No Service Tax on indivisible works contracts prior to 1-6-2007 – SC
25 August, 2015
The Supreme Court of India has held that indivisible works contracts were not liable to Service tax prior to 1-6-2007 under various entries of the Finance Act, 1994. The Court rejected the contentions of the Revenue Department that the 46th Constitutional Amendment had itself divided works contracts by Article 366(29A)(b), and that the amendment of the Service Tax provisions in 2007, defining works contract for the first time, would not make any difference.
Relying on the second Supreme Court judgement in the case of Gannon Dunkerley, the Apex Court was of the view that service tax charging section itself must lay down with specificity that the levy can only be on works contracts, and that the measure of tax can only be on that portion which contains a service element which is to be derived from the gross amount charged. Observing that since this was not done by the Finance Act, 1994, prior to 2007, it was held that any charge to tax under the five heads in Section 65(105)(g), (zzd), (zzh), (zzq) and (zzzh), would only be of service contracts simpliciter and not composite indivisible works contracts.
Further, the Court held that works contract is a separate species of contract distinct from the contracts for services simpliciter. It noted that there is no concurrent power of taxation in the Indian Constitution, and that while the Parliament can tax the service element contained in these contracts, States can only tax the transfer of property in goods element contained in these contracts. It, therefore, becomes very important to segregate the two elements completely, according to the Court.
The Court, while allowing the assessee’s appeals, also noted that no attempt to remove the non-service elements from the composite works contracts was made by the Finance Act, 1994 prior to 2007, by deducting from the gross value of the works contract the value of property in goods transferred in the execution of a works contract. It was also observed that if the contentions of the Revenue Department were to be agreed with, many infrastructural projects (like construction of dams or tunnels), not being exempt under the Finance Act, 1994, would fall within its tentacles, which was never the intention of Parliament.
Finally, the Apex Court overruled the Delhi High Court Judgment in the case of G.D. Builders. It was held that the lower court had misread another judgment of the Apex Court in the case of Mahim Patram Private Ltd. to conclude that a tax is leviable even if no rules are framed for assessment of such tax.