Service Tax - Construction service - Works contract - abatement -Legality - assessees lose in Delhi High Court
EVER since the Government introduced tax on works contract with effect from 01.06.2007, there has been total confusion and abundant litigation on the legality, procedure and what exactly constitute the service and what is excluded. There is neither unanimity in judicial opinion nor clarity in Government views. Harrowed assessees are running helter-skelter with demands running into crores!
If works contract service came into existence from 1.6.2007, was it taxable earlier under construction service or some such service? Is the difference only in providing pure service and service, which also includes sale of goods?
Drinking water projects for the State Governments were not taxed as they were not commercial construction, but with works contract, the Service Tax Department dragged them into the Service Tax net, with approbation from at least one Tribunal Bench.
When abatement is availed, the gross value including the value of goods and materials supplied or used has to be taken into account. Can there be Service Tax on the value of goods sold?
Some of these questions were answered by the Delhi High Court in a massive judgement last week.
The High Court observed,
The new levy imposed by Finance Act 2007 does not indicate or show that works contract relating to "construction of industrial and commercial complexes" or "construction of (residential) complexes" as specified, would be only applicable when the contractor was providing labour or service and was paid for the same and not to composite contracts when the contractor was providing labour/services as well as goods used for construction of industrial and commercial complexes or residential complexes as specified.
In case of a composite contract, the service element should be bifurcated and ascertained and then taxed.
The High Court held:
1. After 46th Amendment to the Constitution, composite contracts can be bifurcated to compute value of the goods sold/supplied in contracts for construction of buildings with labour and material.
2. Computation of service component is a matter of detail and not a matter relating to validity of imposition of service tax.
3. Authorities cannot compel and force an assessee to accept the notifications in question and pay tax accordingly, as seeking coverage under the notification is voluntary. An assessee can state that the service component of a composite contract should be computed in a fair and reasonable manner and accordingly taxed.
The writ petitions were dismissed.
We bring you this judgement today.