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TMI Blog2013 (11) TMI 1004X X X X Extracts X X X X X X X X Extracts X X X X ..... h, 2006, the challenge is with respect to column 4 entries at S. No. 5, 7 and 10. In some writ petitions, assessment orders have been passed and appellate proceedings have been initiated. However, in Writ Petition No. 4107/2008 by G.D. Builders, Writ Petition No. 5046/08 by Unitech Limited, Writ Petition Nos. 401/2009, 4057/2010 & 6658/2010 by Simplex Infrastructure Ltd. and Writ Petition Nos. 4187/2008 and 5646/2010 filed by Vistar Construction Pvt. Ltd., show cause notices have been issued and the proceedings are still pending before the original authority. In Writ Petition No. 4127/2008 filed by Clarion Properties Ltd. and Writ Petition No. 4658/2008 filed by Vipul Limited, notice for appearance of furnishing of documents/reply has been given and even show cause notice has not been issued. Contentions of the Petitioners 2. Contentions of the petitioners can be crystallized as under:- (i) Service tax levied from time to time by Finance Act, 1994 and subsequent amendments is in exercise of power under residual entry 97 of List I of the Seventh Schedule of the Constitution of India. It is levied on taxable service as defined in Section 65(105) read with definition clauses. (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2A of Service Tax (Determination of Value) Rules, 2006 determines value of services involved in "works/composite contracts" and it is levied @ 2%, enhanced to 4% with effect from 1st March, 2008. The said levy is not applicable to "services" covered under Section 65(105)(zzq) and (zzzh). (ix) There is a conflict between Section 65(105)(zzzza), (zzq) and (zzzh) and what is covered by Section 65(105)(zzzza) cannot be covered by Section 65(105)(zzq) and (zzzh). The two sets of provisions cannot co-exist. Subsequent legislation shows that the earlier legislation will not cover "composite or works contract". (x) Section 66 is the charging section and provisions of Section 67 are the valuation provisions. Value of taxable services under Section 67 is the gross amount charged by the service provider for such "services provided or to be provided". Service tax can be charged only for the specified "taxable services" as defined in sub-clauses of Section 65(105). Tax can be only on the value of services and not beyond. There is no provision for a notional value or to enable the authorities to reduce or subtract value of material or goods. The gross amount charged or the value of service ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xes (residential complexes) under section 65(105)(zzzh) with effect from 16th June, 2005. The term "construction of complexes" was defined in Section 65(30a) as under:- "construction of complex" means- (a) construction of a new residential complex or a part thereof; or (b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal journey and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or (c) repair, alternation, renovation or restoration of, or similar services in relation to, residential complex;" The expression "residential complex" was defined in Section 65(91a) but we need not refer to the said definition as it is not relevant. 6. Section 65(105)(zzzza) introduced service tax in respect of works contract service with effect from 1st June, 2007 by Finance Act, 2007 and reads as under:- "Taxable service" means any services provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 003-Service Tax, dated the 20th June, 2003 [G.S.R. 503 (E), dated the 20th June, 2003]; or (iii) the taxable services provided are only completion and finishing services in relation to building or civil structure, referred to in sub-clause (c) of clause (25b) of section 65 of the Finance Act, 1994. Explanation.- For the purposes of this notification, the "gross amount charged" shall include the value of goods and material supplied or provided or used by the provider of the commercial or industrial construction service for providing such service." 8. For the purpose of clarity, we record that clauses (ii) and (iii) of the proviso were added by way of amendment notification No.19/2005-ST dated 7th June, 2005. What is subject matter of challenge before us are two pronged; the explanation and clause (iii) of the proviso. The effect of clause (iii) to the proviso was/is that benefit of the said notification would not be available in case the service provider was providing "completion and finishing services" in relation to building or civil structure referred to in sub-clause (c) of clause (25b) of Section 65 of the Act. The second challenge before us is to the explanation. 9. Notifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of the description specified in column (3) of the Table below and specified in the relevant sub-clauses of clause (105) of section 65 of the Finance Act, specified in the corresponding entry in column (2) of the said Table, from so much of the service tax leviable thereon under section 66 of the said Finance Act, as is in excess of the service tax calculated on a value which is equivalent to a percentage specified in the corresponding entry in column (5) of the said Table, of the gross amount charged by such service provider for providing the said taxable service, subject to the relevant conditions specified in the corresponding entry in column (4) of the Table aforesaid: Table S.No Sub-clause of clause (105) of Section 65 Description of taxable service Conditions Percentage (1) (2) (3) (4) (5) 5. (zzd) Erection, commissioning or installation, under a contract for supplying a plant, machinery, equipment or structures and erection, commissioning or installation of such plant, machinery, equipment or structures. This exemption is opti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation of taxable services shall be determined in accordance with the said-clauses of clause (105) of section 65 and where for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected as follows :- (i) Specific description shall be preferred to more general description; (ii) Composite services consisting of a combination of different services which cannot be classified as per clause (i), shall be classified as if they consist of a service which gives them their essential character, in so far as this criteria is applicable; (iii) Where a service cannot be classified as specified in clauses (i) and (ii) above, it shall be classified under the sub-clause which occurs first among the sub-clauses which merit equal consideration. 14. Section 67 stipulates that the value of any taxable service shall be the gross amount charged by service provider for such services provided or to be provided by him. Thus, it sets out the manner of valuation of taxable services for charging service tax. Section 67 is not the charging section as elucidated and relates to manner of computation or value which ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , pay order, travelers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value (Omitted by Finance Act 2012 w.e.f. 1st July 2012) (c) "gross amount charged" includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment." With effect from 19th April, 2006, Service Tax (Determination of Value) Rules, 2006 have become applicable. Discussion 16. Before be delve further into the questions, we would like to reproduce the statements made by the counsel as recorded in the order dated 1st July, 2013:- "Learned counsel appearing for the petitioner accepts and states that "service component" in composite contracts can be taxed, but not as works contract per se. Learned counsel for the petitioner further states that the respondents are also competent to bifurcate and tax the service component alone. He submits that the notifications dated 07.06.2005 and 01.03.2006 are bad in law because they have been issued under Section 93(1) of the Finance Act, as if the respondents have granted exemption to the extent of 67% of a composit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of industrial and commercial complex or construction of residential complexes as specified. Introduction and imposition of service tax on works contract by Finance Act, 2007 does not mean that we have to read down, the scope and ambit of the provisions enacted levy tax on contracts relating to "commercial and industrial construction" service or "construction of (residential) complexes" services as specified by Finance Act 2004 and Finance Act 2005 respectively. The new levy imposed by Finance Act 2007 does not indicate or show that works contract relating to "construction of industrial and commercial complexes" or "construction of (residential) complexes" as specified, would be only applicable when the contractor was providing labour or service and was paid for the same and not to composite contracts when the contractor was providing labour/services as well as goods used for construction of industrial and commercial complexes or residential complexes as specified. It would cover any and every contract, when the contractor was only supplying labour or undertaking construction services, whether with or without supply of material, i.e. composite contract. The levy is valid when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lyana Mandapam Asscn. vs. UOI and Ors. (2004) 267 ITR 9 (SC), challenge was made and rejected by the Supreme Court on imposition of service tax on Kalyan Mandapam or Mandap keepers who provided furniture, fixtures, floor coverage etc for organizing social or business functions. The tax on "service" was defined as any service provided to a client by a mandap keeper in relation to use of mandap in any manner, including facilities provided to the client in relation to such use and also the service, if rendered, as a caterer. The Supreme Court made reference to the 46th amendment i.e. Article 366 (29A) of the Constitution and referred to the fact that as per the formula prescribed in the Finance Act 1994, service tax was levied on 40% of the gross amount charged by the mandap keepers from the client where mandap keepers were providing catering services. Thus, in the case of mandap keepers, service tax was payable on composite contract where the mandap keepers were to also provide food, furniture, electrical fittings, tents etc. The contention that the service tax imposed on mandap keepers was tax on land or tax on sale or purchase of goods was rejected. It was observed that Article 366 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the expression "complete" in the present case). Thus the definition clauses in the Act for applying section 65(105)(zzq) and (zzzh) have to be given full effect. 22. Affirming the judgment in the case of Raheja Development (supra), the Supreme Court in its recent decision Larsen & Toubro Limited versus State of Karnataka, Civil Appeal No.8672/2013 elucidated the effect of Article 366 (29A) as conferring power on the States to tax "works contract" by taxing transfer of property in goods whether as goods, or in the form of goods involved in the execution of "works contracts". The expression "works contract" is very wide and encompasses several types of contract and should not be given a restrictive meaning. The earlier test, i.e., "dominant purpose test" is no longer valid. Referring to the aspect theory, it has been observed as under:- "100. We have no doubt that the State legislatures lack legislative power to levy tax on the transfer of immovable property under Entry 54 of List II of the Seventh Schedule. However, the States do have competence to levy sales tax on the sale of goods in an agreement of sale of flat which also has a component of a deemed sale of goods. Aspects th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished. (vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative. (vii) XXXXX (viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while laying down that in the absence of law by Parliament so providing, it was not permissible for the State Legislatures to impose such a tax; it did not mean that the legislative power of the State could not be exercised till the enactment of a law under sub-clause (b) of clause (3) of Article 286 by Parliament, observing: (Gannon Dunkerley case [(1993) 1 SCC 364] , SCC pp. 390-91, para 39) "It only means that in the event of a law having been made by Parliament under Article 286(3)(b) the exercise of the legislative power of the State under Entry 54 in List II to impose a tax of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366 would be subject to restrictions and conditions in regard to the system of levy rates and other incidents of tax contained in the said law. The existence of a law enacted under Article 286(3)(b) cannot, therefore, be regarded as a condition precedent for the exercise of the taxing power of the State under Entry 54 in List II to impose a tax of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366. This does not, however, absolve Parliament from enacting a law as envisaged by Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer could be calculated and it was therefore held:- "27. We are, however, not oblivious of the decision of this Court wherein the measure or value to which the rate will be applied for computing the tax liability is considered to be one of the components of tax. (See Govind Saran Ganga Saran v.CST [1985 Supp SCC 205 : 1985 SCC (Tax) 447] , SCC para 6.) But then measure or value to which rate would be applied is one thing, but how the turnover would be determined is another. Computation provisions may bear a relationship with the nature of charge and charging section and computation provisions together constitute an integrated code as was held in CIT v. B.C. Srinivasa Setty [(1981) 2 SCC 460 : 1981 SCC (Tax) 119] (SCC at p. 465); but it is equally well settled that only because rules had not been framed under the Central Act, the same per se would not mean that no tax is leviable. 28. In Sudhir Chandra Nawn v. WTO [AIR 1969 SC 59 : (1969) 1 SCR 108] this Court rejected the contention that Section 7(1) of the Wealth Tax Act was unconstitutional as no Rules had been framed to value the asset for the purpose of the Act, stating: (AIR p. 63, para 10) "10. The plea that Section 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also been amended to allow the Parliament to specify by law restrictions and conditions with regards to the system of levy of rates and other incidence of tax on transfer of goods involved in the execution of works contract. It has been highlighted in the Mahim Patram's case (Supra) as follows:- 15. Clause (3) of Article 286 of the Constitution was also amended to enable Parliament to specify by law restrictions and conditions in regard to the system of levy rates and other incidents of the tax on the transfer of goods involved in the execution of works contract. Pursuant to or in furtherance of the said enabling provision, as noticed hereinbefore, and in deference to observations made in Gannon Dunkerley [(1993) 1 SCC 364] , clause (g) of Section 2 was substituted by a new clause defining "sale" in the following terms: "2. (g) 'sale', with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes,- (i) a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the present matter and that the High Court ought to have differentiated the two matters. In reply, our attention was invited to paras 31 and 32 of the judgment of the High Court in which service aspect was distinguished from the supply aspect. In our view, reliance placed by the High Court on Federation of Hotel and Restaurant [(1989) 3 SCC 634 : AIR 1990 SC 1637] and, in particular, on the aspect theory is, therefore, apposite and should be upheld by this Court. In view of this, the contention of the appellant on this aspect is not well founded. It is well settled that the measure of taxation cannot affect the nature of taxation and, therefore, the fact that service tax is levied as a percentage of the gross charges for catering cannot alter or affect the legislative competence of Parliament in the matter." xxxx xxxx A tax on services rendered by mandap-keepers and outdoor caterers is in pith and substance, a tax on services and not a tax on sale of goods or on hire-purchase activities. Section 65 clause (41) sub-clause (p) of the Finance Act, 1994, defines taxable service (which is the subject-matter of levy of service tax) as any service provided to a customer by a mand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x or a general tax which applies to all commercial activities involving production of goods and provision of services. Reference was made to the principles of equivalence and it was observed: "35. For each contract, tax is levied under the Finance Acts, 1994 and 1998. Tax cannot be levied under that Act without service being provided whereas a professional tax under Entry 60 is a tax on his status. It is the tax on the status of a cost accountant or a chartered accountant. As long as a person/firm remains in the profession, he/it has to pay professional tax. That tax has nothing to do with the commercial activities which he undertakes for his client. Even if the chartered accountant has no work throughout the accounting year, still he has to pay professional tax. He has to pay the tax till he remains in the profession. This is the ambit and scope of Entry 60, List II which is a taxing entry. Therefore, Entry 60 contemplates tax on professions, as such. Entry 60, List II refers to "tax on employments". xxxx xxxx 39. It was further observed that a lawyer has to pay tax to take out a licence irrespective of whether he actually practises or not. That tax is a tax for the privilege o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e examines Article 366(29-A) carefully, one finds that clause (29-A) provides for an inclusive definition and has two limbs. The first limb says that the tax on sale or purchase of goods includes a tax on transactions specified in sub-clauses (a) to (f). The second limb provides that such transfer, delivery or supply of goods referred to in the first limb shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made. Now, in K.L. Johar case [AIR 1965 SC 1082 : (1965) 2 SCR 112] , this Court held that the States can tax hire-purchase transactions resulting in sale but only to the extent to which tax is levied on the sale price. This led Parliament to say, in the Statement of Objects and Reasons to the Constitution (Forty-sixth Amendment) Act, "though practically the purchaser in a hire-purchase transaction gets the goods on the date of entering into the hire-purchase contract, it has been held by the Supreme Court in K.L. Johar case [AIR 1965 SC 1082 : (1965) 2 SCR 112] that there is a sale only when the purchaser exercises the option to purchase which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omposite contract, the service element should be bifurcated and ascertained and then taxed. The contention that the petitioners are paying sales tax or VAT on material in relation to execution of the contract under composite contracts for construction of industrial/commercial complexes and construction contracts as specified under Section 65(105) (zzq) and (zzzh) therefore fails. The contention that there was/is no valid levy or the charging section is not applicable to composite contracts under clauses (zzq) and (zzzh) of Section 65(105) stands rejected. But the petitioners have rightly submitted that only the service component can be brought to tax as per provisions of Section 67 which stipulates that value of taxable service is the "gross amount charged" by the service provider for such services provided or to be provided by him and not the value of the goods provided by customers of service provider and the service tax cannot be charged on the value of the goods used in the contract. 32. Similarly, the contention that exemption notification could be issued under Section 93 of the Finance Act in respect of any "taxable service" defined in Section 65(105), misses the legal posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slature. With great respect, we are unable to agree. The first feature to be noticed is that the alternate method of taxation provided by sub-section (7) or (7-A) of Section 7 is optional. The sub-sections expressly provide that the method of taxation provided thereunder is applicable only to a contractor who elects to be governed by the said alternate method of taxation. There is no compulsion upon any contractor to opt for the method of taxation provided by sub-section (7) or sub-section (7-A). It is wholly within the choice and pleasure of the contractor. If he thinks it is beneficial for him to so opt, he will opt; otherwise, he will be governed by the normal method of taxation provided by Section 5(1)(iv). Sub-section (8) provides that the option to come under sub-section (7) or (7-A) has to be exercised by the contractor "either by an express provision in the agreement for the contract or by an application to the assessing authority to permit him to pay the tax in accordance with any of the said sub-sections". In these circumstances, it is evident that a contractor who had not opted to this alternate method of taxation cannot complain against the said sub-sections, for he is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... measure or computation of the tax imposed. The distinction between the two has to be kept in mind (see Gujarat Ambuja Cements Ltd. vs. Union of India AIR 2005 SC 3020). 34. A Division Bench of Andhra Pradesh High Court in Nagarjuna Construction Company Ltd. Vs. Union of India, (2010) 19 STR 321 (AP) had examined the three provisions which are subject matter of the present writ petition including 2007 Rules enacted under Section 94 of the Finance Act. After referring to the composition scheme stipulated in Rule 3 which is optional, it was held that where a person has exercised the option under Rule 3(3) of 2007 Rules, he will have to comply with the conditions stipulated therein. Further, disqualification for exercise of such option where stipulated, is binding and cannot be ignored. 35. The Supreme Court in Nagarjuna Construction Co. Ltd. vs. Union of India and Anr. (2013) 1 SCC 721, has affirmed the decision of the Andhra Pradesh High Court. It has been observed that Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 was lucid that the assessee who want to avail the benefit, must opt to pay service tax in respect of the works contract, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notification. This is because the formula framed by way of delegated legislation is presumptuous and based on assumption. (4) 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. (5) 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. (6) 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. (7) Authorities cannot compel and force an assessee to accept the notifications in question and pay tax accordingly, as seeking coverage under the notificat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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