SC rules on taxability of 'works contract service' pre-2007 : Game - set - match for taxpayers?

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Recently, SC in the case of L&T Ltd and others [TS-437-SC-2015-ST], overruled CESTAT LB decision, while holding indivisible works contract not taxable prior to June 2007 by classification under taxable categories such as “commercial or industrial construction service”, “construction of complex service”, or “erection, commissioning & installation service”, as the case may be.  SC found that service tax levy / charge itself was non-existent prior to introduction of Sec 65(105)(zzzza), thereby upholding minority view delivered by CESTAT President Justice G. Raghuram and Judicial Member.
Tax Experts analyse the impact of this ruling.


N Venkataraman
Senior Advocate

Though there is plethora of judgments of Hon’ble SC on works contract taxability relating to VAT/sales tax, this is the first judgment delivered by SC on service tax front. It essentially brings out 5 important ratios:

A) It has held that works contract is a separate specie of transaction both in commerce and in law, distinct from sale simplicitor and service simplicitor;

B) A composite works contract or a Lumpsum Turnkey contract involves both goods and services empowering both Union and States to tax same transaction within respective domains, therefore, it is imperative that neither Union nor States can encroach into the taxing domain of other partner and should restrict the exercise of power within its own boundaries, failing which the levy would be constitutionally infirmed;

C) The Parliament for the first time had created a charge along with a supporting computation machinery in line with the principle laid down by the Constitutional bench in second Gannon Dunkerly case w.e.f. 1-6-2007 prospectively. Works contract service therefore, cannot be taxed prior to said date.

D) Consequently, various tax services mainly consulting engineer, erection commissioning and installation and commercial and industrial construction service, construction of residential complex would only cover service simplicitor or pure service and not works contract service.

E) After referring to definition of works contract service, the definition excludes infrastructure contracts like airports, tunnel, bridges, etc. It is inconceivable to presume a works contract tax on these projects prior to 1-6-2007. Further, the Finance Minister’s speech also makes it clear that the levy gets created for the first time w.e.f. 1-6-2007.

This finally puts an end to an otherwise unending controversies on account of divergent views expressed in the past by Division Benches resulting in Third member reference, Larger Bench (LB) judgment comprising of 3 members and a LB judgement of 5 members where again it was a strict verdict of 3:2.

This judgment has finally given a quietus and a great relief to the infrastructure sector.