Introduction
Works contracts means a contract wherein there is a transfer of property in goods involved in execution of such contract is leviable to tax as sale of goods. Basically, which involves both material and services and are indivisible contract in contrast to pure contract of supply of materials. Works contract was introduced in the Finance Act, 1994 w.e.f. 1.06.2007. Prior to 1.06.2007, there was no provision in the Finance Act,1994 to levy service tax on works contract. However, lots of litigation is flowing around this particular subject whether service tax could be levied on the service component of the composite contract i.e. works contract or not prior to 1.06.2007. Issue Whether works contract can be vivisected and service tax can be levied prior to introduction of works contract service on 1.06.2007.
Analysis with case law references Article 366(29A) of the Constitution of India, a composite contract is permitted to be vivisected for the purposes of taxation of the element of the transfer of goods involved in execution of the contracts. But, there is no such provision in the Constitution that enables the Central Government to do so for the purpose of levying Service Tax. Currently, the Service Tax provisions levy tax on the value of services rendered as regards construction service, installation and commissioning service, etc. However, in view of the fact that the transactions are composite in nature, it is absolutely impermissible for the Central Government to vivisect the same and levy tax on the service element. In order to do the same, a similar Constitutional amendment will have to be introduced, which expands the definition of the phrase "taxes on services" to include services rendered in the execution of a works contract.
In Geo Miller & Co. (P) Ltd. vs. State of M. P., (2004) 5 SCC 209, the Supreme Court has held that the legal fiction introduced by the 46th Constitutional amendment does not define 'sale'. The legal fiction is meant for entry 54 of List II of the Seventh Schedule to the Constitution and can not be extended for the purpose of entry 52 of List II. Extending this logic, it can be argued that the effect of the amendment does not extend to entry 97 of List I, from which the Parliament has derived power to levy service tax. Hence, CBEC does not have a case that after the 46th Constitutional Amendment, a composite contract has become divisible for service tax.
It was held in the case of Daelim Industrial Co. Ltd. (2003(06)LCX0023) that the works contract cannot be vivisected and subject to service tax. Same decision is being taken by the Larger Bench in case of Jyoti Ltd. (2008(009)STR373) where it was held that the works contract comes under service tax net in 2007, for contracts prior to 2007, service tax cannot be levied on it. Tribunal in the case of Indian Oil Tanking Ltd. vs. CCE, Raigad [2010(018)STR 0577] held that the lump sum indivisible turnkey contracts cannot be visvisected and subjected to service tax prior to 1.06.2007. 46th Amendment to Constitution made with intent to enable States to levy sales tax on sale component and not empowers levy of tax on service component of works contract. Further held that the decision of Delhi Tribunal in case of Daelim Industrial Ltd. has a precedential value and binding on Co-ordinate benches after SLP against those decision dismissed by the Supreme Court.
The Tribunal before coming to the conclusion examine the decision of Bharat Sanchar Nigam Ltd. vs. UOI (2006(002)STR 0161(SC)), BSBK Pvt. ltd vs. Commissioner (2008(009)STRJ29(S.C.), Daelim Industrial Co. Ltd. vs. Commissioner (2004(08)LCX001), Deibold System Pvt. Ltd. (2008(09)STR 0546)) etc. It was also held by the High Court in the case of Turbotech Precision Engineering Pvt. Ltd. (2010(018) STR 0545) that in respect of the contracts which falls under the definition of the works contract prior to 1.06.2007, revenue has no power to call upon the assessee to pay service tax, since the provision of law has come into force with effect from 1.06.2007. However, the taxing authorities are of the view that the works contract can be vivisected and service tax can be imposed on the service element of the contract.
The department view has been accepted in the series of judgment. In the case of BSBK P. ltd. (2010 (018) STR 0555), it was held that works contract (i.e. turnkey contracts in the particular case) can be vivisected and discernible service element involved therein can be segregated and classifiable as well as valued for the levy of service tax. The Larger bench in the BSBK P. Ltd. disagree with the decision in Daelim's case. It was argued that although the Daelim's case was challenged by the Revenue in the Supreme court and the same has been dismissed but the rejection of the SLP or appeal cannot be construed as affirmation of the judgment as it only means SC declined to interfere with the judgment.
It is to be noted that though the decision of the India Oil tanking ltd. [2009(01)LCX0305] was much prior to this decision, the same was not considered while holding the ratio of decision of Daelim Industrial Co. was not a good law. Recently, same issue has been arose in the case of Larsen & Toubro Ltd. (2013(032) STR 0410) whereby the matter has been referred to Larger Bench of five members since there is a conflict of opinion between three members Bench decisions of this Tribunal Jyoti Ltd., Indian Oil Tanking Ltd. and BSBK Pvt. Ltd. Conclusion Therefore controversy remains that whether decision of BSBK Pvt. Ltd. is a good law and vivisection of composite contract is possible prior to introduction of works contract service. However, this issue pertains only to five kinds of contracts prescribed under Article 366(29A) of the Constitution as decided in the BSNL case by the SC. Thus, much awaiting decision of the five members bench in case of Larsen & Toubro Ltd. could only put to an end of the debate..........
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