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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL  APPEAL NO. 6770 OF 2004

Commissioner, Central Excise & Customs,               …Appellant Kerala

Vs.

M/s Larsen & Toubro Ltd.                                     …Respondent

WITH

Civil Appeal No. 4468 of 2006

Commissioner, Central Excise & Customs,               …Appellant Vadodara-II  

Vs.

M/s Larsen & Toubro Ltd. & Anr.                               …Respondents

WITH

Civil Appeal No.  6434 of 2015

CCE-II, Vadodara                                                      …Appellant   

Vs.

M/s Skanska Cementation                                     …Respondent

WITH

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Civil Appeal No. 2798 of 2009

CCE, Haldia                                                               …Appellant   

Vs.

S. Swaminathan, Project Manager,                         …Respondent M/s P.I.Ltd.

WITH

Civil Appeal No. 4234 of 2009

CCE, Vadodara                                                        …Appellant

Vs.

M/s Ishikawajima Harima Heavy Ind.                       …Respondent Co. Ltd.  

WITH

Civil Appeal No. 4281 of 2009  

CCE, Vadodara                                                         …Appellant

Vs.

M/s Ballash Nedam International                              …Respondent

WITH

Civil Appeal No. 6429  of 2015  

CST, Bangalore                                                        …Appellant   

Vs.

M/s Turbotech Precision Eng. P. Ltd.                       …Respondent

WITH

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Civil Appeal No. 4893 of 2011

M/s. Alstom Project India Ltd. Tr. M.D.                    …Appellant   

Vs.

CST, New Delhi                                                 …Respondent

WITH

Civil Appeal No. 6084 of 2011

M/s. Instrumentation Ltd.                                          …Appellant   

Vs.

CCE, Jaipur                                                       …Respondent

WITH

Civil Appeal No. 8477 of 2011

CST, Bangalore                                                         …Appellant   

Vs.

M/s Asea Brown Boveri Ltd.                                      …Respondent

WITH

Civil Appeal No. 732 of 2012

M/s Engineers India Ltd.                                            …Appellant   

Vs.

CST                                                                    …Respondent

WITH

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Civil Appeal No. 1627 of 2012  

Commissioner of Central Excise & Customs             ...Appellant   

Vs.

ABB Ltd.                                                           …Respondent

WITH

Civil Appeal No.  6430  of 2015    

Commissioner of Central Excise & S. Tax                 ...Appellant   

Vs.

Simplex Engineering &                                     …Respondent Foundry Works Pvt. Ltd.  

WITH

Civil Appeal No. 5841 of 2011

CCE, Bangalore                                                        ...Appellant   

Vs.

M/s ABB Ltd.                                                        …Respondent

J U D G M E N T

R.F. NARIMAN, J.

1. This  group  of  appeals  is  by  both  assessees  and  the

revenue and concerns itself  with whether service tax can be

levied on indivisible works contracts prior to the introduction, on

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1st June, 2007, of the Finance Act, 2007 which expressly makes

such works contracts liable to service tax.

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  Gannon

Dunkerley’s case.  It was observed that the expression “sale of

goods”  in  that  entry  has  become  “nomen  juris”  and  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

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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 following conclusion:-

“To sum up, the expression “sale of goods” in 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 sale.” (at page 425)1

3. The  Law  Commission  of  India  in  its  61st Report

elaborately  examined  the  law  laid  down  in  Gannon

Dunkerley’s  case  and  suggested  that  the  relevant  entry

contained in the 7th Schedule to List  II  to the Constitution of

1 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 Gannon Dunkerley’s case 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. Seervai’s Constitutional Law of India, Vol. III, page 2326, had this to say: “This 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 Gannon Dunkerley’s Case is clearly right, and  requires  no  reconsideration.  Therefore,  it  becomes  necessary  to  consider  Gannon Dunkerley’s Case more fully than in the earlier editions of this book.”

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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  of  “sale”,  and  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 as follows:-

366 (29A) “tax on the sale or purchase of goods” includes-

(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 is made;  

4. The Constitutional amendment so passed was the subject

matter of a challenge in  Builders' Assn. of India v. Union of

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India,  (1989)  2  SCC  645.   This  challenge  was  ultimately

repelled and this Court stated:-

“… After  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 above.” (at para 36)

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 7 th

Schedule to the Constitution of India. All the present cases are

cases  which  arise  before  the  2007  amendment  was  made,

which introduced the concept  of  “works contract”  as being a

separate subject matter of taxation. Various amendments were

made  in  the  sections  of  the  Finance  Act  by  which  “works

contracts” which were indivisible and composite were split  so

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that  only  the  labour  and  service  element  of  such  contracts

would be taxed under the heading “Service Tax”.

7. Learned counsel for  the revenue has essentially  raised

four arguments before us in which he assails the judgments of

various Tribunals and High Courts which have decided against

the  revenue  on  this  point.  According  to  him,  the  46 th

Amendment  has itself  divided works contracts by Article  366

(29A)(b).  After  taking  out  the  “goods”  element  from  such

contracts,  what  remains  is  the  “labour  and  service”  element

which, according to him, has been subjected to tax by various

entries in the Finance Act, 1994.  Further, relying upon Section

23 of the Contract Act and  Mcdowell and Company Ltd. v.

Commercial  Tax Officer,  1985 (2) SCC 230, he went on to

argue that post 1994 all indivisible works contracts were made

with  a  view to  evade  or  avoid  tax  and  that  therefore  being

contrary to public policy, the principles in Mcdowell’s judgment

should  apply  to  make  such  so-called  indivisible  contracts

taxable under the Finance Act,  1994.  According to him,  the

Finance Act, 1994 itself contains both the charge of tax as well

as the machinery by which only the labour and service element

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in these indivisible contracts is taxable, it being his contention

that the statute need not do what the constitutional amendment

has already done – namely, split the indivisible works contract

into  a  separate  contract  of  transfer  of  property  in  goods

involved in  the execution of  the works contract   on the one

hand,  which  is  taxable  by  the  States,  and  the  labour  and

services element on the other, which is taxable, according to

him, by the Central Government.  Further, he argued that the

fact that the 2007 Amendment Act has, in fact, defined works

contract for the first time and sought to split it, and tax only the

element  of  labour  and  service  would  make  no  difference

because,  according  to  him,  whatever  elements  of  works

contracts  were  taxable  under  the  Finance  Act,  1994  would

continue to  be taxable and would be untouched by the said

amendment.

8. On the  other  hand,  learned counsel  for  the assessees

assailed the judgments of  the Tribunals and the High Courts

against them, in particular the judgment in G.D. Builders v. UOI

and Anr.,  2013 [32] S.T.R. 673 (Del.), of the Delhi High Court.

In answer to revenue’s contention, learned counsel argued that

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a works contract is a separate species known to the world of

commerce and law as such. That being so, an indivisible works

contract  would  have  to  be  split  into  its  constituent  parts  by

necessary legislation which would then contain, post splitting, a

charge to service tax together with the necessary machinery to

enforce such charge.  According to learned counsel,  not  only

was  there  no  such  charge  pre-2007  but  there  were  no

machinery provisions as well to bring indivisible works contracts

under the service tax net.  According to learned counsel, what

was taxable under the Finance Act,  1994 was only cases of

pure service in  which there was no goods element involved.

Further,  according  to  them,  for  various  reasons,  the  sheet

anchor  of  revenue’s  case,  the  Delhi  High Court  judgment  in

G.D. Builders  (supra), was wholly incorrect, and the minority

judgment of the judicial members of a Full Bench of the Delhi

Tribunal  in  M/s  Larsen  &  Toubro  Ltd.  v.   CST,Delhi,

2015-TIOL-527-CESTAT-DEL-LB,  comprehensively  discussed

all the authorities that were relevant to this issue and arrived at

the correct conclusion.

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9. We have heard learned counsel  for  the parties.  Before

examining the contentions made on the both sides, it  will  be

necessary to set out the Finance Act, 1994 insofar as it pertains

to the levy of service tax.

10.  Section  64.  Extent,  commencement  and  application.

(1) This  Chapter  extends  to  the  whole  of  India except the State of Jammu and Kashmir.  

(2) It shall come into force on such date as the Central  Government  may,  by  notification  in  the Official Gazette, appoint.

(3) It shall apply to taxable services provided on or after the commencement of this Chapter.  

Section 65.  Definitions.  In this Chapter, unless the context otherwise requires, ----

(105) “taxable service” means any service provided-

(g) to a client, by a consulting engineer in relation to  advice,  consultancy  or  technical  assistance  in any  manner  in  one  or  more  disciplines  of engineering [but  not  in  the discipline of  computer hardware  engineering  or  computer  software engineering;

(zzd) to  a  customer,  by  a  commissioning  and installation  agency  in  relation  to  erection, commissioning or installation;

(zzh) to  any  person,  by  a  technical  testing  and analysis agency, in relation to technical testing and analysis;

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(zzq) to any person,  by a commercial  concern,  in relation to construction service;

(zzzh)  to  any  person,  by  any  other  person,  in relation to construction of a complex;

Explanation : For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly  or  partly,  by  a  builder  or  any  person authorized  by  the  builder  before,  during  or  after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorized by the builder before  the  grant  of  completion  certificate  by  the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer;”

Section 66.  Charge of service tax

There  shall  be  levied  a  tax  (hereinafter referred to as the service tax) at the rate of ten per cent. Of the value of the taxable services referred to in sub-clauses (a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (k), (l), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zd), (ze), (zf), (zg), (zh), (zi), (zj),  (zk), (zl),  (zm), (zn), (zo),  (zq), (zr), (zs), (zt), (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc),  (zzd),  (zze),  (zzf),  (zzg),  (zzh),  (zzi),  (zzj), (zzk),  (zzl),  (zzm),  (zzn),  (zzo),  (zzp),  (zzq),  (zzr), (zzs),  (zzt),  (zzu), (zzv),  (zzw), (zzx),  and (zzy) of clause  (105)  of  section  65  and  collected  in  such manner as may be prescribed.   

Section  67.   Valuation  of  taxable  services  for charging  service  tax.-  For  the  purposes  of  this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service rendered by him.  

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Explanation.1-  For  the  removal  of  doubts,  it  is hereby declared that the value of a taxable service, as the case may be, includes,-

(a) the  aggregate  of  commission  or  brokerage charged  by  a  broker  on  the  sale  or  purchase  of securities  including  the  commission  or  brokerage paid by the stock-broker to any sub-broker; (b) the  adjustments  made  by  the  telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or  pager  or  facsimile  or  telegraph or  telex  or  for leased circuit; (c) the amount of premium charged by the insurer from the policy holder; (d) the  commission  received  by  the  air  travel agent from the airline; (e) the  commission  received  by  an  actuary,  or intermediary or insurance intermediary or insurance agent from the insurer; (f) the reimbursement received by the authorized service station from manufacturer  for  carrying out any  service  of  any  automobile  manufactured  by such manufacturer; and (g) the  commission  or  any  amount  received  by the  rail  travel  agent  from  the  Railways  or  the customer, but does not include, - (i) initial  deposit  made by the subscriber at the time  of  application  for  telephone  connection  or pager or facsimile (FAX) or telegraph or telex or for leased circuit: (ii) the  cost  of  unexposed  photography  film, unrecorded  magnetic  tape  or  such  other  storage devices, if any, sold to the client during the course of providing the service; (iii) the  cost  of  parts  or  accessories,  or consumables  such  as  lubricants  and  coolants,  if any,  sold  to  the  customer  during  the  course  of

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service or repair of motor cars, light motor vehicle or two wheeled motor vehicles; (iv) the  airfare  collected  by  air  travel  agent  in respect 0f service provided by him; (v) the rail  fare  collected by rail  travel  agent  in respect of service provided by him; (vi) the cost of parts or other material, if any, sold to  the  customer  during  the  course  of  providing maintenance or repair service; (vii) the cost of parts or other material, if any, sold to  the  customer  during  the  course  of  providing erection, commissioning or installation service; and  (viii) interest on loans.

Explanation 2. - Where the gross amount charged by  a  service  provider  is  inclusive  of  service  tax payable, the value of taxable service shall be such amount as with the addition of tax payable, is equal to the gross amount charged.”

11. By the Finance Act,  2007, for the first  time, Section 65

(105)( zzzza) set out to tax the following:-

“(zzzza) to any person,  by any other  person in relation  to  the  execution  of  a  works  contract, excluding  works  contract  in  respect  of  roads, airports,  railways,  transport  terminals,  bridges, tunnels and dams. Explanation : For the purposes of this sub-clause, “works contract” means a contract wherein,- (i) Transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and  (ii) Such contract is for the purposes of carrying out,- (a) Erection,  commissioning  or  installation  of plant, machinery, equipment or structures, whether

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pre-fabricated or otherwise, installation of electrical and  electronic  devices,  plumbing,  drain  laying  or other  installations  for  transport  of  fluids,  heating, ventilation or air-conditioning including related pipe work,  duct  work  and  sheet  metal  work,  thermal insulation,  sound insulation,  fire  proofing or  water proofing, lift and escalator, fire escape staircases or elevators; or   (b)  Construction  of  a  new  building  or  a  civil structure  or  a  part  thereof,  or  of  a  pipeline  or conduit, primarily for the purposes of commerce or industry; or (c) Construction of a new residential complex or a part thereof; or (d)  Completion  and  finishing  services,  repair, alteration,  renovation  or  restoration  of,  or  similar services, in relation to (b) and (c); or  (e)  Turnkey  projects  including  engineering, procurement  and  construction  or  commissioning (EPC) projects;”

12. Section 67 of the Finance Act 1994 was amended to read

as follows:-

“Valuation of taxable services for charging Service tax –  

(1) Subject to the provisions of this Chapter,  service tax  chargeable  on  any  taxable  service  with reference to its value shall,—  

(i) in a case where the provision of service is for a consideration  in  money,  be  the  gross  amount charged  by  the  service  provider  for  such  service provided or to be provided by him;  

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(ii) in a case where the provision of service is for a consideration  not  wholly  or  partly  consisting  of money, be such amount in money, with the addition of  service  tax  charged,  is  equivalent  to  the consideration;  

(iii) in a case where the provision of service is for a consideration  which  is  not  ascertainable,  be  the amount  as  may  be  determined  in  the  prescribed manner.”

13. Pursuant to the aforesaid, the Service Tax (Determination

of Value) Rules, 2006 were made, Rule 2A of which reads as

under:-

“2A.  Subject  to  the  provisions  of  section  67,  the value of service portion in the execution of a works contract, referred to in clause (h) of section 66E of the Act, shall be determined in the following manner, namely:-  

(i) Value of service portion in the execution of a works  contract  shall  be  equivalent  to  the  gross amount  charged  for  the  works  contract  less  the value  of  property  in  goods  transferred  in  the execution of the said works contract.  

Explanation.-For the purposes of this clause,-  

(a)  gross  amount  charged  for  the  works  contract shall  not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;  

(b) value of works contract service shall include,-

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(i) labour charges for execution of the works;  (ii) amount paid to a sub-contractor for labour and services;  (iii) charges for planning, designing and architect's fees;  (iv)  charges  for  obtaining  on  hire  or  otherwise, machinery and tools used for the execution of the works contract;  (v) cost of consumables such as water, electricity, fuel used in the execution of the works contract;  (vi) cost of establishment of the contractor relatable to supply of labour and services;  (vii)  other  similar  expenses  relatable  to  supply  of labour and services; and  (viii) profit earned by the service provider relatable to supply of labour and services;  

(c)  where value added tax or  sales tax has been paid or payable on the actual value of property in goods  transferred  in  the  execution  of  the  works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in  the  execution  of  the  said  works  contract  for determination of the value of service portion in the  execution of works contract under this clause.  

(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion  involved  in  the  execution  of  the  works contract shall determine the service tax payable in the following manner, namely:-  

(A) in  case  of  works  contracts  entered  into  for execution  of  original  works,  service  tax  shall  be payable  on  forty  per  cent   of  the  total  amount charged for the works contract;  (B)  in  case  of  works  contract  entered  into  for maintenance  or  repair  or  reconditioning  or

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restoration or  servicing  of  any  goods,  service tax shall be payable on seventy  per cent of the total amount charged for the works contract;  (C) in case of  other works contracts,  not  covered under  sub-clauses  (A)  and  (B)  including maintenance,  repair,  completion  and  finishing services such as glazing, plastering, floor and wall tiling,  installation  of  electrical  fittings  of  an immovable' property, service tax shall be payable on sixty per cent of the total amount charged for the works contract.

Explanation I.-For the purposes of this rule,-  

(a) "original works" means-  

(l) all new constructions;  

(ii)  all  types  of  additions  and  alterations  to abandoned or damaged structures on land that are required to make them workable;   

(iii) erection, commissioning or installation of plant, machinery  or  equipment  or  structures,  whether pre-fabricated or otherwise;  

(d) "total amount" means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-  

(i) the amount charged for such goods or services, if any; and  

(ii) the value added tax or sales tax, if any, levied thereon:  

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Provided that  the fair  market  value of  goods and services  so  supplied  may  be  determined  in accordance with the generally accepted accounting principles.  

Explanation  2.-For  the  removal  of  doubts,  it  is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs,  used  in  or  in  relation  to  the  said  works contract,  under  the  provisions  of  CENVAT Credit Rules, 2004.”2

14. Crucial  to  the  understanding  and  determination  of  the

issue  at  hand  is  the  second  Gannon  Dunkerley judgment

which  is  reported  in  (1993)  1  SCC  364.   By  the  aforesaid

judgment, the modalities of taxing composite indivisible works

contracts was gone into. This Court said:-

“On behalf of the contractors, it has been urged that under  a  law  imposing  a  tax  on  the  transfer  of property  in  goods  involved  in  the  execution  of  a works contract under Entry 54 of the State List read with Article 366(29-A)(b), the tax is imposed on the goods  which  are  involved  in  the  execution  of  a works contract and the measure for levying such a tax can only be the value of the goods so involved and the value of the works contract cannot be made the measure for levying the tax. The submission is further that the value of such goods would be the cost  of  acquisition of  the goods by the contractor and, therefore, the measure for levy of tax can only

2 The said Rule was substituted by the Service Tax (Determination of Value) Rules, 2012 with effect from 01.07.2012, which substituted Rule has been set out hereinabove.   

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be  the  cost  at  which  the  goods  involved  in  the execution of a works contract were obtained by the contractor.  On  behalf  of  the  States,  it  has  been submitted that since the property in goods which are involved in the execution of a works contract passes only when the goods are incorporated in the works, the measure for  the levy of  the tax would be the value of the goods at the time of their incorporation in the works as well as the cost of incorporation of the goods in the works. We are in agreement with the submission that measure for the levy of the tax contemplated by Article 366(29-A)(b) is the value of the  goods  involved  in  the  execution  of  a  works contract.  In  Builders'  Association  case [(1989)  2 SCC 645 : 1989 SCC (Tax) 317 : (1989) 2 SCR 320] it has been pointed out that in Article 366(29-A)(b), “[t]he  emphasis  is  on  the  transfer  of  property in goods (whether as goods or in some other form)”. (SCC p. 669, para 32: SCR p. 347). This indicates that  though the tax is  imposed on the transfer  of property  in  goods  involved  in  the  execution  of  a works  contract,  the  measure  for  levy  of  such imposition is the value of the goods involved in the execution  of  a  works  contract.  We are,  however, unable to agree with the contention urged on behalf of the contractors that the value of such goods for levying the tax can be assessed only on the basis of the  cost  of  acquisition  of  the  goods  by  the contractor. Since the taxable event is the transfer of property  in  goods  involved  in  the  execution  of  a works contract and the said transfer of property in such  goods  takes  place  when  the  goods  are incorporated in the works,  the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works and not the cost of acquisition of the goods by the contractor. We are also unable to accept the contention urged on behalf of the States that in addition to the value of the goods involved in the execution of the works

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contract the cost of incorporation of the goods in the works can be included in the measure for  levy of tax. Incorporation of the goods in the works forms part  of  the  contract  relating  to  work  and  labour which  is  distinct  from  the  contract  for  transfer  of property  in  goods  and,  therefore,  the  cost  of incorporation of the goods in the works cannot be made  a  part  of  the  measure  for  levy  of  tax contemplated by Article 366(29-A)(b).

 Keeping in view the legal fiction introduced by the Forty-sixth Amendment whereby the works contract which was entire and indivisible has been altered into a contract which is divisible into one for sale of goods and other for supply of labour and services, the value of the goods involved in the execution of a works contract on which tax is leviable must exclude the  charges  which  appertain  to  the  contract  for supply of labour and services. This would mean that labour charges for execution of works, [item No. (i)], amounts  paid  to  a  sub-contractor  for  labour  and services  [item  No.  (ii)],  charges  for  planning, designing  and  architect's  fees  [item  No.  (iii)], charges  for  obtaining  on  hire  or  otherwise machinery  and  tools  used  in  the  execution  of  a works  contract  [item  No.  (iv)],  and  the  cost  of consumables  such  as  water,  electricity,  fuel,  etc. which are consumed in the process of execution of a  works  contract  [item  No.  (v)]  and  other  similar expenses for  labour  and services will  have to  be excluded  as  charges  for  supply  of  labour  and services.  The  charges  mentioned in  item No.  (vi) cannot,  however,  be  excluded.  The  position  of  a contractor  in  relation  to  a  transfer  of  property  in goods in the execution of  a works contract  is not different from that of a dealer in goods who is liable to pay sales tax on the sale price charged by him from the customer for the goods sold. The said price includes the cost of bringing the goods to the place of sale. Similarly, for the purpose of ascertaining the

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value of goods which are involved in the execution of a works contract for the purpose of imposition of tax, the cost of transportation of the goods to the place of works has to be taken as part of the value of the said goods. The charges mentioned in item No. (vii) relate to the various expenses which form part of the cost of establishment of the contractor. Ordinarily  the cost  of  establishment  is  included in the  sale  price  charged  by  a  dealer  from  the customer  for  the  goods  sold.  Since  a  composite works contract involves supply of materials as well as  supply  of  labour  and  services,  the  cost  of establishment  of  the contractor  would  have to  be apportioned  between  the  part  of  the  contract involving supply of materials and the part involving supply  of  labour  and  services.  The  cost  of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract  and  the  cost  of  establishment  which  is relatable  to  supply  of  material  involved  in  the execution  of  the  works  contract  only  can  be included  in  the  value  of  the  goods.  Similar apportionment will  have to be made in respect of item No. (viii)  relating to profits.  The profits which are  relatable  to  the  supply  of  materials  can  be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded. This means that in respect of charges mentioned in item Nos. (vii) and (viii), the cost  of  establishment of  the contractor  as well  as the profit earned by him to the extent the same are relatable to supply of labour and services will have to  be  excluded.  The  amount  so  deductible  would have to be determined in the light of the facts of a particular  case  on  the  basis  of  the  material produced by the contractor. The value of the goods involved in the execution of a works contract  will, therefore,  have  to  be  determined  by  taking  into account the value of the entire works contract and

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deducting  therefrom  the  charges  towards  labour and services which would cover— (a) Labour charges for execution of the works; (b) amount paid to a sub-contractor for labour and services; (c) charges for planning, designing and architect's fees; (d)  charges  for  obtaining  on  hire  or  otherwise machinery and tools used for the execution of the works contract; (e) cost of consumables such as water, electricity, fuel, etc. used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and (f)  cost  of  establishment  of  the  contractor  to  the extent  it  is  relatable  to  supply  of  labour  and services; (g)  other  similar  expenses  relatable  to  supply  of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services. The  amounts  deductible  under  these  heads  will have to be determined in the light of the facts of a particular  case  on  the  basis  of  the  material produced by the contractor.

   Normally, the contractor will be in a position to furnish  the  necessary  material  to  establish  the expenses  that  were  incurred  under  the  aforesaid heads  of  deduction  for  labour  and  services.  But there may be cases where the contractor has not maintained  proper  accounts  or  the  accounts maintained by him are not  found to be worthy of credence by the assessing authority. In that event, a question  would  arise  as  to  how  the  deduction towards  the  aforesaid  heads  may  be  made.  On behalf of the States, it has been urged that it would be permissible for the State to prescribe a formula

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on the basis of a fixed percentage of the value of the  contract  as  expenses  towards  labour  and services and the same may be deducted from the value  of  the  works  contract  and  that  the  said formula need not be uniform for all works contracts and  may  depend  on  the  nature  of  the  works contract. We find merit in this submission. In cases where  the  contractor  does  not  maintain  proper accounts or the accounts maintained by him are not found worthy of credence it would, in our view, be permissible for the State legislation to prescribe a formula for determining the charges for labour and services  by  fixing  a  particular  percentage  of  the value of the works contract and to allow deduction of the amount thus determined from the value of the works contract  for  the purpose of  determining the value of the goods involved in the execution of the works contract.  It  must,  however, be ensured that the  amount  deductible  under  the  formula  that  is prescribed for deduction towards charges for labour and services does not  differ  appreciably  from the expenses  for  labour  and  services  that  would  be incurred in normal circumstances in respect of that particular  type  of  works  contract.  Since  the expenses for labour and services would depend on the nature of the works contract and would not be the same for all types of works contracts, it would be  permissible,  indeed  necessary,  to  prescribe varying scales for deduction on account of cost of labour  and  services  for  various  types  of  works contracts.”(at paras 45, 47 and 49)

15. A  reading  of  this  judgment,  on  which  counsel  for  the

assessees heavily relied, would go to show that the separation

of the value of  goods contained in the execution of  a works

contract will have to be determined  by working from the value 25

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of the entire works contract and deducting therefrom charges

towards labour and services. Such deductions are stated by the

Constitution Bench to be eight in number.   What is important in

particular  is  the  deductions  which  are  to  be  made  under

sub-paras  (f),  (g)  and  (h).  Under  each  of  these  paras,  a

bifurcation has to be made by the charging Section itself so that

the cost  of  establishment  of  the  contractor  is  bifurcated into

what is relatable to supply of labour and services. Similarly,  all

other expenses have also to be bifurcated insofar as they are

relatable to supply of labour and services, and the same goes

for the profit that is earned by the contractor.  These deductions

are  ordinarily  to  be  made  from  the  contractor’s  accounts.

However,  if  it  is  found  that  contractors  have  not  maintained

proper accounts, or their accounts are found to be not worthy of

credence, it is left to the legislature to prescribe a formula on

the basis of a fixed percentage of the value of the entire works

contract  as relatable to the labour and service element of  it.

This judgment, therefore, clearly and unmistakably holds that

unless  the  splitting  of  an  indivisible  works  contract  is  done

taking into account the eight heads of deduction, the  charge to

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tax that  would be made would otherwise contain,  apart  from

other things, the entire cost of establishment, other expenses,

and profit earned by the contractor and would transgress into

forbidden  territory  namely  into  such  portion  of  such  cost,

expenses  and  profit  as  would  be  attributable  in  the  works

contract to the transfer of property in goods in such contract.

This being the case, we feel that the learned counsel for the

assessees are on firm ground when they state that the service

tax charging section itself must lay down with specificity that the

levy of  service tax can only  be on works contracts,  and the

measure of tax can only be on that portion of works contracts

which contain a service element which is to be derived from the

gross amount charged for the works contract less the value of

property  in  goods  transferred  in  the  execution  of  the  works

contract.  This not having been done by the Finance Act, 1994,

it is clear that any charge to tax under the five  heads in Section

65(105)  noticed  above  would  only  be  of  service  contracts

simpliciter and not composite indivisible works contracts.  

16. At this stage, it is important to note the scheme of taxation

under our Constitution. In the lists contained in the 7th Schedule

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to the Constitution, taxation entries are to be found only in lists I

and II.  This is for the reason that in our Constitutional scheme,

taxation  powers  of  the  Centre  and  the  States  are  mutually

exclusive.  There is no concurrent power of taxation.  This being

the case,  the moment  the levy contained in  a  taxing statute

transgresses into a prohibited exclusive field, it is liable to be

struck down.  In the present case, the dichotomy is between

sales tax leviable by the States and service tax leviable by the

Centre.   When  it  comes  to  composite  indivisible  works

contracts, such contracts can be taxed by Parliament as well as

State legislatures.  Parliament can only tax the service element

contained in these contracts, and the States can only tax the

transfer  of  property  in  goods  element  contained  in  these

contracts.  Thus, it  becomes very important to segregate the

two  elements  completely  for  if  some  element  of  transfer  of

property in goods remains when a service tax is levied, the said

levy would be found to be constitutionally infirm.  This position

is well reflected in Bharat Sanchar Nigam Limited v. Union of

India, (2006) 3 SCC 1, as follows:-

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“No one denies the legislative competence of  the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the  transaction.  This  does  not  however  allow the State  to  entrench  upon  the  Union  List  and  tax services by including the cost of such service in the value  of  the  goods.  Even  in  those  composite contracts which are by legal fiction deemed to be divisible  under  Article  366(29-A),  the value of  the goods  involved  in  the  execution  of  the  whole transaction cannot be assessed to sales tax. As was said in Larsen & Toubro v. Union of  India[(1993) 1 SCC 364] : (SCC p. 395, para 47) :-

“The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution  of  a  contract  and  the  cost  of establishment  which  is  relatable  to  supply  of material  involved  in  the  execution  of  the  works contract  only  can be included in  the value of  the goods.”

 For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service. As was held by us in Gujarat Ambuja Cements Ltd. v. Union of India [(2005) 4 SCC 214] , SCC at p. 228, para 23:-

“This mutual exclusivity which has been reflected in Article  246(1)  means  that  taxing  entries  must  be construed  so  as  to  maintain  exclusivity.  Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading of  the  entry  does  not  cover.  If  in  substance,  the statute is not referable to a field given to the State, the court will  not by any principle of interpretation

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allow a statute not covered by it to intrude upon this field.” (at paras 88 and 89)

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.  In Gannon Dunkerley,  1959  SCR 379,  this  Court

recognized works contracts as a separate species of contract

as follows:–  

“To avoid misconception, it must be stated that the above conclusion has reference to works contracts, which are entire and indivisible, as the contracts of the  respondents  have  been  held  by  the  learned Judges of the Court below to be. The several forms which such kinds of contracts can assume are set out in Hudson on Building Contracts, at p. 165. It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such  a  case,  there  are  really  two  agreements, though  there  is  a  single  instrument  embodying them, and the power of the State to separate the agreement to sell, from the agreement to do work and  render  service  and  to  impose  a  tax  thereon cannot be questioned, and will stand untouched by the present judgment.” (at page 427)

18. Similarly, in Kone Elevator India (P) Ltd. v. State of T.N.,

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(2014) 7 SCC 1, this Court held:-

“Coming  to  the  stand  and stance  of  the  State  of Haryana,  as  put  forth  by  Mr  Mishra,  the  same suffers from two basic fallacies, first, the supply and installation of lift treating it as a contract for sale on the  basis  of  the  overwhelming  component  test, because there is a stipulation in the contract that the customer is obliged to undertake the work of  civil construction and the bulk  of  the  material  used  in construction  belongs  to  the  manufacturer,  is  not correct, as the subsequent discussion would show; and second, the Notification dated 17-5-2010 issued by the Government of Haryana, Excise and Taxation Department, whereby certain rules of the Haryana Value Added Tax Rules, 2003 have been amended and  a  table  has  been  annexed  providing  for “Percentages for  Works  Contract  and Job Works” under the heading “Labour, service and other like charges as percentage of total value of the contract” specifying  15%  for  fabrication  and  installation  of elevators (lifts) and escalators, is self-contradictory, for  once  it  is  treated  as  a  composite  contract invoking labour and service, as a natural corollary, it would be works contract and not a contract for sale. To elaborate,  the  submission  that  the  element  of labour and service can be deducted from the total contract  value  without  treating  the  composite contract as a works contract is absolutely fallacious. In  fact,  it  is  an  innovative  subterfuge.  We  are inclined to  think  so as it  would  be frustrating the constitutional  provision  and,  accordingly,  we unhesitatingly repel the same.” (at para 60)

19.    In Larsen & Toubro Ltd. v. State of Karnataka, (2014) 1

SCC 708, this Court stated:-

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“In our opinion, the term “works contract” in Article 366(29-A)(b) is amply wide and cannot be confined to  a  particular  understanding  of  the  term or  to  a particular  form.  The  term  encompasses  a  wide range  and  many  varieties  of  contract.  Parliament had such wide meaning of  “works contract”  in  its view at the time of the Forty-sixth Amendment. The object  of  insertion  of  clause  (29-A)  in  Article  366 was to enlarge the scope of the expression “tax on sale or purchase of goods” and overcome Gannon Dunkerley  (1) [State  of  Madras v. Gannon Dunkerley  and  Co.  (Madras)  Ltd.,  AIR  1958  SC 560  :  1959  SCR  379]  .  Seen  thus,  even  if  in  a contract, besides the obligations of supply of goods and  materials  and  performance  of  labour  and services, some additional obligations are imposed, such contract does not cease to be works contract. The additional obligations in the contract would not alter the nature of contract so long as the contract provides for a contract for works and satisfies the primary  description  of  works  contract.  Once  the characteristics  or  elements  of  works  contract  are satisfied in a contract then irrespective of additional obligations, such contract would be covered by the term “works contract”. Nothing in Article 366(29-A) (b)  limits the term “works contract”  to contract  for labour  and  service  only.  The  learned  Advocate General for Maharashtra was right in his submission that the term “works contract” cannot be confined to a contract to provide labour and services but is a contract  for  undertaking or  bringing into existence some “works”. We are also in agreement with the submission  of  Mr  K.N.  Bhat  that  the  term “works contract” in Article 366(29-A)(b) takes within its fold all genre of works contract and is not restricted to one  specie  of  contract  to  provide  for  labour  and services alone. Parliament had all  genre of works contract in view when clause (29-A) was inserted in Article 366.” (at para 72)

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20. We also find that the assessees’ argument 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.

21. This Court in Mathuram Agrawal v. State of M.P., (1999)

8 SCC 667, held:-

“Another  question  that  arises  for  consideration  in this connection is whether sub-section (1) of Section 127-A and the proviso to sub-section (2)(b) should be construed together and the annual letting values of all the buildings owned by a person to be taken together for determining the amount to be paid as tax in respect of  each building.  In our considered view this position cannot be accepted. The intention of  the  legislature  in  a  taxation  statute  is  to  be gathered  from  the  language  of  the  provisions particularly  where  the  language  is  plain  and unambiguous. In a taxing Act  it  is  not  possible to assume any intention or governing purpose of the statute  more  than  what  is  stated  in  the  plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention  of  the  legislature.  The  statute  should clearly  and  unambiguously  convey  the  three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at  which  the  tax  is  to  be  paid.  If  there  is  any ambiguity  regarding any of  these ingredients  in  a

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taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter.

 This construction, in our considered view, amounts to supplementing the charging section by including something which the provision does not state. The construction placed on the said provision does not flow from the plain language of the provision. The proviso  requires  the  exempted  property  to  be subjected to tax and for the purpose of valuing that property alone the value of the other properties is to be taken into consideration. But, if in doing so, the said  property  becomes  taxable,  the  Act  does  not provide at what rate it would be taxable. One cannot determine the rateable value of the small property by  aggregating  and  adding  the  value  of  other properties, and arrive at a figure which is more than possibly the value of the property itself. Moreover, what rate of tax is to be applied to such a property is also not indicated.” (at paras 12 and 16)

22. Equally,  this  Court  in  Govind  Saran  Ganga  Saran  v.

CST, 1985 Supp SCC 205, held:-

“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable  event  attracting the levy, the second is  a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is  the  rate  at  which  the  tax  is  imposed,  and  the fourth is the measure or value to which the rate will be  applied for  computing the tax  liability. If  those components  are  not  clearly  and  definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative  scheme  defining  any  of  those components of the levy will be fatal to its validity.”

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(at para 6)

23. To similar effect  is this Court’s judgment in  CIT v. B.C.

Srinivasa Setty, (1981) 2 SCC 460, held:-

“Section 45 charges the profits or gains arising from the transfer  of  a capital  asset to income tax.  The asset  must  be  one  which  falls  within  the contemplation  of  the  section.  It  must  bear  that quality  which  brings  Section  45  into  play.  To determine whether the goodwill of a new business is such  an  asset,  it  is  permissible,  as  we  shall presently show, to refer to certain other sections of the head, “Capital gains”. Section 45 is a charging section.  For  the  purpose  of  imposing the charge. Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can  be  applied  for  determining  the  chargeable profits and gains. All transactions encompassed by Section  45  must  fall  under  the  governance of  its computation  provisions.  A  transaction  to  which those  provisions  cannot  be  applied  must  be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income Tax  Act,  where  under  each  head  of  income  the charging  provision  is  accompanied  by  a  set  of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the  charge.  Thus  the  charging  section  and  the computation  provisions  together  constitute  an integrated code. When there is a case to which the computation  provisions  cannot  apply  at  all,  it  is evident that  such a case was not intended to fall within the charging section. Otherwise one would be

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driven  to  conclude  that  while  a  certain  income seems to fall within the charging section there is no scheme  of  computation  for  quantifying  it.  The legislative pattern discernible in the Act  is against such a conclusion. It must be borne in mind that the legislative  intent  is  presumed  to  run  uniformly through  the  entire  conspectus  of  provisions pertaining to each head of income. No doubt there is  a  qualitative  difference  between  the  charging provision  and  a  computation  provision.  And ordinarily  the  operation  of  the  charging  provision cannot  be  affected  by  the  construction  of  a particular  computation  provision.  But  the  question here  is  whether  it  is  possible  to  apply  the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to  the  fundamental  integrality  of  the  statutory scheme provided for each head.” (at para 10)

24. 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  defines  “taxable  service”  as  “any

service  provided”.    All  the  services  referred  to  in  the  said

sub-clauses are 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

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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 the non-service elements

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.  

25. In fact, by way of contrast, Section 67 post amendment

(by the Finance Act, 2006) for the first time prescribes, in cases

like  the  present,  where  the  provision  of  service  is  for  a

consideration which is not ascertainable, to be the amount as

may be determined in the prescribed  manner.  

26. We have already seen that Rule 2(A) framed pursuant to

this power has followed the second Gannon Dunkerley case in

segregating the ‘service’ component of a works contract from

the ‘goods’ component.  It begins by working downwards from 37

Page 38

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

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pursuant to such contract,  enters into computation of service

tax.

27. In fact, the speech made by the Hon’ble Finance Minister

in moving the Bill to tax Composite Indivisible Works Contracts

specifically stated:-

“State  Governments  levy a  tax  on the transfer  of property  in  goods  involved  in  the  execution  of  a works contract.  The  value  of  services  in  a  works contract should attract service tax. Hence, I propose to  levy  service  tax  on  services  involved  in  the execution  of  a  works  contract.  However,  I  also propose  an  optional  composition  scheme  under which service tax will be levied at only 2 per cent of the total value of the works contract.”

28. Pursuant  to  the  aforesaid  speech,  not  only  was  the

statute  amended  and  rules  framed,  but  a  Works  Contract

(Composition Scheme for Payment of Service Tax) Rules, 2007

was also notified in which service providers could opt to pay

service tax  at  percentages ranging from 2 to  4 of  the gross

value of the works contract.

29. It is interesting to note that while introducing the concept

of service tax on indivisible works contracts various exclusions

are also made such as works contracts in  respect  of  roads,

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airports, airways transport, bridges, tunnels, and dams.  These

infrastructure projects have been excluded and continue to be

excluded  presumably  because  they  are  conceived  in  the

national interest.  If learned counsel for the revenue were right,

each of these excluded works contracts could be taxed under

the five sub-heads of Section 65(105)  contained in the Finance

Act,  1994.  For  example,  a  works  contract  involving  the

construction of a bridge or dam or tunnel would presumably fall

within  Section  65(105)(zzd)  as  a  contract  which  relates  to

erection,  commissioning  or  installation.   It  is  clear  that  such

contracts  were  never  intended  to  be  the  subject  matter  of

service tax. Yet, if learned counsel for the revenue is right, such

contracts, not being exempt under the Finance Act, 1994, would

fall  within  its  tentacles,  which  was  never  the  intention  of

Parliament.  

30. 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. 40

Page 41

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 Mahim Patram’s case.  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 “sale” and “works contract”.  The Court then went on to

discuss Sections 9(2) and 13(3) of the Central Sales Tax Act.

Section 9(2) of the Central Sales Tax Act provides:-

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“Section 9. Levy and collection of tax and penalties. —  

(2) Subject to the other provisions of this Act and the rules made thereunder, the authorities for  the time being empowered to assess, reassess, collect and enforce payment of any tax under the general sales  tax  law  of  the  appropriate  State  shall,  on behalf  of  the  Government  of  India,  assess, reassess,  collect  and  enforce  payment  of  tax, including  any  interest  or  penalty,  payable  by  a dealer  under  this  Act  as  if  the  tax  or  interest  or penalty payable by such a dealer under this Act is a tax or interest or penalty payable under the general sales tax law of the State; and for this purpose they may exercise all  or  any of  the powers they have under the general sales tax law of the State; and the provisions of such law, including provisions relating to  returns,  provisional  assessment,  advance payment of tax, registration of the transferee of any business, imposition of the tax liability of a person carrying  on  business  on  the  transferee  of,  or successor to, such business, transfer of liability of any firm or Hindu undivided family to pay tax in the event of the dissolution of such firm or partition of such  family,  recovery  of  tax  from  third  parties, appeals,  reviews,  revisions,  references,  refunds, rebates, penalties, charging or payment of interest, compounding  of  offences  and  treatment  of documents  furnished  by  a  dealer  as  confidential, shall apply accordingly:

Provided that if in any State or part thereof there is  no  general  sales  tax  law  in  force,  the  Central Government may, by rules made in this behalf make necessary  provision  for  all  or  any  of  the  matters specified in this sub-section.”

33. Section 13(3) of the Central Sales Tax Act says:-

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“The  State  Government  may  make  rules,  not inconsistent with the provisions of this Act and the rules made under sub-section (1), to carry out the purposes of this Act.”

34. 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 the States’

sales  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

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extracted passage from Mahim Patram’s case 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. Para

36(2) reads as follows:-

“(2)  Service  tax  can  be  levied  on  the  service component  of  any  contract  involving  service  with sale  of  goods  etc.  Computation  of  service component is  a matter  of  detail  and not a matter relating to validity of imposition of service tax. It is procedural  and  a  matter  of  calculation.  Merely because  no  rules  are  framed  for  computation,  it does not follow that no tax is leviable.” [at para 36]

35. The aforesaid finding is in fact contrary to a long line of

decisions which have held that where there is no machinery for

assessment, the law being vague, it would not be open to the

assessing  authority  to  arbitrarily  assess  to  tax  the  subject.

Various judgments of this Court have been referred to in the

following passages from  Heinz India (P) Ltd. v. State of U.P.,

(2012) 5 SCC 443. This Court said:-

“This Court has in a long line of decisions rendered from time to  time,  emphasised  the  importance  of machinery provisions for assessment of taxes and fees recoverable under a taxing statute. In one of the earlier decisions on the subject a Constitution

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Bench of  this Court  in K.T. Moopil  Nair v. State of Kerala [AIR  1961  SC  552]  examined  the constitutional  validity  of  the  Travancore-Cochin Land Tax Act (15 of 1955). While recognising what is  now  well-settled  principle  of  law  that  a  taxing statute  is  not  wholly  immune  from  attack  on  the ground that it infringes the equality clause in Article 14, this Court found that the enactment in question was  violative  of  Article  14  of  the  Constitution  for inequality was writ large on the Act and inherent in the very provisions under the taxing section thereof. Having said so, this Court also noticed that the Act was silent as to the machinery and the procedure to be followed in making the assessment. It was left to the executive to evolve the requisite machinery and procedure  thereby  making  the  whole  thing,  from beginning to end, purely administrative in character completely  ignoring  the  legal  position  that  the assessment  of  a  tax  on  person  or  property  is  a quasi-judicial exercise.”

  Speaking for the majority Sinha, C.J. said: (K.T. Moopil case [AIR 1961 SC 552] , AIR p. 559, para 9)

“9.  … Ordinarily, a  taxing  statute  lays  down a regular machinery for making assessment of the tax proposed to be imposed by the statute. It lays down detailed  procedure  as  to  notice  to  the  proposed assessee to make a return in  respect  of  property proposed to be taxed, prescribes the authority and the  procedure  for  hearing  any  objections  to  the liability  for  taxation or  as to  the extent  of  the tax proposed to be levied, and finally, as to the right to challenge  the  regularity  of  assessment  made,  by recourse to proceedings in a higher civil court. The Act  merely  declares  the  competence  of  the Government to make a provisional assessment, and by  virtue  of  Section  3  of  the  Madras  Revenue Recovery Act, 1864, the landholders may be liable

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to  pay  the  tax. The  Act  being  silent  as  to  the machinery and procedure to be followed in making the assessment leaves it to the Executive to evolve the requisite machinery and procedure. The whole thing,  from  beginning  to  end,  is  treated  as  of  a purely administrative character, completely ignoring the legal position that the assessment of a tax on person  or  property  is  at  least  of  a  quasi-judicial character.”                                  (emphasis supplied)

  In Rai Ramkrishna v. State of Bihar [AIR 1963 SC 1667]  this  Court  was  examining  the constitutional validity  of  the  Bihar  Taxation  on  Passengers  and Goods (Carried by Public Service Motor Vehicles) Act, 1961. Reiterating the view taken in K.T. Moopil Nair [AIR  1961  SC  552]  this  Court  held  that  a statute  is  not  beyond  the  pale  of  limitations prescribed by Articles 14 and 19 of the Constitution and that the test of reasonableness prescribed by Article  304(b)  is  justiciable.  However,  in  cases where the statute was completely discriminatory or provides no procedural  machinery for  assessment and levy  of  tax  or  where  it  was  confiscatory, the Court  would  be  justified  in  striking  it  down  as unconstitutional. In such cases the character of the material provisions of the impugned statute may be such as may justify the Court taking the view that in substance the taxing statute is a cloak adopted by the  legislature  for  achieving  its  confiscatory purpose.   In Jagannath  Baksh  Singh v. State  of  U.P. [AIR 1962  SC  1563]  this  Court  was  examining  the constitutional  validity  of  the  U.P.  Large  Land Holdings  Tax  Act  (31  of  1957).  Dealing  with  the argument  that  the  Act  did  not  make  a  specific provision  about  the  machinery  for  assessment  or recovery of tax, this Court held: (AIR pp. 1570-71,

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para 17) “17.  …  if  a  taxing  statute  makes  no  specific

provision about  the machinery to recover  tax and the procedure to make the assessment of the tax and leaves it entirely to the executive to devise such machinery  as  it  thinks  fit  and  to  prescribe  such procedure as appears to it  to be fair, an occasion may arise  for  the  courts  to  consider  whether  the failure to provide for a machinery and to prescribe a procedure does not tend to make the imposition of the  tax  an  unreasonable  restriction  within  the meaning of Article 19(5). An imposition of tax which in the absence of a prescribed machinery and the prescribed  procedure  would  partake  of  the character of a purely administrative affair can, in a proper sense, be challenged as contravening Article 19(1)(f).”                                    (emphasis supplied)

 In State of A.P. v. Nalla Raja Reddy [AIR 1967 SC 1458]  this  Court  was  examining  the constitutional validity  of  the  Andhra  Pradesh  Land  Revenue (Additional  Assessment)  and  Cess  Revision  Act, 1962 (22 of 1962) as amended by the Amendment Act (23 of 1962). Noticing the absence of machinery provisions in  the impugned enactments this  Court observed: (AIR p. 1468, para 22) “22. … if Section 6 is put aside, there is absolutely no  provision  in  the  Act  prescribing  the  mode  of assessment. Sections 3 and 4 are charging sections and they say in effect that a person will have to pay an  additional  assessment  per  acre  in  respect  of both dry and wet lands. They do not lay down how the  assessment  should  be  levied. No  notice  has been  prescribed,  no  opportunity  is  given  to  the person  to  question  the  assessment  on  his  land. There  is  no  procedure  for  him  to  agitate  the correctness of the classification made by placing his land in a particular class with reference to ayacut, acreage  or  even  taram.  The  Act  does  not  even

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nominate  the  appropriate  officer  to  make  the assessment to deal with questions arising in respect of  assessments  and  does  not  prescribe  the procedure for assessment. The whole thing is left in a nebulous form. Briefly stated under the Act there is  no  procedure  for  assessment  and  however grievous the blunder made there is no way for the aggrieved party to get it corrected. This is a typical case where a taxing statute does not provide any machinery of assessment.”        (emphasis supplied)

The appeals filed by the State against the judgment of the High Court striking down the enactment were on the above basis dismissed.

 Reference  may  also  be  made  to Vishnu  Dayal Mahendra Pal v. State of  U.P. [(1974) 2 SCC 306] and D.G. Gose and Co. (Agents) (P) Ltd. v. State of Kerala [(1980)  2 SCC 410]  where this  Court  held that  sufficient  guidance  was  available  from  the Preamble  and  other  provisions  of  the  Act.  The members  of  the  committee  owe  a  duty  to  be conversant  with  the  same  and  discharge  their functions in accordance with the provisions of the Act  and  the  Rules  and  that  in  cases  where  the machinery for  determining annual  value has been provided  in  the  Act  and  the  rules  of  the  local authority,  there  is  no  reason  or  necessity  of providing the same or similar provisions in the other Act or Rules.    There is no gainsaying that  a total  absence of machinery  provisions  for  assessment/recovery  of the tax levied under an enactment, which has the effect of making the entire process of assessment and  recovery  of  tax  and  adjudication  of  disputes relating thereto administrative in character, is open to  challenge  before  a  writ  court  in  appropriate proceedings. Whether or not the enactment levying the tax makes a machinery provision either by itself

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or in terms of the Rules that may be framed under it is,  however,  a  matter  that  would  have  to  be examined in each case.” (at paras 15-21)

36. In  a  recent  judgment  by  one  of  us,  namely,  Shabina

Abraham & Ors. v. Collector of Central Excise & Customs,

judgment  dated  29th July,  2015,  in  Civil  Appeal  No.5802  of

2005, this Court held:-

“It is clear on a reading of the aforesaid  paragraph that  what  revenue is asking us to do is to stretch the machinery  provisions  of the Central Excises and Salt Act, 1944 on the basis  of  surmises  and conjectures.  This  we  are  afraid  is  not  possible. Before  leaving   the  judgment  in  Murarilal’s  case (supra), we wish to add that  so  far  as partnership firms  are concerned,  the  Income Tax Act  contains a  specific  provision  in  Section  189(1)  which introduces  a  fiction  qua dissolved firms. It states that  where  a  firm  is  dissolved,  the  Assessing Officer  shall  make  an  assessment  of  the  total income of   the firm as if  no such dissolution had taken place and all the provisions of the Income Tax Act would apply to assessment of such  dissolved firm.  Interestingly enough, this provision is referred to only in the minority judgment in M/s. Murarilal’s case (supra).    The impugned judgment in the present case has referred to Ellis C. Reid’s case but has not extracted the real ratio contained therein. It then goes on to say that this is a case of  short  levy  which  has been  noticed  during  the  lifetime  of  the  deceased and  then  goes  on  to  state  that  equally  therefore legal  representatives  of  a  manufacturer  who  had paid  excess  duty  would  not  by  the  self-same

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reasoning  be  able  to  claim  such  excess  amount paid by the  deceased. Neither of these reasons are reasons which refer to any provision of law.  Apart from  this, the High Court went  into  morality  and said  that the moral principle of unlawful enrichment would also apply and  since  the  law  will not permit this,  the  Act  needs  to  be  interpreted  accordingly. We wholly disapprove of the approach of the High Court.  It  flies in  the face of  first  principle when it comes  to  taxing  statutes. It is therefore necessary to reiterate the law as it stands.  In  Partington  v. A.G.,  (1869)  LR  4  HL  100  at  122,  Lord  Cairns stated:

   “If the person sought to be taxed comes within the  letter  of  the  law  he  must  be taxed,  however great the hardship may  appear  to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax, cannot bring the subject within  the letter  of  the  law,  the  subject  is  free,  however apparently  within  the spirit of law the case might otherwise appear to  be.  In  other words, if there be admissible  in  any statute,  what  is  called  an equitable,  construction,  certainly,  such  a construction  is  not  admissible  in a taxing statute where you can  simply  adhere  to the words of the statute". (at paras 26 and 31)

37.  We find that the Patna, Madras and Orissa High Courts

have, in fact, either struck down machinery provisions or held

machinery provisions to bring indivisible  works contracts into

the  service  tax  net,  as  inadequate.   The  Patna  High  Court

judgment  was  expressly  approved by  this  Court  in  State  of

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Jharkhand v. Voltas Ltd.,  East  Singhbhum,  (2007)  9 SCC

266.  This Court held:-

“Section 21 of the Bihar Finance Act,  1981, as amended states:

“21. Taxable  turnover.—(1)  For  the  purpose  of this part the taxable turnover of the dealer shall be that part of his gross turnover which remains after deducting therefrom—

(a)(i)  in  the  case  of  the  works  contract  the amount  of  labour  and  any  other  charges  in  the manner and to the extent prescribed;”

Rule 13-A of the Bihar Sales Tax Rules which was also  amended  by  a  notification  dated  1-2-2000 reads as follows:

“13-A. Deduction  in  case  of  works  contract  on account  of  labour  charges.—If  the  dealer  fails  to produce any account or the accounts produced are unreliable deduction under sub-clause (i) of clause (a) of sub-section (1) of Section 21 on account of labour charges in case of works contract from gross turnover  shall  be  equal  to  the  following percentages...”

The aforesaid provisions have been adopted by the State  of  Jharkhand  vide  notification  dated 15-12-2000 and thus are applicable in the State of Jharkhand.

Interpretation of the amended Section 21(1) and the newly substituted Rule 13-A fell for consideration of a Division Bench of the Patna High Court in Larsen &  Toubro  Ltd. v. State  of  Bihar [(2004)  134  STC 354]  .  The Patna High Court  in  the said decision observed as under:

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“Rule  13-A unfortunately  does  not  talk  of  ‘any other  charges’.  Rule  13-A unfortunately  does  not take  into  consideration  that  under  the  Rules  the deduction  in  relation  to  any  other  charges  in  the manner  and  to  the  extent  were  also  to  be prescribed.  Rule  13-A  cannot  be  said  to  be  an absolute  follow-up  legislation  to  sub-clause  (i)  of clause (a) of Section 21(1). When the law provides that something is to be prescribed in the Rules then that thing must be prescribed in the Rules to make the  provisions  workable  and  constitutionally  valid. InGannon  Dunkerley  &  Co. [(1993)  1  SCC  364  : (1993) 88 STC 204] the Supreme Court observed that as sub-section (3) of Section 5 and sub-rule (2) of Rule 29 of the Rajasthan Sales Tax Act and the Rules were not providing for particular deductions, the  same were  invalid.  In  the  present  matter  the constitutional  provision  of  law says  that  particular deductions  would  be  provided  but  unfortunately nothing is provided in relation to the other charges either in Section 21 itself or in the Rules framed in exercise of the powers conferred by Section 58 of the Bihar Finance Act.

*** In our considered opinion sub-clause (i) of clause

(a)  of  Section  21(1)  read  with  Rule  13-A  of  the Rules did  not  make sub-clause (1)  fully  workable because  the  manner  and  extent  of  deduction relating  to  any  other  charges  has  not  been provided/prescribed by the State.” (at paras 9-12)

38. Similarly, the Madras High Court in  Larsen and Toubro

Ltd. v. State of Tamil  Nadu and Ors.,  [1993] 88 STC 289,

struck down Rules 6A and 6B of the Tamil Nadu General Sales

Tax Rules as follows:-

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“…The  eight  principles  are  the  criteria  and  the norms which every State legislation has to conform as per  the decision of  the apex Court  which has been already adverted to by us supra. In addition thereto,  we have  also  referred to  at  considerable length the particular reasons assigned by the apex Court while striking down section  of the Rajasthan Sales  Tax  Act  and  rule  29(2)  of  the  Rules  made thereunder. The impugned rules 6-A and 6-B of the Rules, in our view, do not pass the above vital and essential test and the basic requirements laid down by the  ratio  of  the  decision  of  the  apex  Court  in Gannon  Dunkerley's  case  supra; .  The  impugned rules are squarely opposed to the ratio of the said decision  and  particularly  the  ratio  laid  down  in conclusion Nos. 1, 2, 3, 6 and 7 of the decision in Gannon  Dunkerley's  case  [1993]  88  STC  204 supra; and also reiterated by the apex Court in the second Builders Association of India case [1993] 88 STC 248 (SC); [1992] 2 MTCR 542. In the light of the above, we see no merit in the stand taken for the respondents relying upon the decisions reported in [1957] 8 STC 561 (SC) (A. V. Fernandez v. State of  Kerala)  and  [1969]  23  STC  447  (Mad.) (Kumarasamy Pathar v. State of  Madras) that  the omission  to  exclude  certain  items  relating  to non-taxable  turnovers  is  of  no  consequence  and does  not  affect  or  undermine  the  validity  of  the impugned proceedings. Consequently, applying the ratio of the above decisions, we hereby strike down rules  6-A and  6-B  as  illegal  and  unconstitutional, besides  being  violative  of  sections 3  to 6, 14 and 15 of  the  Central  Sales  Tax  Act  and consequently unenforceable.

The provisions of section 3-B merely levied the tax on the transfer of property in goods involved in the execution of  the works contract.  The assessment, determination  of  liability  and  recovery  had  to  be under  the  provisions  of  the  Act  read  with  the

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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 of “gross amount charged”,  only speaks of

the “gross amount charged”  for 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 by Mcdowell’s case.

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, 56

Page 57

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

tax “levied” by 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.  Since the levy itself of service tax has been found

to be non-existent, no question of any exemption would arise.

With these observations, these appeals are disposed of.   

45.    We,  therefore,  allow all  the  appeals  of  the  assessees

before us and dismiss all the appeals of the revenue.  

                                                                ……………………J. (A.K. Sikri)

……………………J.          (R.F. Nariman)

New Delhi; August 20, 2015

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