YFC Projects Pvt. Ltd. v. Union of India

(b) construction of pipeline or conduit; or

(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, which is –

(i) used, or to be used, primarily for; or

(ii) occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.”

(c) repair, alteration, renovation or restoration of, or similar services in relation to, residential complex. Section 65 (91a): “residential complex” means any complex comprising of –

(i) a building or buildings, having more than twelve residential units;

(ii) a common area; and

(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system, located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing of planning of the layout, and the construction of such complex is intended for personal use as residence by such person. Explanation. – For the removal of doubts, it is hereby declared that for the purposes of this clause,- (a) “personal use” includes permitting the complex for use as residence by another person on rent or without consideration; (b)“residential unit” means a single house or a single apartment intended for use as a place of residence.”

5. It may be pointed out at this juncture that w.e.f. 01.06.2007 a further amendment to the Finance Act, 1994 was made whereby Section 65 (105) (zzzza) was introduced whereunder „works contract service‟ was identified as a taxable service. It is pertinent to note that in the present petitions we are not concerned with the period on or after 01.06.2007 but with the period prior to 01.06.2007.

6. The short point involved in these petitions is that the impugned three provisions pertain, inter alia, to composite contracts involving erection, commissioning or installation services, commercial or industrial construction as well as construction of residential complexes. Such composite contracts may have service as well as supply components. It is an accepted position that, insofar as the sale/supply of materials is concerned, they fall under Entry 54 of List II of the Seventh Schedule to the Constitution of India and, therefore, fall within the exclusive domain of the State Legislature. This is, of course, to be read with Article 366 (29-A) of the Constitution. It is, therefore, clear that Parliament cannot legislate in respect of the sale of goods component involved in such a composite contract. Service tax, however, falls within the exclusive domain of Parliament. This is under the residual Entry 97 of List I of the Seventh Schedule to the Constitution. The point taken by the learned counsel for the petitioner is that while this clearcut bifurcation has been made out in the constitutional scheme, Parliament has encroached upon the exclusive powers of State Legislatures by imposing service tax on a composite contract which necessarily includes the sale of goods component.

7. On the other hand, Mr Rajeeve Mehra, learned Additional Solicitor General of India, submits that Parliament has not encroached upon the powers of the State Legislature, inasmuch as, the provisions which are being impugned in these writ petitions are relatable only to the service component of composite contracts. Mr Mehra submitted that this has also been held by another Division Bench of this Court in G.D. Builders vs. UOI and Anr.; 2013(32) STR 673 (Del). He submitted that the very issues that are sought to be raised by Mr Mittal, who appears on behalf of the petitioners, were also raised before that Bench. This, according to Mr Mehra, would be evident from paragraph 2 of the said decision in G.D. Builders (supra) wherein the contentions of the petitioners in those matters have been crystallized. Paragraph 2 of the said decision reads as under:-

(vi) The exemption notifications by which 67% of the contract value in a composite contract is abated has the effect of imposing service tax on “composite or works contract” which is not covered by the main statutory provision. Thus, what is not covered and cannot be covered by the principal enactment, have been covered and brought under the service tax ambit by the explanations appended to the notifications. Thus, abatement granted in the notifications is invalid and contrary to main enactment. The said argument is equally applicable to column 4 of serial numbers 5, 7 and 10 of the 2006 notification.

(vii) As per Section 93 of the Finance Act, 1994, the Central Government is empowered to grant exemption from levy of service tax either wholly or in part but as “composite contracts” and “works contracts” are not covered under Section 65(105)(zzq) or (zzzh) Central Government cannot grant exemption by way of notification.

(viii) Service tax has been imposed on services involved in execution of “composite/works contract” only with effect from 1st June, 2007 under Section 65(105)(zzzza). Rule 2A of Service Tax (Determination of Value) Rules, 2006 determines value of services involved in works/composite contracts and it is levied @ 2%, enhanced to 4% with effect from 1st March, 2008. The said levy is not applicable to services covered under Section 65(105)(zzq) and (zzzh).

(ix) There is a conflict between Section

65(105)(zzzza), (zzq) and (zzzh) and what is covered by Section 65(105)(zzzza) cannot be covered by Section 65(105)(zzq) and (zzzh). The two sets of provisions cannot coexist. Subsequent legislation shows that the earlier legislation will not cover composite or works contract.

(x) Section 66 is the charging section and provisions of Section 67 are the valuation provisions. Value of taxable services under Section 67 is the gross amount charged by the service provider for such “services provided or to be provided”. Service tax can be charged only for the “specified taxable services” as defined in sub-clauses of Section 65(105). Tax can be only on the value of services and not beyond. There is no provision for a notional value or to enable the authorities to reduce or subtract value of material or goods. The gross amount charged or the value of service cannot include value of goods and material supplied/used.

(xi) Vagueness or uncertainty makes a levy invalid and illegal.”

8. It was submitted by Mr Mehra that the very issue with regard to the applicability of service tax only on the service element had been specifically raised in that batch of matters. In fact point Nos. (ii), (iii) and (iv) are specific to that aspect of the matter.

9. Adverting further to the said decision in G.D. Builders (supra), Mr Mehra also drew our attention to the following paragraphs:-

32. Similarly, the contention that exemption notification could be issued under Section 93 of the Finance Act in respect of any “taxable service” defined in Section 65(105), misses the legal position and has to be rejected. The notifications in questions dated 10th September, 2004, 7th June, 2005 and 1st March, 2006 granting exemption of 67% towards the value of the material used for computing the service tax payable ensure that the service element is taxable. It is an alternative to an otherwise subjective determination in each case, which may be cumbersome and require a detailed examination for ascertainment of the service element. The formula prescribed is not mandatory or compulsory. Further, it will apply at the option of an assesee. It will be applicable only when the required parameters are met and is not illegal and ultra vires the Act, i.e. the Finance Act, 1994. It is also not contrary to the charging section/provisions of the Finance Act imposing levy of service tax. The aim and purpose of the said notifications is to provide a convenient, alternative, optional and hassle free method for payment of service tax, provided the requirements mentioned in the notifications are satisfied..................”

10. The Division Bench culled out the following principles which are set out in paragraph 36 of G.D. Builders (supra):-

11. Finally, Mr Mehra submitted that in view of the decision of G.D. Builders (supra) nothing further remains to be decided in the present petitions, particularly because the Division Bench in G.D. Builders (supra) had specifically held that it is only the service element of a composite contract which would be exigible to service tax under the impugned provisions.

12. We may point out that in G.D. Builders (supra) the challenge was with respect to the notifications dated 21.08.2003, 10.09.2004 and 07.06.2005 and, in particular, to the explanation contained in those notifications. All those notifications had been issued in respect of Sections 65(105)(zzd), 65 (105)(zzq) and 65(105)(zzzh) respectively.

13. A challenge was also made to notification No.1/2006 dated 01.03.2006 which superseded the above mentioned three notifications. The Division Bench in G.D. Builders (supra) held the said notifications to be intra vires the provisions which are impugned herein.

14. Considering the arguments raised by counsel for the parties and having gone through the impugned provisions, we feel that the manner in which the Division Bench has read the said provisions in order to decide as to whether the notifications in question were intra vires the said provisions or not have adequately addressed the issue which is sought to be raised by the petitioners herein. The Division Bench has clearly and categorically interpreted the said provision as imposing service tax only on the service component of the composite contracts which fall under the impugned provisions. The Division Bench in G.D. Builders (supra) held that it is the service portion of the composite contract which alone could be made the subject matter of service tax and that the aspect doctrine would be applicable for bifurcating/vivisecting the composite contract into its service component and sale of goods component. While the sale of goods would be taxable under the authority of the State Legislature, the service component would be taxable by virtue of Parliamentary legislation which includes the Finance Act, 1994. It was further observed in G.D. Builders (supra) that the computation of the service component was only a matter of detail and not a matter relating to the validity of imposition of service tax. It was also observed that the notifications which were impugned before it were in the alternative and optional and it was for the assessees to take advantage or benefit of the said notifications, if the assessees so desired. However, it was also made clear that the assessee cannot be compelled to pay service tax on a proportion or value of a composite contract as per the notification.

15. On going through the impugned provisions, we do not find any encroachment by Parliament on the powers of the State Legislature to impose a tax on the sale of goods. The provisions clearly relate only to the service component of the composite contracts referred to in the impugned provisions.

16. The grievance of the petitioner with regard to assessment and computation cannot be equated with the challenge to the constitutional validity of the impugned provisions. It is open to the petitioner to raise issues of computation before the appropriate Adjudicating Authority/Appellate Authority and demonstrate the extent to which service tax can be imposed on the services that are provided by them. To be clear, it is open to the petitioner to demonstrate the extent of the service element included in the composite contract and to pay service tax only on that component.

17. The Division Bench in G.D. Builders (supra) has already interpreted the impugned provisions and has taken the view that it is only the service element which is to be taxed under the impugned provisions. We agree with that view. As such, there is no encroachment by Parliament on the exclusive powers of the State Legislature in respect of Entry No.54, List II and, therefore, the said provisions are constitutional. The computation of service tax is, of course, left to the Adjudicating Authority/Appellate Authority.

18. Insofar as the question of the ready-mix concrete is concerned, it is true that the petitioner manufactures the same and either supplies it to third parties or uses it in its own works. It is not the entire ready-mix concrete which is to be taxed under the provisions of service tax but, only the service element in relation to the use of the ready-mix concrete which would be amenable to service tax. Therefore, in the case of ready-mix concrete also the challenge does not hold good.

19. Consequently, the impugned provisions are valid but, are to be applied in the manner indicated above. The writ petitions are dismissed. The parties shall bear their own costs.

BADAR DURREZ AHMED, J SIDDHARTH MRIDUL, J JANUARY 09, 2014 dn