Service Tax not leviable on Composite Works Contract Prior to 2007: Supreme Court upholds Verdict in Larsen and Toubro Ltd [Read Judgment]

While upholding its earlier verdict in Larsen and Toubro Ltd, a two-judge bench comprising Justice M.R. Shah and Justice B.V Nagarathna observed that service tax cannot be levied on the composite works contract prior to the amendment made to the Finance Act, 1994 by insertion of the definition of works contract as under clause (zzzza).

A Bench comprising Justices M.R. Shah and B.V Nagarathna was considering a bunch of appeals wherein the Revenue had argued that the Apex Court's decision in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Ltd. requires reconsideration. In the said judgment it was held that service tax on composite works contracts was not leviable prior to the 2007 amendment to the Finance Act, 1994. She averred that service tax on composite works contracts was payable even before the 2007 amendment. Moreover, the insertion of Section 65(105)(zzzza) by way of the 2007 amendment was only clarificatory in nature.

On the other hand, Counsels appearing on behalf of the assesses submitted that the said judgment does not call for consideration.

The bench observed that the issue before the Court in Larsen and Toubro (supra) was whether service tax on composite works contracts was leviable prior to the 2007 amendment to the Finance Act.

Noting that in order to levy service tax a charging section and a mechanism for levy and assessment of service tax on service element of works contract ought to be present, the bench held that “However, the same was not available in the Finance Act, 1994 prior to the 2007 amendment. It was held that works contracts are a separate species of contract distinct from contracts of service simpliciter and would have to be taxed separately.”

Concluding the order, the bench further observed that “Therefore, reliance placed by the assesses in the present case on the aforesaid judgments is just and proper. On the other hand, the contention of Ms. Diwan, learned ASG to the effect that even prior to the aforesaid amendment being made to the Finance Act, 1994 service tax on works contract was leviable is not correct. It was being levied on purely service contract and not on service element of works contract as there was no definition of a works contract till then. Hence, the amendment made to the Finance Act, 1994 by insertion of the definition of works contract as under clause (zzzza) is not clarificatory in nature. Having found that the Service Tax was not at all leviable on service element of a works contract, Parliament felt the need for the amendment and was so incorporated by the Finance Act, 2007.”

“Thus, the judgment in Larsen and Toubro Ltd. (supra) has been correctly decided and does not call for a reconsideration insofar as the period prior to 1^st June, 2007 is concerned,” the Court concluded.

To Read the full text of the Judgment CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates