2014 (1) TMI 1558 - HC - Service Tax

Constitutional validity of Section 65(105) (zzd), Section 65 (105) (zzq) and Section 65 (105) (zzzh) of the Finance Act, 1994 - Levy of the service tax on the works contract and Ready-mix Concrete - Held that - impugned three provisions pertain, to composite contracts involving erection, commissioning or installation services, commercial or industrial construction as well as construction of residential complexes. Such composite contracts may have service as well as supply components. It is an accepted position that, insofar as the sale/supply of materials is concerned, they fall under Entry 54 of List II of the Seventh Schedule to the Constitution of India and, therefore, fall within the exclusive domain of the State Legislature. This is, of course, to be read with Article 366 (29-A) of the Constitution. It is, therefore, clear that Parliament cannot legislate in respect of the sale of goods component involved in such a composite contract. Service tax, however, falls within the exclusive domain of Parliament. This is under the residual Entry 97 of List I of the Seventh Schedule to the Constitution. We do not find any encroachment by Parliament on the powers of the State Legislature to impose a tax on the sale of goods. The provisions clearly relate only to the service component of the composite contracts referred to in the impugned provisions - The grievance of the petitioner with regard to assessment and computation cannot be equated with the challenge to the constitutional validity of the impugned provisions. It is open to the petitioner to raise issues of computation before the appropriate Adjudicating Authority/Appellate Authority and demonstrate the extent to which service tax can be imposed on the services that are provided by them. To be clear, it is open to the petitioner to demonstrate the extent of the service element included in the composite contract and to pay service tax only on that component - petitioner manufactures the ready-mix concrete and either supplies it to third parties or uses it in its own works. It is not the entire ready-mix concrete which is to be taxed under the provisions of service tax but, only the service element in relation to the use of the ready-mix concrete which would be amenable to service tax - Consequently, the impugned provisions are valid but, are to be applied in the different manner - Decided against assessee.

Issues Involved:
1. Constitutional validity of Section 65(105)(zzd), Section 65(105)(zzq), and Section 65(105)(zzzh) of the Finance Act, 1994.
2. Legality of service tax on works contracts and ready-mix concrete (RMC) prior to the enactment of the Finance Act, 2007.
3. Refund of service tax collected from the petitioner for the period from September 2004 to May 2007.

Detailed Analysis:

1. Constitutional Validity of Section 65(105)(zzd), Section 65(105)(zzq), and Section 65(105)(zzzh) of the Finance Act, 1994:
The petitioner challenged the constitutional validity of the aforementioned sections, arguing that they pertain to composite contracts involving both service and supply components. According to the petitioner, the sale/supply of materials falls under Entry 54 of List II of the Seventh Schedule to the Constitution of India, which is within the exclusive domain of the State Legislature. The petitioner contended that Parliament has encroached upon the exclusive powers of State Legislatures by imposing service tax on composite contracts that include a sale of goods component.

The court, however, referenced the decision in G.D. Builders vs. UOI, which clarified that the impugned provisions relate only to the service component of composite contracts. The court held that the service portion of the composite contracts could be made subject to service tax, applying the aspect doctrine to bifurcate the contract into its service and sale components. The service tax is imposed only on the service element, which falls under the exclusive domain of Parliament under the residual Entry 97 of List I of the Seventh Schedule to the Constitution.

2. Legality of Service Tax on Works Contracts and Ready-Mix Concrete (RMC) Prior to the Enactment of the Finance Act, 2007:
The petitioner argued that works contracts were not subject to tax prior to the enactment of the Finance Act, 2007, which introduced Section 65(105)(zzzza) identifying "works contract service" as a taxable service. The court noted that the challenge was specific to the period before 01.06.2007 and referenced the decision in G.D. Builders, which held that service tax could be imposed on the service component of composite contracts under the impugned provisions. The court agreed with this interpretation, stating that the impugned provisions do not encroach upon the powers of the State Legislature and are constitutional.

Regarding ready-mix concrete, the court clarified that only the service element related to the use of ready-mix concrete is subject to service tax, not the entire product.

3. Refund of Service Tax Collected from the Petitioner for the Period from September 2004 to May 2007:
The petitioner sought a refund of the service tax collected during this period, arguing that the tax was illegally imposed. However, the court dismissed this claim, reiterating that the impugned provisions are valid and that service tax can be imposed on the service component of composite contracts. The court emphasized that issues of computation and assessment should be raised before the appropriate Adjudicating Authority/Appellate Authority, where the petitioner can demonstrate the extent of the service element in the composite contract and pay service tax accordingly.

Conclusion:
The court dismissed the writ petitions, upholding the constitutional validity of the impugned provisions. It confirmed that service tax is applicable only to the service component of composite contracts and not to the sale of goods component, which falls under the State Legislature's domain. The court also clarified that the service element related to ready-mix concrete is subject to service tax. Issues of computation and assessment should be addressed before the appropriate authorities.

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