In a recent ruling, the Madras High Court, concurring with the Supreme Court’s decision in Commissioner of Service Tax v. Bhayana Builders (P) Ltd has ruled that the explanation in serial number 7 of the service tax notification no. 1/2006 is ultra vires to the finance act provisions and the constitution.
Justice Anita Sumanth allowed the writ petition filed by the petitioner Bharathi Constructions.
The petition prayed to o issue a writ of Declaration, to declare Explanation in Sl.No.7 of Notification No.1/2006-ST dated 01.03.2006 as ultra vires Sections 65(105)(zzq), 65(zzzh), 66 and 67 of the Finance Act, 1994 as amended and also ultra vires Articles 14 and 265 of the Constitution of India in so far as the petitioner is concerned.
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The counsels of both the petitioner and the respondent-department accede to the position that this issue has to be decided in favour of the assessee in view of the judgment of the Supreme Court in Commissioner of Service Tax v. Bhayana Builders (P) Ltd.,2018 , where the identical issue has been decided.
The Supreme Court, in its decision observed that there was no evidence to justify the formula used in the notification, which set service tax at 33% of the gross amount charged. The Court noted that the language of the notification implied service tax was based only on the amount charged by the service provider, excluding the value of goods supplied by the service recipient. Even with a 2005 explanation, which clarified inclusion of goods provided by the service provider, there was no provision for including goods supplied by the recipient in the gross amount calculation.
The apex court, referring to its earlier decision in Commissioner, Central Excise and Customs, Kerala v. M/s. Larsen & Toubro Ltd., emphasized that service tax under Section 65(105) of the Finance Act, 1994 applies only to service contracts and not composite works contracts. It noted that exemption notifications under Section 93 relate solely to taxable services defined under specific sub-clauses of the Act. Therefore, goods/materials cannot be included in taxable value unless explicitly provided by law.
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Explanation 1 of Serial Number 7 of the Notification states that “Explanation.- The gross amount charged shall include the value of goods and materials supplied or provided or used by the provider of the construction service for providing such service.”
Concurring with the above observations, the High Court allowed the petition declaring the explanation is ultra vires to finance act and constitution.
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