In the Customs Excise & Service Tax Appellate Tribunal
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1 2015(1) ECS (1)(Tri-Del) In the Customs Excise & Service Tax Appellate Tribunal, West Block No.2, R. K. Puram, New Delhi, Court No. 1 Date of hearing: 10.11.14 to 14.11.2014 Date of decision: 19.03. 2015 S. Tax Stay No. 59278 of 2013 in S.T. Appeal No. 58658 of 2013 S. Tax Appeal No. 550 of 2007 M/s Larsen and Toubro Limited Appellant M/s Kehems Engg. Pvt. Ltd. Vs. CST, Delhi/ CCE&ST, Indore/ CCE/ Rajkot Respondent Service Tax Appeal No. 622 of 2007 CCE & ST, Indore Appellant Vs. M/s Kehems Engineering Pvt. Ltd. Respondent Appearance: Shri N. Venkatraman, Learned Sr. Counsel and Shri P. K. Sahu, Shri B. L. Narasimhan, Shri Puneet Agrawal, Learned Advocates for Assessees; and Shri Amresh Jain and Shri Govind Dixit, Learned AR’s for Revenue. Coram: Hon’ble Mr. Justice G. Raghuram, President Hon’ble Ms. Archana Wadhwa, Member (Judicial) Hon’ble Mr. Rakesh Kumar, Member (Technical) Hon’ble Mr. P. R. Chandrasekharan, Member (Technical) Hon’ble Mr. R. K. Singh, Member (Technical) (Interim Order Nos. 72 – 74/2015) The value of goods supplied in a composite works contract is well known or determined. From the total value of the composite contract, if the value for the supply of goods is deducted, the remainder would be the value of the service component. Therefore, at the practical level of implementation, there is absolutely no difficulty in determination of value of service rendered. Therefore, the argument of lack of machinery provision for determination of tax liability is 2 only a figment of imagination and has no practical relevance. Therefore, the challenge to the levy on this ground is clearly unsustainable. It is very difficult to segregate supply of goods and services as they are inter-dependent and in my view such an exercise is a futile one. The vires of service tax levy on all such composite transactions have been upheld in quite a few decisions by the Supreme Court. This is where the doctrine of pith and substance and the doctrine of aspects come into play. The decision of the Supreme Court in Federation of Hotel and Restaurant Assn. of India v. Union of India has beautifully explained this proposition…. the contention that a composite contract consisting of supply of goods and supply of services cannot be vivisected for the purpose of taxation does not take into account the reality of economic transactions which are subjected to tax. In its latest decision in State of Karnataka v Pro Lab and Others - 2015- TIOL-08-SC-CT-LB, decided on 30th January, 2015, another larger bench of the Supreme Court considered the issue of levy of sales tax on processing and supplying of Photographs. The hon’ble apex court held that ,- "after insertion of clause 29-A in Article 366, the Works Contract which was indivisible one by legal fiction, altered into a contract, is permitted to be bifurcated into two: one for "sale of goods" and other for "services", thereby making goods component of the contract exigible to sales tax. While going into this exercise of divisibility, dominant intention behind such a contract, namely, whether it was for sale of goods or for services, is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of clause 29-A of Article 366, the State Legislature is now empowered to segregate the goods part of the Works Contract and impose sales tax thereupon. Entry 54, List II of the Constitution of India empowers the State Legislature to enact a law taxing sale of goods. Sales tax, being a subject-matter into the State List, the State Legislature has the competency to legislate over the subject." This latest decision of the Supreme Court clearly settles the issue about the divisibility of a works contract for the purpose of taxation. If by virtue of clause 29A of Article 366, the State Legislature is empowered to segregate the goods part of the works contract and impose sales tax thereon, the same logic would apply in respect of Central Legislation imposing service tax. In other words, the Parliament is empowered to segregate the service component of the works contract and impose service tax thereon. This is precisely what the Finance Act, 1994 has done when it sought to levy service tax on CICS , COCS and ECIS under sections 65(25b) r/w 65 (105) (zzq), 65(30a) and 65 (91a) r/w 65 (105)(zzzh) and 65 (39a) r/w 65(105)(zzd). In other words ,Whenever or wherever such services are rendered either as a pure labour contract or as part of the works contract, service tax liability is attracted, especially considering the fact that there is no restriction stipulated in the statute for levy of service tax on 3 these services. Therefore full play and effect to the statutory provisions have to be given. Further a statutory provision cannot be interpreted so as to create discrimination among various classes of service providers, one set of people supplying services alone, liable to tax, and another set providing both supply of goods and services, not liable to tax. In my humble view, we cannot create discrimination through judicial interpretation. The issue referred to the Larger Bench is fully and squarely covered by the G D Builders case decided by the hon’ble Delhi High Court and the matter should rest there. Consequently, it has to be held that a composite works contract can be vivisected and discernible service elements therein can be levied to service tax provided such elements are declared as taxable services in the law, even prior to 1-6-2007 when a specific entry was created for certain type of works contract services. The reference should be answered accordingly and returned to the referring benches for decision on other questions such as, determination of value of the service component and quantification of service tax amount payable thereon, time bar, imposition of penalty, and so on, if any raised. (P.R. Chandrasekharan) Member (Technical) Absence of Rules would not necessarily eclipse or paralyse Section 67 which refers to the value of service, implying thereby that the value of goods “sold” in a composite contract was not to be a part of the value for the purpose of that Section. Thus, Section 67, even in its pre 18.04.2006 avatar in no way encroached upon the state Govt’s domain relating to levy of sales tax. Indeed, Notification No.12/2003-ST needs, thus, to be viewed as a measure of abundant caution and care on the part of the Central Govt. to obviate even a remote possibility of service tax being charged on the value of goods “sold” as a part of a composite contract, and not as an attempt to imply that it has power to levy service tax on the same. It is pertinent to mention that any provisions regarding valuation, howsoever detailed, cannot entirely rule out the possibility of certain degree of interpretational uncertainty but that would not be fatal to the levy unless the uncertainty is of such a high degree as to lead to arbitrariness. Merely because CCS, CICS, ECIS, provided as part of Works Contracts and hence becoming classifiable under Works Contract Service [S.65 (105)(zzzza)] w.e.f. 01.06.2007 in no way means that these services (as part of works contracts) were not taxable earlier (i.e. prior to 01.06.2007) under Section 65 (105) (zzzh), 65 (105)(zzq), 65 (105) (zzd) respectively because classification of a service is to be determined as per the definitions of various taxable services prevalent during the relevant period and merely because the classification changes with the introduction of a taxable service under which an existing service gets more specifically covered (by virtue of Section 65A), does not mean that the said service was not taxable during the period prior thereto. 4 (R.K. Singh) Member (Technical) Exemption notifications issued by the Central Government under Section 93 of the Finance Act, providing for abatement of the taxable value of the specified services (including ECIS, CICS and CICS) which entail both supply of goods as well as services, as to exclude the value of the goods determined on average basis from the gross amount charged for such service contracts, are sufficient for avoiding the taxation of the same goods by the State Government as well as by the Central Government and no machinery provision for determination of precise value of the taxable service in such contracts by totally excluding to the value of the goods deemed to have been sold is necessary. The transactions of sale of goods and sale of service are so intermixed that insisting on absolute separation of goods and services for taxation by the State Government and the Central Government respectively would be only a futile exercise – some overlap in this regard is inevitable, which has to be ignored in the interests of smooth functioning of the laws governing the levy of tax on sale of goods by the State Government and levy of service tax on the service by the Central Government. ….. the amount charged by a service provider for the service on which service tax is payable may involve the cost of the goods used for providing the service. The principle of non encroachment by the centre into the taxation territory of States and vice versa does not mean that each service transaction should be examined with a microscope for removing the goods component or each sales transaction should be examined with a microscope to remove the service component.