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)

M/s. Total Environment Building Systems Pvt. Ltd. Versus The Deputy Commissioner of Commercial Taxes & Ors., YFC Projects Pvt. Ltd. Versus Union of India, M/s. G.D. Builders Versus Union of India & Anr., M/s. National Building Construction Corporation Ltd. (NBCC) Versus Union of India & Anr., M/s. Unitech Ltd. Versus Union of India & Ors., M/s. National Building Construction Corporation Ltd. (NBCC) Versus Union of India & Ors., M/s. Larsen and Toubro Ltd. Versus Commissioner of Service Tax, Delhi, Commissioner of Service Tax Mumbai - II Versus M/s. IOT Infrastructure & Energy Services Limited, M/s. L&T Hydrocarbon Engineering Limited (previously known as Larsen & Toubro Limited) Versus Commissioner of Service Tax, Mumbai

The SC dismissed appeals challenging service tax levy on composite works contracts prior to Finance Act 2007. The Court held that before the 2007 ... Levy of Service Tax - Composite Works Contracts prior to the introduction of the Finance Act, 2007, by which the Finance Act, 1994 came to be amended to introduce Section 65(105)(zzzza) pertaining to Works Contracts - whether for the period prior to introduction of the Finance Act, 2007, the service tax would be leviable on the Composite Works Contracts? As per M.R. SHAH, J. HELD THAT:- It is observed and held in the decision of [2020 (3) TMI 1324 - SUPREME COURT] that even the rule of overruling the judgments should be applied with great caution, and only when the previous decision is manifestly wrong, as, for instance, if it proceeded upon a mistaken assumption of the continuance of a repealed or expired Statute, or is contrary to a decision of another court which the court is bound to follow; not, upon a mere suggestion, that some or all of the members of the court might later arrive at a different conclusion if the matter was res integra. It is further observed that otherwise there would be great danger of want of continuity in the interpretation of law. It is further observed and held that the decisions rendered by a coordinate Bench is binding on the subsequent Benches of equal or lesser strength and a coordinate Bench of the same strength cannot take a contrary view than what has been held by another coordinate Bench unless it is shown to be per incuriam. In Saurashtra Cement & Chemical Industries Ltd. and another Vs. Union of India and others, [2000 (10) TMI 954 - SUPREME COURT] this Court refused to indulge on the question of delegated legislation in taxing statute since the authority of the legislature in introducing the statute in question, i.e., Mines and Minerals (Regulation and Development) Act, 1957 could not be doubted and in any event, was a settled proposition of law for more than a decade. Applying the doctrine of stare decisis, the Court rejected the plea to reconsider the decision in State of Madhya Pradesh v. Mahalaxmi Fabric Mills Ltd., [1995 (2) TMI 435 - SUPREME COURT] holding that The Central Legislature introduced the legislation (MMRD Act) in the year 1957 and several hundreds and thousands of cases have already been dealt with on the basis thereof and the effect of a declaration of a contra law would be totally disastrous affecting the very basics of the revenue jurisprudence. It is true that the doctrine has no statutory sanction but it is a rule of convenience, expediency, prudence and above all the public policy. It is to be observed in its observance rather than in its breach to serve the people and subserve the ends of justice. In view of the binding decision of this Court in the case of Larsen and Toubro Limited [2013 (9) TMI 853 - SUPREME COURT], the assessee is not liable to pay the service tax till the date of amendment of the provision on the indivisible/composite works contracts and therefore, the said appeals also deserve to be allowed and the assessment orders levying the service tax are to be set aside. Appeal dismissed. As per J. [B.V. NAGARATHNA] Speaking about the mutually exclusive taxation and powers of the Centre and the State, the dichotomy between the sales tax leviable by the State and service tax leviable by the Centre was emphasised by this Court in the aforesaid judgment. In the context of composite indivisible works contract, only Parliament can tax the service element contained in these contracts and State only can tax the transfer of property in goods element contained in these contracts. Thus, it is important to segregate the two elements completely for the purpose of taxation. Hence, it was held that works contract is a separate species of contract distinct from contracts for service simpliciter recognised in the world of commerce and law as such and has to be taxed separately as such. Referring to the decision of works contract in Gannon Dunkerley I [1992 (11) TMI 254 - SUPREME COURT] Kone Elevator India (P) Limited [2014 (5) TMI 265 - SUPREME COURT], Larsen & Toubro Ltd. and others vs. State of Karnataka [2013 (9) TMI 853 - SUPREME COURT] all arising under the Sales Tax law, it was emphasised that there was no charging section to tax works contract in the Finance Act, 1994 i.e. until the amendment made with the insertion of subclause (zzzza) to clause 105 of Section 65 of the Finance Act, 1994. Further, in Larsen & Toubro Ltd. [1992 (11) TMI 254 - SUPREME COURT] the correctness of the judgment in G.D. Builders vs. Union of India [2013 (11) TMI 1004 - DELHI HIGH COURT] was also considered. In the said case, it was held by the Delhi High Court that Section 65(105)(g), (zzd), (zzh), (zzq) and (zzzh) were good enough to tax indivisible composite works contract and that even when rules are yet to be framed for computation of taxes, taxes would be leviable. This proposition was based on the judgment in Mahim Patram (P) Ltd. vs. Union of India [2007 (2) TMI 73 - SUPREME COURT]. It was observed that in G.D. Builders [2013 (11) TMI 1004 - DELHI HIGH COURT] there was a misreading of Mahim Patram which was a case related to tax under the Central Sales Tax Act; that in Mahim Patra, it was observed that under Section 9(2) of the Central Sales Tax Act power is conferred on officers of various States to utilise the machinery provided under the provisions of the States’ sales tax statutes for the purposes of levy and assessment of Central Sales Tax under the Central Act. That Rules could also be made in exercise of power under Section 13(3) of the Central Sales Tax Act as a result of which the necessary machinery for the assessment of Central Sales Tax was found to be there. Therefore, even in the absence of Rules made under the Central Sale Tax Act the machinery provided under the State Sales Tax statute for the purpose of levy and assessment Central Sales tax under the Central Act could be utilized and the same is different from saying that no Rules being framed at all under the Central Sale Tax Act. The definition of Works contract inserted for the first time by virtue of Section 65(105)(zzzza) under the Finance Act, 2007 assumes significance and has to be applied w.e.f. 1st June, 2007. Thus, on and from the enforcement of the amendment in the Financial Year 2007, i.e. 1st June, 2007 the tax on the service component of works contract became leviable. Therefore, till then it was not so leviable as there was no concept of works contract under the said Act. The judgment in Larsen and Toubro Ltd. has been correctly decided and does not call for a reconsideration insofar as the period prior to 1st June, 2007 is concerned - appeal dismissed. 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.