Larsen and Toubro Ltd, Kehems Engg Pvt Ltd Vs. CST, Delhi/ CCE & ST, Indore/ CCE/ Rajkot and CCE & ST, Indore Vs. Kehems Engineering Pvt. Ltd.
Facts of the Case
The matter raised before the Larger Bench of the Hon’ble CESTAT, Delhi in the instant case is that whether components of a composite transaction amounting to supply of labour/ rendition of service(s), under a Works Contract ought to be classified only under erstwhile Section 65(105)(zzzza) of the Finance Act, inserted vide the Finance Act, 2007, w.e.f June 1, 2007, or are also comprehended within the ambit of existing taxable services such as Commercial or Industrial Construction Service (“CICS”), Construction of Complex Service (“COCS”), or Erection, Commissioning or Installation Service (“ECIS”).
The Five Member Bench of the Hon’ble CESTAT, Delhi by a majority of 3-2 has decided the issue in the following manner:
Observations of Two Judicial Members: The Hon’ble Judicial Members relying upon decisions in the case of CST Vs. Turbotech Precision Engineering Pvt. Ltd. [2010 (18) S.T.R 545 (Kar)] and Strategic Engineering Pvt. Ltd. Vs. CCE [2011 (24) S.T.R 387 (Mad)] held as under:
- Works Contract was not a taxable service prior to June 1, 2007;
- Definition of CICS, COCS and/or ECIS read with the charging provision (erstwhile Section 66 of the Finance Act) and the valuation provision (Section 67 of the Finance Act) do not comprehend Works Contract within their ambit;
- The Hon’ble Delhi High Court in case of G.D. Builders and Others versus Union of India and Another [(2013) 32 STR 673 (Del.)] (“GD Builders Case”) held that a Works Contract can be vivisected and discernible taxable service elements could be subjected to Service tax prior to June 1, 2007 is erroneous on per incuriam and sub silentio grounds.
- Four essential components is must for imposition of tax to a transaction namely, character of the imposition, the person on whom the levy is imposed, the rate at which tax is imposed and the value to which the rate is applied for computing tax liability. If ambiguity in any of the four concepts, then levy would fail. In the instant case, ambiguity exists with the fourth concept;
- If Revenue’s contention of Works Contract being exigible to Service tax prior to June 1, 2007 was correct, insertion of Works Contract service in the Finance Act would have been unnecessary. Further, even after June 1, 2007, CICS, COCS and ECIS continue to be taxable services, since there is neither a repeal/ omission of these provisions nor these are excluded from the list of taxable services catalogued in the charging provision, Section 66 of the Finance Act. Furthermore, Rule 2A of the Service Tax Valuation Rules has no application to CICS, COCS or ECIS, even after June 1, 2007 as the Revenue neither suggests nor contends the same;
- CICS, COCS and ECIS covers only such contracts/ transactions which involve pure supply of labour or rendition of service(s), falling within the ambit of the respective definitions;
- CESTAT larger Bench decision in C.C.E. Vs. B.S.B.K. Pvt. Ltd. [2010 (253) ELT 522] (“BSBK case”), to the extent it rules that a Works Contract is a taxable service prior to June 1, 2007 as well is overruled.
Observations of Three Technical Members: The Hon’ble Technical Members relying upon the decision in GD Builders Case, BSBK case and YFC Projects (P.) Ltd. vs. Union of India [(2014) 44 GST 334/43 taxmann.com 219 (Delhi)] (“YFC Case”), held as under:
- Although the two larger benches of the Hon’ble Tribunal, Delhi in case of Jyoti Ltd. Vs. CCE [2008 (9) S.T.R 373] and in CCE Vs. Indian Oil Tanking Ltd. [2010 (18) S.T.R 57] held the view that a Works Contract service is not leviable to Service tax prior to June 1, 2007, when a specific entry was introduced in the taxable service list in Budget 2007. But, the Revenue has challenged these decisions before the Hon’ble Supreme Court and the appeals have been admitted in July, 2008 and August, 2010 are pending for disposal;
- In GD Builders Case and YFC Case, the Hon’ble Delhi High Court has considered the very same matter and held that Works Contract can be vivisected and discernible taxable service elements could be subjected to Service tax prior to June 1, 2007;
- This Tribunal being sub-ordinate to both the Apex Court and the High Court would be bound by the above mentioned decisions. In other words, the ratio decidendi of the GD Builders Case stands uncontroverted as of now and therefore, the same is binding on all sub-ordinate courts including this Tribunal;
- The CESTAT in several cases had followed the decision of the Delhi High Court in GD Builders Case after consistently holding that the GD Builders decision is not per incuriam and is a good law. Now, the Hon’ble Tribunal cannot turnover/ somersault by stating that decision in GD Builders Case is erroneous on per incuriam and sub silentio grounds. Hence, frequent change of views by the Tribunal will add to the uncertainty and might impact the institutional integrity;
- Merely because there are no machinery provisions to compute or quantify the amount of tax prior to June 1, 2007, levy of Service tax cannot be any challenge. Further, no difficulty exist while practically determining the value of service (rendered) component of a composite contract as the same can be worked out by deducting the value for the supply of goods from the total value of the composite contract;
- Separate and specific constitutional provision together with the machinery for determining the measure is required only when State Government wants to tax goods portion in a service transaction or the Central Government wants to tax service portion in a sales transaction. But for charging of Service tax by the Central Government on a service transaction including a Works Contract, no machinery for excluding the value of the goods involved in the provision of service is required and for the lack of such machinery provision, the levy cannot be held to be invalid.
Thus, the Five Member Bench of the Hon’ble Tribunal held that Service elements in a composite Works contract (involving transfer of property in goods and rendition of services), where such services are classifiable under CICS, COCS and ECIS are subject to levy of Service tax even prior to insertion of taxable service ‘Works Contract’ under Section 65(105) (zzzza) of the Finance Act i.e. prior to June 1, 2007.