Daelim Days are Over – Larger Bench holds that Daelim is not Good Law
IT had to come sooner than later, but it did come a little late. We had too much of dilli daleim. Now composite contracts can be vivisected.
For more than seven years, CESTAT decision in Daelim Industrial Co - 2003-TIOL-110-CESTAT-DEL that works contracts are not divisible and therefore cannot be split to levy service tax, held the field; in fact it was even approved by the Apex Court when Revenue's SLP was dismissed by the Apex Court - 2004-TIOL-66-SC-ST.
But over the years the service tax law evolved and more services were brought into the tax net – for e.g. Erection, Commissioning and Installation Service, Commercial or Industrial Construction Service, Construction of Complex Service; and the department itself was coming to terms with the various aspects of taxability of goods and services involved in service contract by giving exemption to the value of goods (Notification No. dated June 20, 2003) and providing abatement from the value of taxable service (Notification No. dated 1.3.2006) etc.
In the year 2006, the Supreme Court while dealing with taxability of sim cards under UP Trade Tax law, dealt with the Constitutional aspects of levy of both service tax and sales tax in a single contract for sale of sim cards and came to a conclusion that both the levies can be imposed on mutually exclusive values related to sale of goods and services. This judgment probably emboldened the Government to go a step further and bring into service tax net ‘works contracts' with effect from June 1, 2007.
From 2003 to 2007 much water flowed under the Daelim bridge making it a relic of the past. Now the validity of the law laid down in the Daelim Industrial case was scrutinized threadbare by a Larger Bench in its latest order dated May 6, 2010 and conclusively held that
“………… .An activity in the nature of service, whether provided individually or integrally and solely, separately or combinedly with other activities, has its Identity. Permutation and combination of activities or services do not change character of the activity or service. It may be possible that while an activity in a cluster of activities may be dominant others may not be prominent. But each activity has its identity, existence and independence and play its role. A plain and simple service contract or a composite contract comprising various activities of different nature of services do not make any difference to discern role of each service involved in a composite or Turnkey contracts.”
On the efficacy of the Daelim judgment, the Larger Bench observed,
“ The plea that because decision of Daelim's case has been followed in the past by different Benches of the Tribunal, that holds the field does not get sanction of law when different aspects of a commercial transaction are liable to tax under different legislations according to the fields of taxation assigned to States and Government of India.”
DDT got some quick comments from concerned netizens.
One netizen had this to say
“ this was very much expected especially after the BSNL judgment of Apex Court wherein it was held that Sales tax/VAT and Service tax are levied on mutually exclusive components of consideration received for sale of both goods and services under one contract. This judgment was in fact referred to by the CESTAT in this case. In my view Daelim was a flawed judgment from the word go but unfortunately it held the field for almost seven years without much of a challenge. As a matter of fact, ironing out legal creases in India takes a long time and this judgment has probably come at an appropriate time when mopping up service tax revenues is the primary focus of taxmen. In the instant case both time and luck ran out for supporters of Daelim case. More money will flow into Government's kitty. It was a reasoned judgment and I hope it will stand legal scrutiny even if it is challenged in the Apex Court.”
However, another netizen was slightly sceptical of this judgment and he sent in his comments as follows:
“ The referring Bench was of the view that in the case before it, the divisibility of contract was not in issue - either in law or even on facts. Conceptually, after the 46th Amendment in terms clause (29-A) in Article 366 of the Constitution, a works contract can be dissected for the purpose of levy of sales tax and service tax ” .
The 46th amendment says nothing about services tax. It deals with only sales tax as also explained in the statement of object and reasons. I am of the view that even today, the levy of service tax on works contract is unconstitutional. Like the amendment for levy of sales tax on works contract, for levy of service tax also, there should be an amendment. Just because some part of the works contract was brought under sales tax, the other part does not automatically go to the service tax. This issue is pending in AP High Court and let us see the outcome....”
We are sure to be flooded with comments and articles on the latest LB decision, some of which we will bring you in the days ahead.
But, for the Larger Bench Decision, please wait till tomorrow.
In the meanwhile see