COMMISSIONER, CENTRAL EXCISE & CUSTOMS, KERALA vs. M/S LARSEN & TOUBRO LTD.

CIVIL APPEAL No. 6770/2004Supreme Court[2015] 8 S.C.R. 104620 August 2015Bench: 2 JudgesAuthor: A.K. SIKRI, R.F. NARIMAN53 pages
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What were the facts?

The Supreme Court was hearing appeals concerning the levy of service tax on indivisible works contracts prior to the Finance Act, 2007. The assessee, Larsen & Toubro Ltd., and other similar entities, argued that service tax could not be levied on composite works contracts under the Finance Act, 1994, as it lacked the necessary machinery for assessment and segregation of service and goods components. The Revenue, represented by the Commissioner, Central Excise & Customs, Kerala, contended for the levy of service tax. The assessment years are not explicitly stated but pertain to the period before the Finance Act, 2007. The dispute revolves around the constitutional validity and statutory basis of levying service tax on such contracts.

What did the Supreme Court hold?

The Supreme Court held that service tax, as introduced by the Finance Act, 1994, was not leviable on indivisible works contracts prior to the Finance Act, 2007. The Court reasoned that a works contract is a distinct species of contract, separate from services simpliciter. The charging section of the Finance Act, 1994, did not specifically lay down the charge or the machinery to levy and assess service tax on indivisible composite works contracts. The Court emphasized that taxation requires specificity, and where there is no machinery for assessment, the law being vague, it is not open to the assessing authority to arbitrarily assess the subject to tax. The Court also noted that the constitutional scheme mandates that taxation powers of the Centre and States are mutually exclusive, and in composite works contracts, Parliament can only tax the service element, and States can tax the transfer of property in goods. If an element of transfer of property in goods remains when a service tax is levied, the levy would be constitutionally infirm. The Court found that the Finance Act, 1994, and its associated rules did not provide for the segregation of the service component from the goods component in such contracts. The amendment by the Finance Act, 2006, and the Service Tax (Determination of Value) Rules, 2006, Rule 2A, for the first time, provided a mechanism to segregate these components, aligning with the constitutional requirements. Therefore, the appeals of the assessees were allowed, and those of the Revenue were dismissed. The Court expressly left undecided the question of whether such contracts were contrary to public policy, as their primary finding on the lack of statutory machinery rendered the issue moot.

What were the issues?

1. Whether service tax, as introduced by the Finance Act, 1994, is leviable on indivisible works contracts prior to the introduction of the Finance Act, 2007? (Question of law, concerning Section 65(105)(zzzza) and Section 67 of the Finance Act, 1994, and constitutional provisions regarding taxation powers). - Assessee's contention: Service tax is not leviable on indivisible works contracts because the Finance Act, 1994, lacks the specific charging section and machinery for assessment, making the levy vague and unworkable. They rely on the principle that taxation requires a clear charge and machinery, citing cases like C.I.T. v. B.C. Srinivasa Setty and the second Gannon Dunkerley case. - Revenue's contention: Service tax is leviable on the service component of works contracts, and the Finance Act, 1994, provides the necessary framework. They argue that the charging sections and valuation rules are sufficient. 2. Whether composite indivisible works contracts entered into after the enactment of the Finance Act, 1994, are contrary to public policy, being hit by Section 23 of the Contract Act and the McDowell's case? (Question of law). - Assessee's contention: Such contracts might be considered contrary to public policy if they circumvent taxation laws or are otherwise objectionable. However, their primary argument is the lack of statutory machinery for service tax levy. - Revenue's contention: Not explicitly recorded, but impliedly, they would argue that such contracts are valid and taxable.

Which sections of the Income-tax Act were involved?

Section 65(105),Section 67,Section 23

AI-generated summary — verify with the full judgment below

[2015] 8 S.C.R. 1046 A COMMISSIONER, CENTRAL EXCISE & CUSTOMS, B KERALA v. MIS LARSEN & TOUBRO LTD. (Civil Appeal No. 6770 of 2004 etc.) AUGUST20, 2015 [A. K. SIKRI AND R. F. NARIMAN, JJ.] c Service tax (as introduced by Finance Act, 1994) - Whether leviable on indivisible works contract, prior to introduction of Finance Act, 2007 - Held: A works contract is a separate species of contract distinct from contracts of services simpliciter and need to be taxed separately as such D - The service tax charging section itself must lay down with specificity that the levy of service tax can only be on works contract- 1994 Act lays down charge of tax only for the service tax simpliciter- It does not lay down charge or machinery to levy and assess service tax on indivisible composite works E contracts - Where there is no machinery for assessment, the law being vague, it would not be opef'/ to the assessing authority to arbitrarily assess the subject to tax -Therefore, service tax could not have been levied on composite indivisible works contract, prior to Finance Act, 2007 which F expressly makes such works contracts liable to service tax - Finance Act, 1994 - s. 65 (1

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