Case: Commnr.,Central Excise &amp; Customs, Kerala Vs. M/S. Larsen &amp; Toubro Ltd

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 Gannoncase. It was observed that the expressionin that entry has becomend 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 followingsum up, the expressionin 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(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 Gannoncase 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.Constitutional Law of India, Vol. III, page 2326, had this to say: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 GannonCase is clearly right, and requires no reconsideration. Therefore, it becomes necessary to consider GannonCase more fully than in the earlier editions of this book.The Law Commission of India in its 61st Report elaborately examined the law laid down in Gannoncase 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 ofand 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 asax on the sale or purchase ofincludes-(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply isThe Constitutional amendment so passed was the subject matter of a challenge in Builders Assn. of India v. Union of India, (1989) 2 SCC 645. This challenge was ultimately repelled and this CourtAfter the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts as stated>5. This is the historical setting within which the present controversy arises.6. Service tax was introduced by the Finance Act, 1994 and various services were set out in Section 65 thereof as being amenable to tax. The legislative competence of such tax is to be found in Article 248 read with Entry 97 of List I of the 7th Schedule to the Constitution of India. All the present cases are cases which arise before the 2007 amendment was made, which introduced the concept ofas being a separate subject matter of taxation. Various amendments were made in the sections of the Finance Act by whichch were indivisible and composite were split so that only the labour and service element of such contracts would be taxed under the heading

Reasoning:
17. We find that the assessees are correct in their submission that a works contract is a separate species of contract distinct from contracts for services simpliciter recognized by the world of commerce and law as such, and has to be taxed separately as such.We also find that theargument that there is no charge to tax of works contracts in the Finance Act, 1994 is correct in view of what has been stated above.A close look at the Finance Act, 1994 would show that the five taxable services referred to in the charging Section 65(105) would refer only to service contracts simpliciter and not to composite works contracts. This is clear from the very language of Section 65(105) which definesy serviceAll the services referred to in the saidare service contracts simpliciter without any other element in them, such as for example, a service contract which is a commissioning and installation, or erection, commissioning and installation contract. Further, under Section 67, as has been pointed out above, the value of a taxable service is the gross amount charged by the service provider for such service rendered by him. This would unmistakably show that what is referred to in the charging provision is the taxation of service contracts simpliciter and not composite works contracts, such as are contained on the facts of the present cases. It will also be noticed that no attempt to remove theelements from the composite works contracts has been made by any of the aforesaid Sections by deducting from the gross value of the works contract the value of property in goods transferred in the execution of a works contract.We have already seen that Rule 2(A) framed pursuant to this power has followed the second Gannon Dunkerley case in segregating thecomponent of a works contract from thecomponent. It begins by working downwards from the gross amount charged for the entire works contract and minusing from it the value of the property in goods transferred in the execution of such works contract. This is done by adopting the value that is adopted for the purpose of payment of VAT. The rule goes on to say that the service component of the works contract is to include the eight elements laid down in the second Gannon Dunkerley case including apportionment of the cost of establishment, other expenses and profit earned by the service provider as is relatable only to supply of labour and services. And, where value is not determined having regard to the aforesaid parameters, (namely, in those cases where the books of account of the contractor are not looked into for any reason) by determining in different works contracts how much shall be the percentage of the total amount charged for the works contract, attributable to the service element in such contracts. It is this scheme and this scheme alone which complies with constitutional requirements in that it bifurcates a composite indivisible works contract and takes care to see that no element attributable to the property in goods transferred pursuant to such contract, enters into computation of service tax.It now remains to consider the judgment of the Delhi High Court in G.D. Builders.31. In the aforesaid judgment, it was held that the levy of service tax in Section 65(105)(g), (zzd), (zzh), (zzq) and (zzzh) is good enough to tax indivisible composite works contracts. Various judgments were referred to which have no direct bearing on the point at issue. In paragraph 23 of this judgment, the second Gannon Dunkerley judgment is referred to in passing without noticing any of the key paragraphs set out hereinabove in our judgment. Also, we find that the judgment in G.D. Builders (supra) went on to quote from the judgment in Mahim Patram Private Ltd. v. Union of India, 2007 (3) SCC 668 , to arrive at the proposition that even when rules are not framed for computation of tax, tax would be leviable.32. We are afraid that the Delhi High Court completely misread the judgment in Mahimcase. This judgment concerned itself with works contracts being taxed under the Central Sales Tax Act. What was argued in that case was that in the absence of any rule under the provisions of the Central Act, the determination of sale price would be left to the whims and fancies of the assessing authority. This argument was repelled by this Court after setting out Sections 2(g) and 2(ja), which define. The Court then went on to discuss Sections 9(2) and 13(3) of the Central Sales Tax Act.In the aforesaid judgment it was found that Section 9(2) of the Central Sales Tax Act conferred powers on officers of the various States to utilize the machinery provisions of thesales tax statutes for purposes of levy and assessment of central sales tax under the Central Act. It was also noticed that the State Government itself had been given power to make rules to carry out the purposes of the Central Act so long as the said rules were not inconsistent with the provisions of the Central Act. It was found that, in fact, the State of Uttar Pradesh had framed such rules in exercise of powers under Section 13(3) of the Central Act as a result of which the necessary machinery for the assessment of central sales tax was found to be there. The Delhi High Court judgment unfortunately misread the aforesaid judgment of this Court to arrive at the conclusion that it was an authority for the proposition that a tax is leviable even if no rules are framed for assessment of such tax, which is wholly incorrect. The extracted passage from Mahimcase only referred to rules not being framed under the Central Act and not to rules not being framed at all. The conclusion therefore in paragraph 36(2) of the Delhi High Court judgment is wholly incorrect.We are afraid that there are several errors in this paragraph. The High Court first correctly holds that in the case of composite works contracts, the service elements should be bifurcated, ascertained and then taxed. The finding that this has, in fact, been done by the Finance Act, 1994 Act is wholly incorrect as it ignores the second Gannon Dunkerley decision of this Court. Further, the finding that Section 67 of the Finance Act, which speaks ofonly speaks of thefor service provided and not the gross amount of the works contract as a whole from which various deductions have to be made to arrive at the service element in the said contract. We find therefore that this judgment is wholly incorrect in its conclusion that the Finance Act, 1994 contains both the charge and machinery for levy and assessment of service tax on indivisible works contracts.42. It remains to consider the argument of Shri Radhakrishnan that post 1994 all indivisible works contracts would be contrary to public policy, being hit by Section 23 of the Indian Contract Act, and hit bycase.43. We need only state that in view of our finding that the said Finance Act lays down no charge or machinery to levy and assess service tax on indivisible composite works contracts, such argument must fail. This is also for the simple reason that there is no subterfuge in entering into composite works contracts containing elements both of transfer of property in goods as well as labour and services.44. We have been informed by counsel for the revenue that several exemption notifications have been granted qua service taxby the 1994 Finance Act. We may only state that whichever judgments which are in appeal before us and have referred to and dealt with such notifications will have to be disregarded.