Works Contract Service - Taxable Even Before Enactment - Major Division in CESTAT
THE least initial deviation from the truth is multiplied later a thousand fold that, someday, the deviation becomes the truth!
A peep into history:
The Daelim Dilemma: In the infamous Daelim Industrial Co case - , the Tribunal held that a composite contract cannot be dissected rather vivisected to levy service tax on the service component. This decision was affirmed by the Supreme Court. Then came the decision of the now famous Larsen & Toubro case - where the Tribunal went further and held that even if there are amounts attributable to individual services, the settled position of law is that a works contract cannot be vivisected.
Government doesn't keep quiet in such situations. In 2007 budget the Government introduced service tax on works contract. In para 154 of his Budget speech, the Finance Minister said,
State Governments levy a tax on the transfer of property in goods involved in the execution of a works contract. The value of services in a works contract should attract service tax. Hence, I propose to levy service tax on services involved in the execution of a works contract.
This would clearly mean that this was a new tax and was not taxed earlier, but the babus have different notions about the Law, Parliament and Finance Minister.
Even the TRU letter of 2007 mentioned ‘execution of works contract' as a new service in continuation of the policy of widening the service tax base.
Somehow an opinion gathered strength in the department that this works contract service which was brought under the service tax net with effect from 1.6.2007 was always taxable under different headings like construction, erection, commissioning etc., If it was already taxable, what was the need to specifically bring it in the budget and make the FM announce it as a new tax?
Don't ask embarrassing questions - yours is not to question why, yours is but to pay and die.
Any way the question and SCNs and orders and appeals made the rounds in all possible forums and different judgements were delivered by learned adjudicators. In one such voyage, the matter got referred to a Five Member Bench of the CESTAT and the Five Member Bench gave its verdict last week.
The Larger Bench had judgements from three High Courts, to consideron this issue.
The Delhi High Court in the case of GD Builders - , held that Service tax can be levied on the service component of any contract involving service with sale of goods etc.
The Karnataka High Court in Turbotech case - held that works contract service can be taxed only from 1.6.2007.
The Madras High Court in Strategic Engineering - held, the respondent has demanded the service tax from the petitioner, by treating it to be carrying on business for execution of work Contract. This plea of the respondent deserves to be noticed to be rejected, as the work contract was, first time, included under 65(105) (zzzza) with effect from 1st June 2007.
Thus different opinions prevail with different benches of the High Court as well as Tribunal.
It is in this situation that the Five Member Larger Bench gave its verdict. Unfortunately it was a divided Bench with the two Judicial Members on one side and the three Technical Members on the other - coincidence perhaps.
The President wrote the minority judgement, which is a must read for any student of law, especially constitutional law and tax laws, for its sheer erudition, brilliance, and deep understanding of the Constitution, the tax laws and the principles of interpretation. Maybe we don't deserve such brilliance in a Tribunal like the CESTAT.
The Legislative boundaries - the foundational premises : The President wrote,
"it is clear that powers to make laws with respect to any of the matters in the List authorized to the particular legislative level, is exclusive. Abstinence by Parliament or a State Legislature, from legislating at all or to the limit of its exclusively allocated powers would not have the effect of transferring to the other legislative level the field exclusively assigned to the abstaining legislature. The corollary of such exclusivity is that if Parliament or the legislature of a State fails to legislate, at all or to the full limits of its allocated powers, such failure does not augment pro-tanto powers of the other legislature. The Constitution does not countenance delegation (of legislative powers), expressly or by abstinence in exercise thereof, by Parliament to State legislatures or vice-versa (subject of course to provisions inter alia such as in Articles 252 and 253).
The position is equally well settled, that residuary legislative power stands allocated to the Union under Entry 97 of List I r/w Art. 248 and that the residuary allocation does not cover fields of legislation (whether general or pertaining to taxing powers) elsewhere enumerated in Lists I, II & III of the Seventh Schedule; that Article 248 r/w Entry 97 is the last refuge, only when all Entries in the three Lists are absolutely exhausted and only if the subject-matter cannot be comprehended in any Entry in the three Lists.
Absent specific enumeration of a legislative field (authorizing levy and collection of taxes on services) either in Lists I or II, such authority is traceable to the residuary powers of legislation authorized to the Union qua Article 248 read with Entry 97 of List I. The legislative field, Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92 A of List I is assigned to States, under Entry 54, List II.
All power, authority or jurisdiction consecrated under or qua the constitutional grant is limited by limitations, conditions or boundaries expressed in the organic charter, inherent therein or implied therefrom. While plenary within the scope of their assigned powers, the Union and State legislatures are nevertheless limited by the distribution of powers assigned and the within the compass of fields/heads of legislation enumerated in the three Lists, as to the subject-matters upon which the Union or State legislatures (or concurrently, under List III) may legislate. Since under our federal arrangement, allocation of taxing powers (to the Union and to States) is exclusive and not concurrent, there is no authority consecrated (except to the extent specified in the Constitution), either to the federal (Union) or the provincial (State) legislature(s), to overlap, smother, swamp or trench upon taxing powers allocated to the other level.
Thus it is, that a fiscal exertion by one level of legislation must be precisely designed and so calibrated to avoid encroachment, poaching into or trenching upon the authorized and delineated field(s) allocated to another level. Harvesting revenue, by levy and collection of taxes qua legislation by Parliament must therefore clearly avoid encroachment into the field(s) authorized to States; and vice-versa."
We wish, more people understood these foundational premises.
The President observed that G. D. Builders decision is and with great respect to the formidable weight accorded to a jurisdictional High Court, in error on per incuriam and sub silentio grounds. He observed that the Karnataka and Madras High Courts, in Turbotech Precision Engineering Pvt. Ltd. and in Strategic Engineering Pvt. Ltd . have clearly concluded that a works contract is not leviable to service tax prior to 01-06-2007. And he was inclined to follow those decisions.
He concluded that " Only since the insertion of sub-clause (zzzza) in clause (105) of Section 65, w.e.f 01-06-2007, complemented by the amended 2006 Rules (inserting Rule 2-A therein) and the 2007 Composition Rules, that the requisite and appropriate statutory framework, for charging, levy, collection and assessment of Service Tax, supported by appropriate computation/valuation machinery on a works contract stands incorporated. This framework defines ‘works contract' (in the Act) by clearly enacting the legislative recognition that this distinct species of contractual arrangements inheres components of sale of goods which fall within the (exclusive) taxation domain of States, for levy of sales tax."
The Member, Judicial agreed with the President, but the three Technical Members did not agree. They held that GD Builders was binding on the Tribunal and did not find the Turbotech and Strategic Engineering cases relevant.
So, the Larger Bench by a majority of 3-2 held that Service elements in a composite (works) contract (involving transfer of property in goods and rendition of services), where such services are classifiable under "Commercial or Industrial Construction"; "Construction of Complex" or "Erection, Commissioning or Installation" (as defined), are subject to levy of service tax even prior to (01.06.2007) insertion of sub-clause (zzzza) in Section 65(105) of the Finance Act, 1994 .
We bring you this large judgement (220 pages) today. Please see Breaking News.