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Commissioner, Central Excise & Customs, Kerala v. M/s Larsen & Toubro Ltd.

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 6770 of 2004)Decided 20 Aug 2015
Civil Appeal No. 6770 of 2004
Justice A.K. Sikri · Justice Rohinton Fali Nariman

Background

This was a large batch of appeals, by both tax assessees (construction/engineering companies such as Larsen & Toubro) and the Revenue, raising a common question: whether service tax could be levied on indivisible ("composite") works contracts, contracts combining supply of goods/materials with labour and services, such as construction contracts, for the period before 1st June 2007, when the Finance Act, 2007 first expressly introduced a specific "works contract service" category. The Revenue relied on earlier provisions of the Finance Act, 1994 (covering services like "commercial or industrial construction") to argue that service tax on the service component of such composite contracts was already leviable even before 2007.

Decision Breakdown

The Supreme Court traced the law from the Constitution Bench's Gannon Dunkerley decisions, which treated an indivisible works contract as a composite transaction that cannot simply be split by a State into a "sale of goods" portion without a specific constitutional/legislative mechanism to do so. The Court held that while the 1994 Finance Act's provisions could tax the service element of specifically defined services, they did not contain adequate "charging" and "machinery" provisions to validly segregate and tax the service component of an indivisible works contract as such: that mechanism was created for the first time only by the Finance Act, 2007's new "works contract service" category and valuation rules under the amended Section 67. The Court expressly rejected a High Court ruling that had held the pre-2007 Finance Act already contained both the charge and the machinery for such a levy, calling that reasoning erroneous. It also rejected the Revenue's fallback argument that all indivisible works contracts entered after 1994 were void as against public policy. As a result, the Court allowed all the appeals filed by assessees and dismissed all the appeals filed by the Revenue, meaning no service tax could be validly charged on indivisible composite works contracts for periods before 1st June 2007.

Lesson Learnt

A tax can only be levied where the law provides both a clear charge and a workable method (machinery) for calculating it: simply having a broadly worded taxing provision is not enough; businesses with composite works contracts entered into before mid-2007 could not lawfully be charged service tax on the labour/service portion of those contracts for that earlier period.

Official source (sci.gov.in)View Judgment (PDF)

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