In Civil Appeal Nos.8673-8684 OF 2013-SC- Service tax cannot be levied on composite works contracts prior to introduction of Finance Act, 2007: Supreme Court Justices M.R. Shah & B.V. Nagarathna [02-08-2022]

Read Judgment:  M/S. TOTAL ENVIRONMENT BUILDING SYSTEMS PVT. LTD. AND ORS V. THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES & ORS 

Mansimran Kaur

New Delhi, August 4, 2022: The Supreme Court has upheld the view adopted in its judgment in Commissioner, Central Excise and Customs, Kerala Vs. Larsen and Toubro Limited,wherein it was specifically observed that on indivisible works contracts, for the period prior to introduction of Finance Act, 2007, service tax was not leviable under Finance Act, 1994. 

The Division Bench of Justice M.R. Shah and B.V. Nagarathna dealt with the  short question of law with respect to the levying of the service tax on Composite Work 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. The Bench placed reliance on the case of Larsen and Toubro Ltd Case(Supra) to reiterate that on indivisible work contracts, for the period prior to introduction of Finance Act, 2007, service tax was not leviable under Finance Act, 1994.

In this case, the appellants  were namely, M/s. Total Environment Building Systems Pvt. Ltd., YFC Projects Pvt. Ltd., G.D. Builders, M/s. National Building Construction Corporation Ltd. (NBCC) and M/s. Unitech Ltd.NBCC, M/s. Larsen and Toubro, M/s. L&T, Hydrocarbon Engineering Ltd. and Revenue. 

It was noted that the same issue was considered by this Court in the case of Larsen and Toubro Limited Case (Supra), wherein this Court specifically observed that  on indivisible works contracts, for the period prior to introduction of Finance Act, 2007, service tax was not leviable under Finance Act, 1994. It was further observed and held that works contracts on which the service tax was levied under the Finance Act, 1994 is distinct from contracts of service. The Revenue did not dispute the issue involved in the present appeals, however it was of the opinion that the decisions rendered by this Court in the case stated above shall be reconsidered.  

After  considering the entire scheme and the levy of service tax pre-Finance Act, 2007 and after giving cogent reasons, a conscious decision was taken up by this Court holding that the service tax was not leviable pre-Finance Act, 2007 on indivisible/Composite Works Contracts.  In furtherance of the same, the Court also noted that no efforts were made by the Revenue then to file any review application to review and/or recall the judgment and order passed by this Court in the case of Larsen and Toubro Limited Case (Supra). 

If  the Revenue was so serious in their view that the decision of this Court in the case of Larsen and Toubro Limited (supra) requires re-consideration, Revenue ought to have filed the review application at that stage and/or even thereafter. No such review application was  filed even as of today, the Court further remarked.  At this stage reliance was placed on the cases of  Dr. Jaishri Laxmanrao Patil Vs. Chief Minister and Ors, Keshav Mills Co. Ltd. Vs. Commissioner of Income Tax, Bombay North, Ahmedabad, Union of India Vs. Raghubir Singh (Dead) by LRs. and Andhra Pradesh Vs. A.P. Jaswal.

In view of the aforesaid principles, the Court noted that the judgment in the case of  Larsen and Toubro Limited (supra) stood the test of time and was never doubted earlier.  Therefore, the Bench held that if the prayer made on behalf of the Revenue to re- consider and/or review the judgment of this Court in the case of Larsen and Toubro Limited (supra) was accepted, in that case, it would affect so many other assesses in whose favour the decisions had already been taken relying upon and/or following the decision of this Court in the case of Larsen and Toubro Limited (supra) and it might unsettle the law, which had been consistently followed since 2015 onwards, the Court observed.

Thus, by placing reliance on the principle of stare decisis, the Court was of the view that the judgment conferred in the case of Larsen and Toubro Limited (supra), neither needed to be revisited nor referred to a Larger Bench of this Court as prayed. Hence, following the binding decision of this Court in Larsen and Toubro Limited Case (supra) and aking the view that for the period pre-Finance Act, 2007, service tax was not leviable on the indivisible/composite works contracts, the other appeals were decided. 

Justice B.V.Nagarathna concurred with Justice Shah’s opinion and also dealt with the issue of levying of service tax on composite work contracts prior to the amendment made to the Finance Act, 1994 in the year 2007 by which Section 65(105) (zzzza) was introduced which gives the definition to the expression work contract. Justice Nagarathna  noted that work contracts have  two essential components: firstly, sale of goods involved in the execution of such contracts which would attract Sales Tax or Value Added Tax (VAT) as the case may be, i.e., prior to the enforcement of the Goods and Services Tax regime and secondly, a service component which is specified in clause (ii)(a)-(e) of the definition of work contract which would attract Service Tax under the provisions of the Finance Act, 1994 as amended in the year 2007. 

If both the above requisites are present, then Service Tax on work contract is leviable on the service component. This is clear from the use of the word and between components (i) and (ii) of the definition of works contract under Clause (zzzza) of Section 65 of the Finance Act, 1994 which is as per the amendment in the year 2007. Thus, the definition speaks of a composite work contract consisting of an element of sale and an element of service, the Court stated. 

The amendment made to the Finance Act, 1994 by insertion of the definition of works contract as under clause (zzzza) is not clarificatory in nature. Having found that the Service Tax was not at all leviable on the service element of a work contract, Parliament felt the need for the amendment and was so incorporated by the Finance Act, 2007, the Court further noted.  Thus the contention that prior to the aforesaid amendment being made to the Finance Act, 1994 service tax on works contract was leviable, was held yo be incorrect by the Bench.

Reliance was  also placed on the cases of Commissioner of Service Tax and Others vs. Bhayana Builders Private Limited and Others,  Nagarjuna Construction Company Ltd. vs. Government of India and Ors. and Customs, Kerala vs. Larsen and Toubro Ltd. Hence, allowing all Civil Appeals except one, the Bench was of the opinion that the judgment  in Larsen and Toubro Ltd. Case (supra) was correctly decided.