Works Contract - No Service Tax prior to 1.6.2007 - Supreme Court delivers landmark judgement
IT is finally over - years of unproductive litigation, thousands of crores involved, hundreds of cases and different views at different stages. The Supreme Court yesterday affixed a seal of finality to the issue.
As is well known, Service Tax on works contract service was imposed with effect from 1.6.2007 and the question is whether the tax is leviable prior to 1.6.2007 under various (then) existing defined services?
This case has traversed through all the Benches of the CESTAT, several High Courts and recently the famous Five Member Bench of the CESTAT (2015-TIOL-527-CESTAT-DEL-LB) where the three Technical Members in majority overruled the two Judicial Members (including the President)
When I explained this case to a Law Professor, he asked me, "Do you need five Members of the Hon'ble Tribunal to decide whether a tax introduced on 1.6.2007 can be made applicable to some services existing prior to that date? Even a child can answer that."
But we needed the Supreme Court to answer this question.
In fact within six months of the imposition of this tax, the matter reached the CESTAT which in 2007-TIOL-2320-CESTAT-MAD on 27.12.2007 held, "works contract became taxable service for the first time on 1-6-07 only. On these facts, the demand raised on the appellants cannot be justified even on the ground that they happened to make stray payments of service tax, now and then, during the above period in the category of ‘Consulting Engineers Service'. In other words, the conduct of the party cannot make an event a taxable service where it is actually not. The demand is unsustainable and so are the penalties".
In para 154 of his 2007 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?
This is exactly what Justice Raghuram, President of the CESTAT asked in the Larger Bench (2015-TIOL-527-CESTAT-DEL-LB) when he observed,
Even after 01-06-2007, CICS, COCS&ECIS continue to be taxable services, since there is neither a repeal/omission of these provisions nor are these excluded from the list of taxable services catalogued in the charging provision, Section 66.
If, as Revenue contends and would invite us so to assume, the scope of CICS, COCS&ECIS include rendition of these services qua a works contract mode as well and provisions of the Act including the charging and valuation provisions read with the exemption notifications do confine the levy (of service tax) to those components of a works contract as are clearly within the competence of the Union, what was the need for the insertion of sub-clause (zzzza), while continuing existing provisions? Revenue does not offer an explanation. Legislature does not engage in vacuous and avoidable exertions is also an interpretive presumption.
Thus a wholly unnecessary amendment (inserting WCS in the Act); and a wholly unnecessary rule (Rule 2-A, inserted in the 2006 Rules) to cater to a situation admirably administered by existing legislative and statutory provisions, as contended by Revenue!
The President knew his Law well, but the majority was against him.
Looming large before the Larger Bench were three High Court judgements:
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.
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.
The Technical Members held that GD Builders was binding on the Tribunal and did not find the Turbotech and Strategic Engineering cases relevant.
Any way, now there is no need for discussion, analysis and dissection of the Law - the Apex Court has given its verdict.
The Supreme Court explained the Scheme of taxation under the Constitution. In the lists contained in the 7th Schedule to the Constitution, taxation entries are to be found only in lists I and II. This is for the reason that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There is no concurrent power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be struck down. In the present case, the dichotomy is between sales tax leviable by the States and service tax leviable by the Centre. When it comes to composite indivisible works contracts, such contracts can be taxed by Parliament as well as State legislatures. Parliament can only tax the service element contained in these contracts, and the States can only tax the transfer of property in goods element contained in these contracts. Thus, it becomes very important to segregate the two elements completely for if some element of transfer of property in goods remains when a service tax is levied, the said levy would be found to be constitutionally infirm.
This point was beautifully explained by Justice Raghuram in his Tribunal Judgement - 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.
The Supreme Court found the GD Builders decision incorrect. Finally the appeals by the assessees were allowed and the appeals by Revenue were dismissed.
Was all this litigation necessary? It happened only because the urge to harvest revenue in all seasons. The Board and all the Commissioners knew that this tax was leviable only from 1.6.2007 - yet they fought a valiant battle. Or perhaps they did not know how to write the law and when caught on the wrong foot, took to litigation. Even now many of them will privately blame the Supreme Court.
In the entire litigation, the winner is jurisprudence - CESTAT President Justice Raghuram's judgement in the Five Member Bench is a classic jurisprudential symphony - a must read for a student of taxation.
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