made on behalf of the Revenue to reconsider and/or review the judgment of this Court in the case of Larsen and Toubro Limited (supra) is accepted, in that case, it will affect so many other assesses in whose favour the decisions have already been taken relying upon and/or following the decision of this Court in the case of Larsen and Toubro Limited (supra) and It may unsettle the law, which has been consistently followed since 2015 onwards.'Final Determinations:Service tax was not leviable on composite/indivisible works contracts prior to the amendment of the Finance Act, 1994 by the Finance Act, 2007 introducing Section 65(105)(zzzza).The 2007 amendment was not merely clarificatory but introduced a new charging provision and definition for works contracts under the service tax regime.The decision in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Limited (2016) is binding and does not require reconsideration or referral to a Larger Bench.The Delhi High Court decision in G.D. Builders is overruled.All appeals challenging assessments and judgments imposing service tax on composite works contracts prior to June 1, 2007 are allowed, and the impugned orders are set aside.The Revenue's appeal against the dismissal of certain appeals is dismissed.No costs were ordered in the matter.