IMPORTANT POINT
Levy of Service Tax is non-existent in Finance Act, 1994.
When the tax cannot be charged under the Act, there is no question of exempting the same.

Headnote:(a) Finance Act, 1994 – Section 65(105) – Charge to tax u/s 65(105) – On service contracts simpliciter – Not on composite indivisible works contracts. (Para 15, 20)
       (b) Constitution of India – Seventh Schedule – Subject of taxation covered by List I and II – No entry in List III – Thus taxation is exclusive to the Centre or the States – No concurrent taxation – Neither the two can be mixed in one levy – Sales tax chargeable on goods while service tax on servicers – Works contract includes both – In works contract, therefore, it becomes very important to segregate the two elements completely – If some element of transfer of property in goods remains when a service tax is levied, the said levy would be found to be constitutionally infirm – Rule 2A, Service Tax (Determination of Value) Rules, 2006 providing such scheme. (Para 16, 17, 26)
       (2006) 3 SCC 1; 1959 SCR 379; (2014) 7 SCC 1; (2014) 1 SCC 708 – Relied upon
       (c) Finance Act, 1994 – Section 65(105) r/w section 67(prior to amendment in 2006) – Defining “taxable service” as “any service provided” – Service contracts simpliciter are chargeable and not composite works contracts – No provision for separating from the value of works contract the value of property in goods transferred in the execution of a works contract – The act does not contain both the charge and machinery for levy and assessment of service tax on indivisible works contracts – Works contract as a whole as in present case not chargeable to service tax. (Para 24, 41)
       (1999) 8 SCC 667; 1985 Supp SCC 205; (1981) 2 SCC 460; (2007) 9 SCC 266; (1993) 1 SCC 364 – Relied upon
       [1993] 88 STC 289; (2008) 012 VST 0031 – Cited with approval
       (2012) 5 SCC 443; (1989) 2 SCC 645; (1985) 2 SCC 230; 2015-TIOL-527-CESTAT-DEL-LB – Referred
        – Referred
       (2007) 3 SCC 668 – Distinguished
       (d) Administration of Justice – Statutory provisions and notifications – Levy of Service Tax non-existent in Finance Act, 1994 – Notifications granting exemption qua service tax “levied” by the Act – Irrelevant. (Para 44)
       Facts of the case:
       In this group of appeals question raised is whether service tax can be levied on indivisible works contracts prior to the introduction, on 1st June, 2007, of the Finance Act, 2007 which expressly makes such works contracts liable to service tax.
       Finding of the Court:
       Levy of Service Tax is non-existent in Finance Act, 1994.
       Result: Appeals disposed of.

Judgement Key Points

The legal document emphasizes that the levy of service tax under the Finance Act, 1994, on indivisible works contracts is non-existent. It clarifies that the Act does not contain a specific charge or machinery provisions for taxing such composite contracts, which include both transfer of property in goods and supply of labor and services. The absence of explicit provisions for segregating and taxing the service component within a works contract renders the levy unconstitutional and legally invalid (!) (!) (!) (!) (!) .

Furthermore, the constitutional scheme assigns exclusive taxation powers to the Centre and the States, with no scope for concurrent taxation. Therefore, the complete segregation of the goods and service elements in works contracts is essential to uphold the constitutional validity of any tax. Since the legislation and rules do not specify such segregation or provide adequate machinery for assessment, any attempt to tax entire works contracts as a whole would transgress constitutional limits (!) (!) (!) .

The document also highlights that the relevant statutory definitions and rules post-2007 explicitly set out the criteria for taxing works contracts, including detailed provisions for bifurcation of the contract’s value into goods and service elements. Prior to this, the absence of such provisions meant that the tax could only be levied on service contracts that are not composite or indivisible (!) (!) .

Additionally, the scheme of taxation under the constitutional framework and the relevant statutes underscores the necessity of clear, definite, and ascertainable components of the tax, including the subject, person liable, rate, and measure. The lack of machinery provisions and explicit segregation mechanisms leads to the conclusion that the levy of service tax on indivisible works contracts is unconstitutional and invalid (!) (!) .

In sum, the document affirms that the levy of service tax on composite, indivisible works contracts under the provisions of the Finance Act, 1994, is not legally tenable due to the absence of specific charge, machinery, and constitutional compliance for such a levy. Consequently, any assessments or notifications attempting to impose such tax are invalid, and the relevant appeals are disposed of accordingly (!) (!) .

Judgment

R.F. Nariman, J.

1. This group of appeals is by both assessees and the revenue and concerns itself with whether service tax can be levied on indivisible works contracts prior to the introduction, on 1st June, 2007, of the Finance Act, 2007 which expressly makes such works contracts liable to service tax.

2. It all began with State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., 1959 SCR 379. A Constitution Bench of this Court held that in a building contract which was one and entirely indivisible, there was no sale of goods and it was not within the competence of the State Provincial Legislature to impose a tax on the supply of materials used in such a contract, treating it as a sale. The above statement was founded on the premise that a works contract is a composite contract which is inseparable and indivisible, and which consists of several elements which include not only a transfer of property in goods but labour and service elements as well. Entry 48 of List II to the 7th Schedule to the Government of India Act, 1935 was what was under consideration before this Court in Gannon Dunkerley’s case. It was observed that the expression “sale of goods” in that entry has become “nomen juris” and that therefore it has the same meaning as the said expression had in the Sale of Goods Act, 1930. In other words, the essential ingredients of a sale of goods, namely, that there has to be an agreement to sell movables for a price, and property must pass therein pursuant to such agreement, are both preconditions to the taxation power of the States under the said entry. This Court, after considering a large number of judgments, ultimately came to the following conclusion:-

“To sum up, the expression “sale of goods” in Entry 48 is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. In a building contract which is, as in the present case, one, entire and indivisible — and that is its norm, there is no sale of goods, and it is not within the competence of the Provincial Legislature under Entry 48 to impose a tax on the supply of the materials used in such a contract treating it as a sale.” (at page 425) [It is interesting to note that a 7 Judge Bench in M/s. Vishnu Agencies (Pvt.) Ltd. vs. Commercial Tax Officer and Ors., 1978 (1) SCC 520, doubted Gannon Dunkerley’s case by stating that its correctness would have to await a more suitable occasion in that the entry, namely, 48 of List II of the 7th Schedule to the Government of India Act had been narrowly construed. It may be pointed out that H.M. Seervai’s Constitutional Law of India, Vol. III, page 2326, had this to say: “This decision was rendered in 1959 and was repeatedly followed, till a doubt was cast on its correctness in Vishnu Agencies by the obiter observations of Chandrachud J. In my submission, the judgment in Gannon Dunkerley’s Case is clearly right, and requires no reconsideration. Therefore, it becomes necessary to consider Gannon Dunkerley’s Case more fully than in the earlier editions of this book.”]

3. The Law Commission of India in its 61st Report elaborately examined the law laid down in Gannon Dunkerley’s case and suggested that the relevant entry contained in the 7th Schedule to List II to the Constitution of India -Entry 54 -could either be amended; or a fresh entry in the State List could be added; or Article 366 which is a definition clause could be amended so as to widen the definition of “sale”, and include therein indivisible composite works contracts. Having regard to the said recommendation of the Law Commission, the Constitution (46th Amendment) Act was passed in 1983 by which Parliament accepted the 3rd alternative of the Law Commission, and amended Article 366 by adding sub-clause (29A). We are concerned with sub-clause (b) of Article 366 (29A) which reads as follows:-

366 (29A) “tax on the sale or purchase of goods” includes-

(b) a tax on the transfer of property

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2015 Supreme(SC) 814

IMPORTANT POINTLevy of Service Tax is non-existent in Finance Act, 1994.When the tax cannot be charged under the Act, there is no question of exempting the same.

Cases Referred (13)

IMPORTANT POINT
Levy of Service Tax is non-existent in Finance Act, 1994.
When the tax cannot be charged under the Act, there is no question of exempting the same.