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TMI Blog2024 (11) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant had not opted for the composition as provided in the Rules, the entire amount received for the works contracts should be treated as consideration and service tax should be collected on the total value of works contracts including the value of goods is not correct. This is because the power of taxation of the Union does not, after the twenty sixth amendment to the Constitution, extend to tax the value of the goods used in works contracts. The Act and the Rules cannot be interpreted so as to tax the value of the goods used in works contracts. Whether service tax could be charged under the head construction of residential complexes when such services were rendered as part of works contracts ? - In Larsen Toubro [ 2015 (8) TMI 749 - SUPREME COURT ] held that works contracts are a separate species of contracts recognized by the world of commerce different from the contracts for services simpliciter. The term works contracts in article 366 (29A) (b) of the Constitution was amply wide and cannot be confined to a particular understanding of the term or to a particular form. Contracts where the services are rendered along with transfer of materials are works contracts which have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t letter dated 2.2.2011 giving details of the work done by it during the period 2006-07 to 2009-10 along with its annual reports. It also submitted work order wise details of the payments received from 1.4.2006 to 31.3.2011. 4. Analysing the above data, the Assistant Commissioner came to a tentative conclusion that the appellant had rendered taxable service of construction of residential complexes chargeable to service tax under section 65(105) (zzzh) of the Finance Act, 1994 Act and issued a Show Cause Notice SCN dated 21.11.2012 demanding service tax of Rs. 46,08,851 invoking extended period of limitation under the proviso to section 73(1) of the Act along with interest under section 75 of the Act. The SCN also proposed to impose penalties on the appellant under sections 76, 77 and 78 of the Act. 5. The appellant opposed the SCN but the proposals therein were confirmed in the OIO passed by the Assistant Commissioner which was upheld by the impugned order passed by the Commissioner (Appeals). The Commissioner (Appeals) specifically recorded that all the services rendered by the appellant were under works contracts as they included the use of materials also but he declined to give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the government hospitals and for the police department to be used as quarters for their employees. Therefore, they squarely fall under the definition of personal use as per the Explanation(a) to section 65(19a) of the Act and therefore, do not fall under the definition of residential complex and hence no service tax was payable and the appellant had accordingly not paid any service tax. v) The SCN is also time barred as it was issued beyond the normal period of limitation of 18 months. vi) The impugned order may therefore be set aside. Submissions on behalf of the Revenue 7. Learned authorised representative for the Revenue vehemently supported the impugned order and asserted that it calls for no interference. Findings 8. We have considered the submissions advanced by both sides and perused the records. The questions which fall for consideration are: a) Were the services of construction of the residential complexes for the government hospitals and the police department rendered by the appellant as works contracts chargeable to service tax under the head construction of residential complex service without abatement towards the value of the goods used? b) If so, was the extended per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat, accordingly, the legislature must be taken to have intended that they should be understood in that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law. It has been already stated that, both under the common law and the statute law relating to sale of goods in England and in India, to constitute a transaction of sale there should be an agreement, express or implied, relating to goods to be completed by passing of title in those goods. It is of the essence of this concept that both the agreement and the sale should relate to the same subject-matter. Where the goods delivered under the contract are not the goods contracted for, the purchaser has got a right to reject them, or to accept them and claim damages for breach of warranty. Under the law, therefore, there cannot be an agreement relating to one kind of property and a sale as regards another. We are accordingly of opinion that on the true interpretation of the expression sale of goods there must be an agreement between the parties for the sale of the very goods in which eventually property passes. In a building contract, the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same passes to the owner of the land as an accretion thereto. Accordingly, there can be no question of title to the materials passing as movables in favour of the other party to the contract. It may be, as was suggested by Mr. Sastri for the respondents, that when the thing to be produced under the contract is moveable property, then any material incorporated into it might pass as movable, and in such a case the conclusion that no taxable sale will result from the disintegration of the contract can be rested only on the ground that there was no agreement to sell the materials as such. But we are concerned here with a building contract, and in the case of such a contract, the theory that it can be broken up into its component parts and as regards one of them it can be said that there is a sale must fail both on the grounds that there is no agreement to sell materials as such, and that property in them does not pass as movables. To sum up, the expression sale of goods in Entry 48 is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. In a building contract which is, as in the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the above conclusion has reference to works contracts, which are entire and indivisible, as the contracts of the respondents have been held by the learned Judges of the Court below to be. The several forms which such kinds of contracts can assume are set out in Hudson on Building contracts, at p. 165. It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such case, there are really two agreement, though there is a single instrument embodying them, and the power of the State to separate the agreement to sell, from the agreement to do work and render service and to impose a tax thereon cannot be questioned, and will stand untouched by the present judgment. 58. In the result, the appeal fails, and is dismissed with costs. 13. Thus, composite works contracts are a separate type of contracts distinct from contracts for sale of goods or for supply of services. Since at the relevant time, the State Governments could only levy tax on sale of goods, works contract services were held to be outside the legislative competenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracts. It was held by the Supreme Court in Commissioner of C. EX. CUS., Kerala Vs. Larsen Toubro Ltd. 2015 (39) S.T.R. 913 (S.C.) as follows: 16. At this stage, it is important to note the scheme of taxation under our Constitution. In the lists contained in the 7th Schedule to the Constitution, taxation entries are to be found only in lists I and II. This is for the reason that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There is no concurrent power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be struck down. In the present case, the dichotomy is between sales tax leviable by the States and service tax leviable by the Centre. When it comes to composite indivisible works contracts, such contracts can be taxed by Parliament as well as State legislatures. Parliament can only tax the service element contained in these contracts, and the States can only tax the transfer of property in goods element contained in these contracts. Thus, it becomes very important to segregate the two elements completely for if some element of transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Union to levy tax on the service component of the works contracts is never in doubt. The question is if the service is covered by the charging section of the Act. 18. Section 66 of the Act was the charging section for levy and collection of service tax on taxable services rendered during the relevant period. The term taxable service is defined in section 65(105) of the Finance Act and its various clauses covered various types of taxable services. Initially, the levy of service tax was levied only on some services which were enlarged over years by adding more clauses in section 65(105) of the Act thereby making more and more services taxable. During the period, whenever taxable services were rendered along with the use of the goods, i.e., as a part of works contracts, abatement towards the value of the goods used was provided through notifications. 19. Later, with effect from 1.6.2007, tax was levied on any service provided in relation to execution of works contract service by inserting clause (zzzza) in section 65 (105) of the Act. It reads as follows : Section 65 (105) taxable service means any service provided or to be provided,- (zzzza) to any person, by any other person in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er those headings if the services were rendered as works contracts. The relevant portion of the judgment is as follows: 19. In Larsen Toubro Ltd. v. State of Karnataka, (2014) 1 SCC 708 = 2014 (34) S.T.R. 481 (S.C.) = 2014 (303) E.L.T. 3 (S.C.), this Court stated :- In our opinion, the term works contract in Article 366(29-A)(b) is amply wide and cannot be confined to a particular understanding of the term or to a particular form. The term encompasses a wide range and many varieties of contract. Parliament had such wide meaning of works contract in its view at the time of the Forty-sixth Amendment. The object of insertion of clause (29-A) in Article 366 was to enlarge the scope of the expression tax on sale or purchase of goods and overcome Gannon Dunkerley (1) [State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., AIR 1958 SC 560 : 1959 SCR 379]. Seen thus, even if in a contract, besides the obligations of supply of goods and materials and performance of labour and services, some additional obligations are imposed, such contract does not cease to be works contract. The additional obligations in the contract would not alter the nature of contract so long as the contract provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the execution of a works contract. 25. In fact, by way of contrast, Section 67 post amendment (by the Finance Act, 2006) for the first time prescribes, in cases like the present, where the provision of service is for a consideration which is not ascertainable, to be the amount as may be determined in the prescribed manner. 26. We have already seen that Rule 2(A) framed pursuant to this power has followed the second Gannon Dunkerley case in segregating the service component of a works contract from the goods component. It begins by working downwards from the gross amount charged for the entire works contract and minusing from it the value of the property in goods transferred in the execution of such works contract. This is done by adopting the value that is adopted for the purpose of payment of VAT. The rule goes on to say that the service component of the works contract is to include the eight elements laid down in the second Gannon Dunkerley case including apportionment of the cost of establishment, other expenses and profit earned by the service provider as is relatable only to supply of labour and services. And, where value is not determined having regard to the aforesaid para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue is right, such contracts, not being exempt under the Finance Act, 1994, would fall within its tentacles, which was never the intention of Parliament. ****** 43. We need only state that in view of our finding that the said Finance Act lays down no charge or machinery to levy and assess service tax on indivisible composite works contracts, such argument must fail. This is also for the simple reason that there is no subterfuge in entering into composite works contracts containing elements both of transfer of property in goods as well as labour and services. 22. The Supreme Court rejected the submission by the Revenue that since notifications were issued giving abatement towards the cost of materials, service tax could be levied under other heads and held that such notifications should be disregarded because there was no levy of service tax at all during the relevant period on works contracts. The relevant portion of the judgment is reproduced below. 44. We have been informed by counsel for the revenue that several exemption notifications have been granted qua service tax levied by the 1994 Finance Act. We may only state that whichever judgments which are in appeal before ..... X X X X Extracts X X X X X X X X Extracts X X X X
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