Indivisible composite works contracts are not chargeable to Service tax prior to June 2007

The Hon'ble Supreme Court of India in the matter of M/s. Total Environment Building Systems Pvt. Ltd. v. The Deputy Commissioner of Commercial Taxes & Ors.[CIVIL APPEAL NOS. 8673-8684 OF 2013 dated August 02,2022] upheld the decision of the Commissioner, Central Excise and Customs, Kerala vs. Larsen and Toubro Limited, (2016) 1 SCC 170 ("the Larsen and Toubro Ltd") need not to be reviewed and stated that no service tax to be levied on Composite Works Contracts prior to the introduction of the Finance Act, 2007 ("the Finance Act").

Facts:

The present appeal has been filed for the issue that whether service tax could be levied on Composite work contracts prior to the introduction of the Finance Act, 2007 which has amended the Section 65(105)(zzzza) of the Finance Act pertaining to Works Contracts Services?

The aforesaid issue has been decide by the Hon'ble Supreme Court in the case of the Larsen and Toubro Ltd, wherein the Court has specifically held that on indivisible works contract prior to the introduction of the Finance Act, 2007, Service Tax was not leviable under the Finance Act, 1994 and specifically observed that works contract on which the Service Tax was levied under the Finance Act, 1994 is distinct from contracts of service.

Petitioner's Contention:

• The decision of the Larsen and Toubro Ltd has been consistently followed by all the High Courts in the country. Therefore, after a period of six to seven years reconsidering the decision at the instance of the respondent may upset the decisions already taken by the different High Courts. Hence, as per the principle of stare decisis, the decision cannot be reconsidered at this length of time, more particularly, when the Revenue did not file any review application earlier to review the decision of the Larsen and Toubro Ltd.

Respondent's contention:

• The decision of the Larsen and Toubro Ltd, holding that there was no service tax leviable on works contracts prior to the amendment by the Finance Act, needs to be re-considered.

• Even prior to the Finance Act, there was an elaborate mechanism for segregating the value of the goods component and the service component in a Works Contract. Therefore, it cannot be said that there was no machinery provision to charge as such the service component in a Composite Works Contracts in order to make it chargeable to Service Tax and hence the decision of the Larsen and Toubro Ltd was erroneous.

Issue:

• Whether Service Tax could be levied on Composite Works Contracts prior to the introduction of the Finance Act, by which the Finance Act, 1994 amended to introduce Section 65(105)(zzzza) pertaining to Works Contract Service.?

Held:

The Hon'ble Supreme Court of India in CIVIL APPEAL NOS. 8673-8684 OF 2013 dated August 02,2022 has held as under:

• The Service Tax was not leviable on Composite Works Contracts, while holding that for the period prior to the -Finance Act, 2007, the decision of the Larsen and Toubro Limited has been followed by various High Courts and the Revenue Department ("the Respondent") has not challenged the said decision nor file any review application to review or to recall the judgement earlier.
• Further, if the Respondent was so serious in their view that decision of the Larsen and Toubro Ltd requires reconsideration, then must ought to have filed the review application at that stage, but no application has been filed even as on today. Merely because in the subsequent cases, the amount of tax involved may be higher, cannot be a ground to pray for reconsideration of the earlier binding decision, which has been consistently followed by various High Courts in the entire country.
• The principle of stare decisis clearly bind us and the decision of Larsen and Toubro Ltd has stood the test of time and has never been doubted earlier. Therefore, to reconsider the decision, will affect so many other assesses in whose favour the decisions have already been taken and It may unsettle the law, which has been consistently followed since 2015 onwards.
• Held that, the case of Larsen and Toubro Ltd need not to be reviewed and orders passed by the respective High Courts taking the view that for the period prior to the Finance Act, 2007, the respective assesses are liable to pay the service tax on indivisible works contracts are hereby quashed and set aside. 
• Opined that, works contract has two essential components: firstly, sale of goods involved in the execution of such contracts which would attract Sales Tax or Value Added Tax  as the case may be, i.e., prior to the enforcement of the Goods and Services Tax regime and secondly, a service component which is specified in clause (ii)(a)(e) of the definition of works contract which would attract Service Tax under the provisions of the Finance Act, 1994 as amended in the year 2007.
• Stated that, the definition of Works contract inserted for the first time by virtue of Section 65(105)(zzzza) under the Finance Act, 2007 assumes significance and has to be applied w.e.f. June 01, 2007. Thus, on and from the enforcement of the amendment in the Financial Year 2007, i.e. June 01, 2007 the tax on the service component of works contract became leviable.