2013 (11) TMI 1004 - HC - Service Tax

Construction services - challenge to the levy on the ground that the Parliament cannot impose service tax on material or goods used in execution of works/composite contract. Central Sales Tax is payable and levied on material used in works contract with effect from 11th May 2002 after amendment of the Central Sales Tax Act 1956 vide Finance Act 2002. - Power of levy service tax on composite or works contracts - validity of abatement of 67% - Held that - 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. The service portion of the composite contracts can be made subject matter of service tax. Aspect doctrine is applied for bifurcating/vivisect the composite contract Service tax can be levied on the service component of any contract involving service with sale of goods etc. Computation of service component is a matter of detail and not a matter relating to validity of imposition of service tax. It is procedural and a matter of calculation. Merely because no rules are framed for computation it does not follow that no tax is leviable. The notifications in question are in alternative and optional. An assessee may take advantage or benefit of the notifications but cannot be compelled to pay service tax on the proportion or value of a composite contract as per the notification. This is because the formula framed by way of delegated legislation is presumptuous and based on assumption. However if an assessee wants to take benefit of the notification he must comply and adhere to the terms and conditions stipulated as per the notification. An assessee to claim benefit or advantage as per a notification must meet the preconditions or stipulations stated therein. An assessee cannot take benefit or advantage of a part of a notification but claim that the other part of the notification should be ignored and thus not acted upon. Notification has to be applied in entirety. Notification has to be read as a whole keeping in mind its objective and purpose. Notification may provide a convenient hassle free and adopt a non-discretionary formula for computing value of the service element in a composite contract. This curtails litigation ambiguity ensures clarity and consistency. A notification cannot be declared as invalid or ultra vires for this reason provided it is optional. 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 notifications meet the tests laid down under Section 93 and 94 of the Act because they relate to manner and mode of computation of service tax in a composite contract. The object and purpose is not to tax as non-service element or to include non-taxable part of the composite contracts. It has not been shown and established that the formula or the value prescribed in the notifications is absurd or irrational. The said notifications are not per se an arbitrary exercise and contrary to data or formula for computing service element. In taxation matters classification should not be struck down as discriminatory unless there are strong and compelling reasons that show absurdity and therefore violation of Article 14 of the Constitution. All writ petitions dismissed - Decided against the assessee.

Issues Involved:
1. Validity of service tax on composite or works contracts under Finance Act, 1994.
2. Challenge to specific notifications (Notification No. 15/2004-ST, Notification No. 18/2005-ST, and Notification No. 1/2006-ST).
3. Applicability of service tax on material or goods used in execution of works/composite contracts.
4. Conflict between different sections of the Finance Act regarding service tax on works contracts.
5. Legislative competence and constitutional validity of service tax on composite contracts.

Detailed Analysis:

1. Validity of Service Tax on Composite or Works Contracts:
The petitioners argued that service tax should only apply to the service element of composite contracts, not on the goods or materials used. They contended that composite or works contracts are excluded from the ambit of service tax under Section 65(105)(zzq) and (zzzh) of the Finance Act, 1994. However, the court held that service tax can be levied on the service component of composite contracts, as established in prior judgments like Home Solutions Retail (India) Ltd. vs. UOI & Anr. and Tamil Nadu Kalyana Mandapam Asscn. vs. UOI and Ors. The court emphasized that the service element should be bifurcated and taxed, not the entire contract value.

2. Challenge to Specific Notifications:
The petitioners challenged the validity of the explanations and certain conditions in Notification No. 15/2004-ST, Notification No. 18/2005-ST, and Notification No. 1/2006-ST. They argued that these notifications unlawfully expanded the scope of the charging section by including the value of goods and materials in the taxable amount. The court clarified that these notifications are optional and provide a convenient method for computing the service element in composite contracts. The court found that the notifications are not ultra vires the Act and are valid as they aim to tax only the service component.

3. Applicability of Service Tax on Material or Goods:
The court reiterated that service tax should not be levied on the value of goods and materials used in the execution of works contracts. It should only apply to the service component. The court noted that the Finance Act, 1994, and the subsequent amendments do not authorize the imposition of service tax on goods or materials. The court referenced the principle established in Larsen & Toubro Limited vs. State of Karnataka, which allows for the bifurcation of composite contracts into service and goods components for taxation purposes.

4. Conflict Between Different Sections of the Finance Act:
The petitioners argued that there was a conflict between Section 65(105)(zzq), (zzzh), and (zzzza) regarding the applicability of service tax on works contracts. The court held that the introduction of service tax on works contracts by Finance Act, 2007, does not negate the applicability of service tax on contracts under Section 65(105)(zzq) and (zzzh). The court clarified that these provisions should be read harmoniously, and service tax should be levied on the service element of the contracts.

5. Legislative Competence and Constitutional Validity:
The court examined the legislative competence of the Parliament to levy service tax on composite contracts under the residual entry 97 of List I of the Seventh Schedule of the Constitution. It upheld the validity of the service tax, emphasizing that it is a value-added tax on the service component of composite contracts. The court referenced several Supreme Court judgments, including All India Federation of Tax Practitioners & Ors. vs. Union of India and Association of Leasing and Financial Service Companies vs. Union of India, to support its conclusion that service tax on the service element of composite contracts is constitutionally valid.

Conclusion:
The court dismissed the writ petitions, upholding the validity of service tax on the service component of composite contracts. It clarified that the challenged notifications are optional and provide a method for computing the service element, ensuring that service tax is not levied on goods and materials used in the contracts. The court emphasized the importance of bifurcating the service and goods components in composite contracts for taxation purposes.

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