2023 (5) TMI 526 - HC - Service Tax

Levy of service tax - works contract service - composite contract - rendering of taxable services in relation to commercial or industrial construction and in relation to construction of complex - HELD THAT - The question whether the composite contracts were taxable under the service tax prior to 01.06.2007 is no longer res integra. The Supreme Court in the case of COMMISSIONER, CENTRAL EXCISE CUSTOMS VERSUS M/S LARSEN TOUBRO LTD. AND OTHERS 2015 (8) TMI 749 - SUPREME COURT had referred to taxable services covered under Clause (g),(zzd), (zzh), (zzq) and (zzzh) of Section 65(105) of the Act and authoritatively held that the said taxable services referred only to service contracts simpliciter and not to composite works contracts. Admittedly, the challenge raised by the petitioner to the validity of Section 65(105)(zzzq) and (zzzh) of the Act is squarely covered by the decision of the Supreme Court in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Limited. - In view of the law laid down by the Supreme Court in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Limited, the impugned order, which proceeds on the basis that composite contracts involving transfer of goods as well as services were covered under the taxable services under Section 65(105)(zzzq) and (zzzh) of the Act, cannot be sustained. Matter remanded to the Adjudicating Authority to adjudicate the show cause notices afresh - petition allowed by way of remand.

Summary

Issues involved:
The issues involved in the judgment are the challenge to the validity of certain clauses of the Finance Act, 1994 regarding the levy of service tax on works contracts and the classification of composite contracts for construction activities under the service tax regime.

Issue 1: Challenge to Validity of Service Tax Levy on Works Contracts
The petitioner sought to quash the impugned sub-clauses of the Finance Act, 1994, claiming that the levy of service tax on works contracts and specific entries in the notification are ultra vires the Constitution of India and the legislative scheme for levying service tax. The petitioner argued that no service tax should be imposed on works executed under composite contracts for construction of residential/commercial flats.

Details: The petitioner contended that the clauses in question were not applicable to composite contracts involving both services and goods, as they specifically referred to taxable services related to commercial or industrial construction and construction of complexes only. The Adjudicating Authority had confirmed a demand for service tax based on these clauses, leading to the petitioner's challenge.

Issue 2: Classification of Composite Contracts for Construction Activities
The petitioner claimed that their contracts were composite in nature, involving both services and sale/purchase of goods. They argued that since no provision existed to separate the service component in such contracts, service tax should not be levied. The petitioner further asserted that the switch to the works contract category post-June 2007 was not a violation of the Act and that they had paid service tax under the Works Contract Rules.

Details: The Adjudicating Authority held that the petitioner's activities fell under "construction of complex services" and were taxable under the Act. The Authority also found the switch to works contract classification post-2007 to be in violation of the Act. However, the Supreme Court precedent established that the Act did not provide for taxing composite works contracts, and the impugned order-in-original was set aside.

Conclusion:
The High Court, following the Supreme Court precedent, ruled in favor of the petitioner, setting aside the impugned order-in-original and remanding the matter for fresh adjudication. The judgment emphasized that the Act did not provide for levying service tax on indivisible composite works contracts, as clarified by the Supreme Court decision.