VIPUL LIMITED v. UOI AND ANR.

V. envisaged;.by 4^clc;^6(3):(^j)...:Keep^ iii view..the grifevmce. pf'the contractor.S;,, th^.there is wide'disparity ini^the sale&:fe., legislation';6f- the,,' yarious' States,•in „the, •matter of irnposit'i.on,. mode,:.of..assessmen't', fates,, etc."• of'^^tbe vtax jon^;;deemed •.sales. • resulting.from.::t!msfe'! of goods-,'mvolvedc' iiT the,execution;• Of works,; coi^ract referred;;io:.iri,;sub-clau^, (6)•of' clause.(;29^A)' of •Arl;icle',.g[6],6,;^ need for.the- laAV'ienvisaged by:•Arii'cl.e- 286(3)(Z?) cannot be minimised '25';'ThLereafter in 'Mahim Pairan^s cass (Supra), the Supreme Court; "6.This.Court noticfed the,, matters which are, eiiYis^gfed for impositiSil^of tax on- sale or,purchase. 'of goods' after the Constitution'46th Amendment;,It;: furthermore 'considered:-the deductions which..were' required to be made/from. the. value-'of..the. entire ' contracl.in order to" arrive at the.value of the gobds-. •:involved in.the execution ofa works contract:- K;was/. held; (Garinon: i;)w?7/i:er?.g^ case [(1.993)' 1,SCC:-364J,•,SCC P:'39i[5], para 47):-.>.;/ • ' "The - value of, the'- goods, involved.in., the • ejcecution^of a works contract wih, therefbre^ ' have to.be deteniT.ined by,,taldng into aQcoiint •'P.age,^l liif,S[1] •. •; the vaIue,:Qf the^ entire works':contract and;: '; ^ •/ deducting therefroni the chf^rges towards-labour^;, r'" V and services which would cover— •:;r>•• \ V (a) labour charges for,e&cution ofthe worlcs^ ' (Z?) amount-paid to. asub-contractor.for labQur;.,V, ^ ^, • ' ^ and services; \:; • • '• - •' [c) charges'- for.planning,; ' architect's fees;,. (4) charges for obtaining on hire or otherwise;; - ^ machinery and tools used for the executipn 9^:;;: tl\eworlcs^contract; ' • ' • • (e) cost' of consumables •such;;;• as wateV;,,;; •, ' electricity-foel,^etc:;ajs^^. - •. the works, contract 1#e property mwhich IS: r^ot,., V•••/; r transferred in the course. 9f execution, of; works-contract; and: •/ ^ -• ••" ' (f) cost ofestablishmerit ofth& contractor.to'the ^..,• ••. -Sctent,it;is; relataWerfo.^supply of labour and.,,.^^ '' V;,:',' services;/; •/-v • •V (gj.other siraUar.expenses-.relatable:to,supplym.; • •^ labourandservices;',^ • v • ' '. -••V r/O profit earned by the contractor to the extent>, -Y';, •:. it is relataMe to..snpply.0flabour.and; services... •. ' The amounts deductible under these,jieads will •• V' -have to be/determinedan-the light ofthe.facts,, a particular.case;.0h.the basis;of,;;produced'by the contractor.";:;.V,, ':,v;.v,. y•. 2^: It' was' forther:ohseryed in • to,:i;t|e; 'iforesaid Gannon ^JDunkem^md '.tam§dan:x§gard.tQ inannqr'.m,wkicbtHe sale pncevof^supli tia^sfe^^^ "cQulib§^Qaiq^lated-andit.waste^,, • '.: ".::"27, We are, liowever, not,oblivious,:o,£ (he decision,,.,>i •.. • -oftiiisCoilrt wliereintlw.measui:eorYaluetowiOT^^^.::\^::-'theraKWillbeappliedfi;ircomputingtlietaxli^^^^^^ considered to be one-offfle.. ".i^rkeOovW&W. 0««g.. >..V'^'gcc 2051 1985 see (fttx) 447]..see para;. 'i'.-r •- Page 32,,of $it.. then measure.orvalue-to.which rate would be applied is one thing, but how 'the turaover' would:' be" •; determined is another. Computation provisions may bear a relationship with.,the nature of.charge and •constitute: ~ ah integrated',..code-.. as • was ' held;- In CITy.B.C. Srinivasa Set(y.l(l9'8i%^^ SCC 4.60';': ' ' • •1981 SCG (Tax). 1.19] (SCC at p.: 465); •buMds •;equally well settled that'only.because; rliles had' not, j.been framed under the'Central Act; the.'same. pe7we would not mean that no tax is leviable. 28, In Sudhir Chandj'a Na\m\. WTO [AIR 1969 SC 59; (1969) 1 SCR 108] this Court rejected, the' • was unconstitutional as no Rules had been framed to ': value the asset for the 'purpose of the Act stating.: ' (AIR p. 63. para 10) "/O. The plea that,Section.•7(l'):ofthe Wealth'. Tax Act is ultra vires Parliament is also wholly without substance. That clause proyide's:'; •Subject.to any rules made iii this behalf, the:/, value of any asset,:• other'than cash, for the. purposes of this Act, shall be estinu.ated to be thfe '. price which in the opinion of the.Wealth.Tax',. Officer it would fetch if.sold in'the open market^ ', ' on the valuation date.' •.•. '. • ^ It was urged that no rule's were framed in respect of" •:, •'.the valuation of lands and buildings.'But Section 7: only directs that the valuation of any asset other,than; • cash'has to be made-subject to the rules. It does riot • '. contemplate that there'shall be rules' before an asset can be valued. Failuiie.to.make rules for valuation^of" a type of asset canifet therefore affect the vires.^f Section 7. It was also said that Section•?(!) which.'-,. requires that the asset''shall be valued at'the price '., which it would-fetch-if sold in the open market on the,-.. ^ y.aluation date^ was.'expropriatory.'This xonteiition.'... •.wasnot raised in'the,';j)etition, and no ground is niade. out for holding that'lhe rate at which wealth tax'.:is • levied is expropriatoi|'.,"; •. <. '

29. The questionwhich, in'our opinibn, is required-to -.• be posed and answered, is as to whether there'exist ••. 'Page 33 of,51 sufficient guidelines for determination' of ' the •, turnover 'in, the. hands of the assessing.authority fox.,,the puipose oflevy oftax. The 1956 Act provides for •' 'levy oftax. Works contract has been brought,within; the purview ofsale. Wherever the said words haypj • ' 'been used, the new defuiition, therefore, would, be- •. •.applied, Section 8provides for' rates oftax on sales-dn' / •; •' the course of inter-State trade or commerce. Bection.. •8-A provides for determination ofturnover. Section'9 • provides for levy and coliection of tax and penalties'. '' '. The s.aid provision would, thus, be applied inrespect;',. of transfer of. property;in goods involved in tire.; 'execution.of•works, contract.'The 19.56-Act,provides,..' for grant"of exemjptio'hs. and various provisions e.g:, proviso appended to. Sections 6(1) and 6(2},bf the- • Act. „. " (Emphasis Supplied^ • 27, 'Thm''ea-fter reference-was made to th'e pr.ovisions-of U.P. Irade •,• ••••'..,-^T^x Agt,-1948 and the Central.Sales TaxAct1956, whether there exist: '•;:;:gui^eline§,.f9r d.etermmation ofthe turnover for the pmpose of-levy of;.v ••• V.tax, as worl^^s Goiitraets- had.heen brought within the pur^aev^.ofsak.. It ", ' was obseryedthat Central Sales Tax (U.P.) Rules,1957;was ap^^^ •. ••: •r'.,;•••,.:Clau§§'3'9fArt 286 ofthe Constitution has--also been amended toajlow • •,y; Farliament.to specify by law. restrictions -and. conditions.with ' regaiMr to'the system of levy of rates and other.incidence.Of tax oh, 'transfer pf goods involved in the execution of works contract, l^t h^: been liiglilighted in the Mahim Patram's-case (Supra), as,follows.:-;., -15. Clause (3) ofArticle.285 ofthe-Constitution was.;: also amended,to.enable Parliament to specify'by law. ".' --'c,• '• ',.; -,. restrictions-and conditions in regard to the system, of.levy rates: and. other-mcidents.of-the.tax.on,-the,, ••: transfer of goods involved in the execution ofworl^. •.. •: rcontraet. Pursuant to or in furtherance of the said;,;•; '' enabling provision, as. noticed-hereinbefore, aiid. in deference ' to observations,.made-" in: Gannon-.,^\pw«A:erfeyI(1993>lSCC,364],;.Glaus:e(g)-ofSection:. > P^ge-34 of51 - ' was.substituted by a new clause'defining "sale- in:. - ".the following terms:, • • "2. (g) 'sale', with its..grammaticar'variatiQns and;, ••cognate expressions, means any transfer of propei^y ' in goods vby one perspn to •another for cash '; or. ^,• v.-•.'.(deferred payment or-, for. any other. •valuable •••;'Sii'';Gonsider^ion, and includes,—^,;::y a transfer,. otherwise; than- in; pursuance, of a. • contract, ofpropeity inany goods^ for cash, deferred - • •'••,;paymei:it or other valuable consideration; '• • • (//).atrmisfef of propei1y,:i.n goods (whether as.goods;.•'• or in some otherform). involved in.the execution of a ••.. works,contract; - ' ^ T, •••'^ •'•.•(/7z) a delivery, of goods', on hire -purchase or,any.system ofpayinent by instalment^;;.: •. ',' (/v) a transfer' ofthe right to,, use any goods for any •.. purpose, (whether.,or not for a specified period) for •„ cash,..deferred, payipent^ or...other valuEtbie, consideration; - •^ ". " (v) a supply',of,goods;;,.by' any ^unincoriiorated. "; association of body of-persons tO; a member theieof-' ' -.for c^sh, deferred -payment or-^other; valuable;; •• consideration; ' • ' ' ^ r - ' ' (vi).a supply, by way..ofor as part ofany servic.e-or:!in' any other-manner.whatsoever, ofgoods, being.'food,• or any other article for.'.human consumption or aiiy..drink• (whether or not intoxicating),.where such — supply or service, is'for. cash, deferred -payment.or •, ';othervaluable cohsideration,,; •' •'•••. •..but does iiot include a mortgage:or hypothecation of or or.i; 2§, Coming baelc to th^ case 6 (gupra), itWas'.pbseiVed: • Page 35 6fk' 2013:DHC:6779-DB.'v; • T'r •• k.-, "In regard to tlie. s.u.6missiDn,m|icle on Article, 366(29-/^)(/), we are of tRe.view that,it does not •, •• provide to the contrary. It only permits the State to" • impose a tax on the supply of food' and drink by• whatever mode it may be made. It does not conceptually or. otherwise include the supply' 'of services within the definition of sale and'purchase,of goods,.Tliis is particlilarly. apparent from ' the. foHovying phrase contained •in. the., said•sub-articlc. •- '•; •'•' ^'siich transfer,, deliveiy or supply ofanygoods, shall ' deemed to be a sate of those goods": In other, words; the oper^ative words of the. said sub-article are::supply.of goods and it is only" supply of food and drinks mid. other articles for human:donsumption that; • is deemed to.be a sale or purchase ofgoo,d?.. j The concept ofcatering, admittedly,, includesi,..;' the concept of rendering service. The fact that tax.dn 'r,'.'.'" the sale, ofthe goods inVoIved'in the'said service can •;•. be levied does,not mean'that a service tax cannot, be' levied on the service aspect of catering- Mr Mohan • Parasaran, learned. Senior Counsel for the appellant. submitted that, the High. Court before applying the aspect theory.laid down by this Court in the case,• ofFederation of Hotel and- Restaurant Assn. of: India y. ilniQh of India [{19^9).[3] SCC 634,;. AIR • 1990 SC 1637] oughtto:hfive' appreciated.that in th.jit: V• matter Article 366(29-A)00' of the,,Gonstitutio.n vva'S:.. not considered' which is of vital importance to the present matter and thatthe High Court ought to have differentiated the two matters..'In reply, our attention was invited to paras 31 and32 ofthejudgmento.f.the., High Court inwhiph service aspect was distinguishe.d from the supply aspect. In our view, reliance placed;' by the High Comt.onFederatiojr of Hotel..and, •" Restaurant{i\9'&9) 3SCC;634': AIR4990 SC l537t: and, in particular,-on. the aspect theory is, therefore,,. •' apposite and should be upheld by this Court. Inview ' of this, the contention.ofthe appellant,on this.aspect. is not well founded... ! f.. • V; 1 •. Page36 of 5>; • •, 'v • It is well settled that the measure of taxation. •..,i • cannot affect the natLh-e'of taxation and, tlierefore, •; • >, the fact that service tax is ieVied as a percentage'of •.the-gross charges for catering cannot alter.or affect.. the legislative competence of.ParliaiTient;. in 'the';' matter." '. ^.; V ^ - - V. •. ••' 'i.'. • xxxx xxxx A,tax on services rendered by- niandap-keepers. and'- '; •; • outdoor caterers is in pith and- substance,' ata^-on • ', services and not a tax on sale of goods or on hire-'.;,; ',' • purchase activities. Section 65 clause (41) sub-claus,e /,.• ••ip) ofthe Finance Act, 1994;..defines taxable service;,;:; • ' ^(whiGh.is the subject-nmtter;of levy ofservice tax) as •• • ' • ^ny service provided to a.customer-by auiiandap- keeper in relation to the us.e of a mandap in any' -' '.'manner including--the., facilities provided to [a. ••. i,..;.customer] in relation tosuch use and also the.•, • "'j'services, if any, rendered-^S-a caterer:, ••. '• ',fhenature and'chafacte.i0fthis service tax is evident r •; 'torn the'fact that the traftfection between amandap-. i:lceeper and his customer i's definitely ndt in tlie nature •;: '. •' •' of a sale or hire-purchasi; of good's:. It is essentially that of providing a servibe. In fact, as,pointed out,. '• earlier, the mariner of service provided' assumes ', predominanpe over-.the providing of, food in such,•. situations which is a definite indicator,of the, • • supremacy ofthe service,aspect. Tile legislature in its, •• •, ••:,wisdom noticed the said' supremacy and identified, •• the same as a potential region to coillect indirect •,i taxes, Moreover, if has been a well-established. v"; judicial principle.that so long as, the legislation is;in,',.-, ' '• •.' 'substance,., on, a matter assigned to a.legislature •,, • enacting,.that statute, it.'must be held valid hi, its.• ' •,,. entirety even though.it may trench.-upon, matters/ • • • •; beyond its competence. Incidental encroachment; •,, 'does not invalidate such a statute on,the,grounds that,it is beyond the.competence of- the legisiatLire^; • • ', {Prafulla Kumar y. Bank of Commerce [AIR.1947 ?,,-., - PC 60: 74: lA.23]^:, Ai-ticle..246(1) of the • "v, ' '• Constitution specifies that Parliaraent ',has, exclusive. powers, to make laws with respect to any of tlie • matters enumerated in List,I in the Seventh Schedule -. • to the Constitution. As per..Article 246.(3), the. State -.,.,; • V;: -;;;, • • •• page37of5i': r; • •: • •..'v I -;,•••Government has exclusive",powers to make laws with ^ ^ ^ respect to matters enumerated in List ir (State Lis,t).'c:•; ••'In respect", of matters.'enumerated in List IlL'-'. • (Concurrent List) both Parliament- and- State- Governments have poy/ers to make laws.,The service., • " • "tax is.made by Parliament/under the above-residuary" •:; -. powers.";. _ 'The impugned Actwas.challenged on the ground that it infringed ontheState's power to levy tax on luxury;- • • •' • vide Entry 62-ofthe State List'^:29, In All India Federation ofTax Pmctioners & Ors.. Vs. Union '•:; „ • •• ofIndia hi 7(2007) -7 SCC 527;the..Supreme Court upheldlevy o£, '. service on^Chartered Accountants and;Architect! It was..observed^ that there was no distinction ofconsumption o± goods and con'suraptioil ' of service as both satisfy liunian.needs., Semce is an economic. • concept based;on the legal principle of equivalence which now starids..^' -. ^ '... incorporated in the Constitution by.the;86!'',amendment. Service tax,- • waraV&lue added tax or ageneral tax which applies to all commercial- v.,^" agtivitiesVinvolving,production of goods,-and provision of servipes.;... •, Reference was made to the•principles of equivalence:^d it Was;,• observed;' ' V'. | - ••.-, "35. For' each contract, tax is levied under the • • "' •; Finance kcts, 1994 and,199'8. Tax cannot, belevied • -..-T" '. • • ' '..under th^- Act without service.being' provided-r-. \ - • •,,v/hereas a professional tax under Entry 60 is atax"on"... his stMus. It is the tax.',on the-status of,a cost, - • ' •accountant-or a chartered accountant; As long as a • '., •, ' person/firm remains in the- profession," he/it has to',,pay professional tax. That tax has nothing to do.with _ - the commercial activities which,lie.undertakes "for:l;iis- -. ^ • " ' client. Even ifthe chartered accountant-has no woi'lc -,; throughout the accounting year,, ^till he has-.to pay'-,,-. ",. professional tax, He has to i^aythe.tax till he remauTS" - V;•, "..'v-;-; ': •' " '. 'PageSS-of Si ' in the profession. Tliis is the ambit.and- scope of.: • -Entry 60, List II which,:is.a,taxing entry. Therefore, ^. Entry 60 contemplates tax on professions; ^wc/i.... • • Enti[7] 60, ListII refers to "tax go employments".' • xxxx xxxx; •• 39. It was further observed.that, a: lawyer has to pay tax to take out a licence irrespective, of whether he actually practises or not;'^ That, tax is a tax'for the.-privilege of having,the; right to 'exercise. the '..profession if and when the pers[6].n taking o.ut the, licence chooses to do so. It- was. held that the. impugned tax on entertainment levied.by, the. Cantonment' Board was. a • tax. on' the act.: of. entertainment resulting-in a- show arid, therefore,-• the • - < Impugned law imposing tax. on entertaim-nent.fell. under Entry,30 ofthe.ProvincialList in Schedule;^!! to.,the,GOI Act," 1935 and not',under'Entry 46 (similar.to Entry 60 of List 11). Therefore, it was held that - Bombay-Legislature-had power, to enact the law' iipposing tax on entert.aihment which had nothing to do with-.the law imposirig tax' on the privilege, of, cai-rying. on any -profession; tradq or calling un.der-.- Entry 46 (similar to Entio;' 60 ofList II in the present.,, case), Therefore, thjs, -Court has.clarified -,the\ dichotomy between tax on- privilege of carrying oir.. any trade or calliiig-on one hand' and the tax on-the activity which an entertainer" undertakes on' each occasion. The tax' on, privilege,to practise, the professi(:Hi, thereforey;fa.lls,under Entry 60^ List H. If is quite different from tax on sen'ices. Keeping: inmind the aforestated dichotomy, it is clearthat tax on' -service- does not fall,under,-Entry '60,,List 11'. Therefore, Parliament has absolute'jurisdiction.,ai^d legislative competence to. enact the.iaw imposing tax on services under Entry 97,. List I of the Sfeventh.Schedule tothe Constitution.",.''-,, ' ' • I Psge.39 df.M • •• - -r-i'' '.s-: 30, IxiApociation ofLeasing.qjitdFmanctalServicer.CQmpa^i^s vs,- -;'j7«<Vn,[2] see-35?, the Supreme-G •• • difference between service tax and sales tax and other taxes, observing. '; that servicetaxis avalue addedtManddestinationbased.co%mptipn.. tax i,e. levied on commercial activitiesy but it is.not a charge pn.. •business,. but, on a. consumer. It is an ^economic.concept on the •.,/i •:;:priricipl^ gf'equiv^ence in the' sense thatconsumption of gopda and; •:cQijsumpU are similar/ Therefore, it: is atax.on activit^^ 'J •'/ i,e.:to-Yalue'^ added or the value addition,which:is made by a•. person prgviding services. Sometimes, the.dividing Ime b^len tte., •.sale, an^.,service niay b& very thin,, espBciahy in.-cases;where, value V ^•'additign:is'.%'.the goods manufactured, produced or sx5ld,.l^t liieie.is ^ 'distinatiQn^b^^ the two,. Service tax i^ atax on.activity whereas., ••'';^e§ is4tax'on sale,of goo& (2^A), itwa§.observed:. • 1'.. J'Scope ofArticle 366(29-4),

49. If one examines A'rtiele 366(29-A) carefully, • •• one finds that clause (29-A) provides for an inclusiye' • • ^ ' -definition pnd has two limbs..The firstlinib says |iat,:;.., • " • •.the tax on sale or purchase ofgoods includes atayon •' • • ••,ti-ansactions specified in -sub-clauses {a) to (J): The.,. • •- ' " "second limb provides that such transfer, deliveiy.o'l. - • ' supply of goods referred to.in.the fii;st limb shallTe-. deemed to be. a sale of,those goods,by the person,,,.., y-.•-^laking-the transfer, deh-y'ery or supply and purchase^... ofthose goods by the person,to vvhoip such trahsfei,,,. •. • • delivery or-,supply is- made. Now, ii\.K.L. Johar •

V. • •,ase [AIR 1965 SC 108,2.;- (1965>.[2] SCR. 112],^this.... 'Court'heid that the States.can tax hire-puichase, •..transactions resulting in sale but only to the extent.to,,,. • -Which, tax is levied- on the sale, pnee.. This led •, V-Parliament.to,say, in the Statement;of,0,bjects a.nd, • • - ' '; page.46of 5l. S.;' Reasons to the Amendment) Act, •Constitution (Forty-sixth "though-practically the purchaser in a hire-purchase, transaction gets the goods on the date of entering into; • the hire-purchase contract, it has'.been held,by-the'. Supreme Court mK.L. Johar case [AYR. 1965 SC.-. 1082; (1965),[2] SCR 112], that there is a. sale Only when the purchaser exercises the optionto purchase which is, at- a later -date- and therefore only the depreciated value of the goods involved in such, transaction at the- time the option is exercised,; becomes assessable to sales tax which position has resulted in avoidance of tax in various ways". • Thus, we find from tire Statement pf.Objects and • Reasons thatthe concept of "deemed sale" is brought in by the Constitution (Forty-sixth Amendment).Act only in the context of imposition ofsales taxand, that the words "transfer, delivery or. supply" of goods is referred to in the second limb of Article 366(29-A) to broaden the.tax base.and that as indicated in the • Report ofthe Law Commission prior to the judgment• of this Court in Gannon Dunkerley case [AIR 1958 SC560: 1959 SCR 379]', works contract was always taxed by the.States as part of the word" "sale";in. Entries 48/54 of List 11.. •, • Sd. The object behind enactment of Article 366"(29-A) is to tax the composite price so that the full valud of the hire-purchase price is taxed and.to avoid the judgm'ent in/C.Z. Johar case [AlR 1965 SC 1082: (1965) 2 SCR 112] whose implication was to narrow the tax base resulting in seepage of.sales tax, revenue. It is in that sense ^'splitting" of the contract, needs to -be unders^Dod. Thus, it cannot be said that Parliament divesteS itself of the power to.jeyy ' service tax vide enactment of the Constitution (Forty-, sixth Amendment) Act. Even in the Report of the Law Commission,' it has been observed that' "if a hire-purchase transaction results,in a sale, sales tax isundoubtedly"leviable by the States. No doubt, it is difficult,to determine the.'sale price' for the; purpose ofthe sales tax law but this has no bearing.• on the question oflegislative competence." (P. 26); 3h The contention of the petitioners that the impugned notificajtions, override the statutory provisions contained in Section 65(105), which defines the term "taxable service", Section 66, which it is claimed is a charging section, and Section 67, tile valuation provisions of the • l^inance Act, 1994, has to be rejected. We have, as already stated above, rejected the argument of the petitioners on bifurcation/vivisect and held that as per the provisions of Section 65(10,5)(zzq) and (zzzh), • service tax is payable and chargeable oh the service element of the contract for construction of industrial and commercial.complexes and' contract.for construction of complexes as specified and in case of a composite contract, the service element-should be •bifurcated-and •; ascertained and then taxed. The contention that the petitioners are paying sales tax or VAT on material in relation-to execution of the ^ contract under composite. contracts, for construction • of industrial/commerciar complexes'• and construction contracts as,,. specified under Section 65(105), (zzq) and (zzzh) therefore', fails. The contention that there was/is no valid levy or the charging se.ction.is not • apphcable to composite contracts under clauses (zzq) and (zzzh). of Section 65(105) stands rejected. But the petitioilers have rightly submitted that only the service co.nlpohent can-be brought to tax, as pef proyi.sions gf Section 67 which stipulates that value of taxable service. is the "gross amount charged" by the service provider for such services ' provided or to be provided by him and not the value of the goods provided by custoi^ers of service provider and the service tax caiinot be charged ©n the value of the goods used in the contract. Page,42 bf 5i, '. 'f: ' r'l; •v\32,'.Similarly, the contentw^ that'exemption notification could be^,, 'V''.:x:i§§ue4iunde^§ectipn-93-oftheTinaiice AcHirrespect of any'''taxable service'' deflned in-Section, 65(105), misses the legal position and has;.•' •••.. to be rejected. The notifications in questions, dated 10th September, - '.20:04, 7th June, 2O05.and lst March, 2006;granting exemption.of 67%:.•towards the value of the material used, for computing.the service tax;•. payable'ensure that the-service eleiirient is taxable. It.is.alternative.' to' an othei^ise subjective deteri&iation in. each case, •which' may be/'.. •cumbersoine and require a detailed examination for.ascertaiiTi'iient of. the service element • The -formula, prescribed is not, ma;hdatory or • compulsory,.Further, it will apply at the option of an assesee.,It will..•:"^bg-^appUcable, only when'the required parariieters.are met and is. not ^ \ - -.. illegal and.ultra vires:the Act, i.e. the Finance-Act, 1994;^.It is alsonot. y. 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 aconvenient, alternative, optional and hassle'.. - ' ' I '.l.fjpge..m^ payment, of service tax,:, provided'the' requiiements •mentloned-':% nQtifications are;satisfied.'•- While dealing, with '.a; -;. V.;,. •. 'I ="^.similaf'3itu^tion, the Suprerne Court in ' \ BuildemMsPciatwn ofIndm SC€ 1'83'.has - '.. ••^•.?\'QV§ei7e[4]:=^, '. •: v... ^... \,;!"The main ground upon which •the.'High' Court,,.,, ' •;-; ^'4has h^d sub-sections (7), and,(7-A).of Section 7.'I.;';';"; 'r. -; be void is that.they levy'tax attwo per cent o^,, ^ v'-' V'' '• ^ • •' • ' "the whSt &mouiit of the contract [sub-section:^ '. V ' (7)] oy ^,a particular.rate applied, to the.entire ' •,: value qI.contract.[siib-section (7-A)] -and•• not • \ • jnerely upon the value.ofthe goods.r.n-ansferred in - - ^ - „'.• ' ' the course of exeisution of the works.coiltfact as' •'.'.Mge 43 pf.5j •IV' i'/" • • • •: • •: -"i • I', - 'V ^ ••;... i "..•-'contemplated by sub-clliuse (b) of clause (29-A)-. •.• •' ^'in;|Article 366. The CqUrt- also npticed that the.•, •• ' goods which are translerred in the com-se of • execution of a.works contract may be "declared '..,, \•••goods"; they may be golds which are liable to be. •' taxed'Lmder tiie Centralfeales T.ax.Act, 1956/ithq..,....goods so transfen-ed may also be taxable mider • different •.Schedules to the Kerala Act which •prescribe different rates.. In.such a situation, it is •-^. •;held, levying tax on the entire, value of the ^ •;•,contract means' levy of •tax •contrary to the.'...provisions of the Central- Sales Tax-Act and the. •, •..ferala General Sales Tax Act. It also mea;ns, th^. •r- • /.Qqurt^held, takmg the non^taxable.components-of:; -, •:' • ' v.'vWQrks cori-fract, e.g„.labour and services etc. For;•.••, '.;,.•/all these reasons, it is held, the said' sub-sections ' •;:. -- • ai^e clearly beyond the legislative competence-of • •the. State Legislature.'With great respe,ct, we are •. iinable to agree. The first".feature to be npticed is that the.alternate method oftaxationprovided'by -,, ' ••^sub-section (7) or (7-A) ofSection 7 is optional.';:, The sub-sections expressly provide that the. method of taxation provided thereunder is,, '. /'3.pplicable only to a contractor 'vVho elects to be,... governed by the -said, alternate method of,.; taxation, -There is "no...compulsion •upon any • contractor tP opt for the, method of taxation •' provided by sub-section;(7;),oi: sub-section (7-A)-, •./i; •...It is wholly witlain the choice and pleasure ofthe,,.contractor': If he thinlcs it is beneficial for him to.••_ - ' •.,'.•30 opt,, "he- will opt; otherwise, he will be,,governed- by the normal method of- taxation provided by Section.'5(l)(iv). Sub-section (8);, • • ' provides that the option to come under subr^ \ ',-section (7),or (7-A) has to be exercised by the '• -:, contractor "either, by am express -provision in the-.';. •,.-.••agreement for.the contract or by an application to; -.. •'-,;•., the assessing authority to permit him to pay the;..-taji -in accordance •with any, of-the-said sub- • •;• ••.••'sections": In;5these circumst^ces, it is evident- •-•.. 'that a c@nti-a:ctor,who-'had,not opted to this,. 'alternate metliod of taxation" cannot complain. ^ •, • •,, -1 •.sn/' Ai w -v againstthe said sub-sections, for he is in-no way affectedby theiTi. Nor can the contractorwho has opted-to the said alternate method of taxation, • complain, Haying vokmtarily,-.and with the'full \ laiowledge of the features.ofthe alternate method -., of taxation, opted to be •governed• by it, a:.;;• eontractor camiot be ' heard to question the --; •; ' yalidity of the'relevant sub-sections or the rules.. ••.•;Svib-seGtions (8), (11) and (12) of Section'7 are.: ^ 'incidental and ancillary to sub-sections (7),and /. (T-A) and cannot equally be faulted. Secondly, it, is true that the goods transferred in the course of, •'•execution of.the- works / contract •may,be ••;-•••' •••.'chargeable at different rates, under, different,/ ••'-,,.•• •gchedule;? appended, to the Kerala 'Act; it may,- - ' •^••.alsQ be that some of them may be- "declai-ed.' •. • ••.•• igogds", the levy oftax upon which is.subject to;• ':'.• certain restrictions specified in. Seetidns..14 and r 'i'S ofthe' Central Sdes Tax Act; it^ may also-be ' ' ' that sale of some of the goods ma.y also be.- • ^. subject, to Central sales tax. It must yet be '.'remembered.that the- method of,•. taxation..introduGed by sub-sections (7) and (7-A) is in the.• •': • •••. natiire of' composition 'of tax payable under.- •^'./•-.giction 5(l)(iv). The impugned sub-sections.'..•,';'h£iye evolved, a Gonvenieht,. hassl.e-fi-ee, and:,,. • simple method ofassessment just as the system. •....pf.levy of entertaimnent tax on-; the gross., •collection capacity of the cinema theatres. By ' \ •i.••opting to this alternate method, the contractor.. saves hiruself the: botheration •of book-keeping,,,-. •. •.. assessment, appeals and all that it. means. Itis riot'. ".•'.necessaiy to enquire and.determine tlie extent,or...- •,. • yalue of goods which have been transferred in •....., !th? course of execution.of a vyprks contract, the,, •, rate applicable.to-them,and.so on..For example,. under sub-section (7), the contractor pays two per. •;; • ' cent of-the, total value ofthe contract'by way of • tax and he is done with^all the above-mentioned; •. botheration,; The rate o^/two. per cent.prescribed - • •;. ijpy subrsection (7) is far lower than the rates" in. •• ".Ichedules 1, 2- arid -5- refeixed.to. in.Secti.o.n •. ' S(l)(iv)(a), In short, sub-sections (7) and (7-A>'-.:; r.-, ' •. - Page.45.of 5.[1] •i--;. •" •.f,.; / i "••. 5K). •t" ••!••• (.,' •. • evolve a rough and ready method of assessment, pf tax, and leave it to.the contractor'either to opt. fpr it or be governed by the normal mediod." (Emphasis supplied) ' •. 33, When the charging provisions are attracted, question of computation or measure to compute tax would arise cind value of taxable service has to be determined. There is a well settled distinction between subject matter or •object of tax; and the measure- or computation ofthe tax imposed. The distinction between the two has to be kept in mind (see Gujarat Ambi^Ja Cements Ltd. Union of W/a AIR 2005 SC 3020). 34: A Division Bench of Andhra Pradesh High Court in Nagarjuna Construction Company Ltd. Vs. Union ofIndia, (2Q)\Q) 19 STR 321 (AP) had examined the three provisions which'are subject matter ofthe ^ present writ petition including 2007 Rules enacted under Section 94 of the Finance Act; After referring to the composition scheme stipulated- •in Rul§ 3 which is optional, it- was held that where a person has.exercised the option under Rule 3(3) of 2007 Rules, he vvillihave to; comply with the conditions stipulated therein. Further, disqualifrcation. -for exercise of such option where stipulated, is binding and camiot be ignored, 35,, The Supreme Court in Nagarjuna Construction Co. Ltd. vs.' Union ofIndia andAnr. (2013) 1 SCC 721, has.affirmed the:,decision ofthe Andhra Pradesh High Court. It has been observed thatRule 3(3:) of the Works Contract (Composition Scheme for Payment of'Service Tax) Rules,'2007 was lucid that the assessee Avho want to:a.vail the ' • Rage 46 of 51 r<, • • r' ' > •

1. M'/'.... ' "/s •Ijenefit, must opt to pay service tax in respect of the'works contract,: - / Ipefore. payment of service tax in j-esp^t of works and the;.option'.so =exercise(i is to be applied for all or entire works;.-contract of •: •the assessee and furtlier change of option will not be permitted; till the. •; • smd wQrl?§..contract are completed. The Supreme Court rejected the,, contention:of the assessee that they- should be allowed to opt for Rule -. 3(3) of the.'Rules, eyen if they hadpaid senace tax on works, contracts' ', prior to l?,'7uly, 2007, when the i-ule was enforced. The contention that., • th§. laile-was.discriminatory was;rejected on the.-gromd that the..•• classification based upon those already, paying sei-vice. tax on works • 'contract; and others,,was not illegal or,'contrary to Article••14..of the. Constitution.' The said decisio.ii takes care of the argument.and-. '' Qonterjtion'that the c.oritracto'rs providing-taxable seiidces' in nature' of, ' ''•completion.and finishing sei-vices"; are excluded from the nOtificatioii.. - '• Their.exclusion cmi be justified for thd reasbn that "completion and- •.finishing services", sometimes have a substantial 'element of "service", and only a limited amount/value is -paid foiVtowards m'aterial-Or,goods;. ' used, Their exclusion does not-mean or imply discrimuiation'as such -,.,,' contractors'- are to be taxed-only for the sei-vice element:in, works,. contract for "completion and fmishing sei-vices" andnot forthe goods-. or m^tenal used, 3,6, \ The aforesaid judgments and-'discussion highlight the,following-., feQets/principles;: -..: -i,..;.y, ^•;-ifl)After46"' Amendment to the Constitution, composit^-contracts -;; " '. can be bifyrQated to compute value ofthe goods sold/Supplied-ifa contracts -for Qohstrnqtioh' ofbuildings, with labotu- and material.'•... - 'Page 4.[7] of 51 'I •• 2013:DHC:6779-DB..J ••• ^ '•. •*., -'v • r / V, • • - ' ' • •. i' '( \ The service poi-tion of the edliipqsite^ eontraGts, can be made. subject matter of.' service, tax.. Aspect' doctrine •is.applied for bifurcating/vivisect the compdsfte.contract -. ^;^(2)Service;-to. can be levied on the service •component of any. •contract.-involying service with sale of goods etc:; Computation • of service component is a matter of detail.and riot.a matter ' •.1:61^1111:^0 Validity of imposition of service tax. It is procediirah:; and a matter ofcalculation. 'Merely;becaus[6], no rules are framed ' fbr CQliputatipn, itdoes not follow that ho tax is leviAble. ^j; (3)The notifications in question are iii alternative and optional. Anr •;• assegsee' may take advantage: or benefit: ofthe notifications, but • ^'oOTQi,be compelled to pay service-tax on the^proportion, o^ ••; valueriof a cqniposite.Qontfact' as. pen the notification.. This lis- '; ••• • because, the fbrrnula-framed by way of delegated, legislationjis: presumptuous and based on assurription. ! (4)However, ifa;n assessee wants,to take'benefit ofthe notificatidn, • • he. must comply' and/adhere to the/ terms and conditioris..'.'stiputo^ as per the notification, ' v;: j. /. •(5)An assessee tO. claim benefit or. advantage- as per:a.notification.: must meet the preconditions or stipulations statpd therein. All assessee.cannot take benefit or advantage •of:;a part of a.; • notifle^ion but ckim that-the- other'.-part•of'the •notification... ••• •' •' 'should be ignored and thus not acted upon. Notification has to:t^:;, appU§d iri entirety. " • r. '. 1 Page 48 bl.•;; • I • •T' (0Notification has to be read as a whole keeping; in •mind its objective and purpose. Notification ma}^ provide a convenient, • hassle free and adopt a non-discretionary formula-for comiDUting: value of the service element in a /composite contract.. This curtails litigation, ambiguity, ensures clarity and consistency;.A notification cannot be declared as invalid or ultra vires for this reason, provided it is optional.- (7) Authorities cannot compel and force an assessee tp accept'^the notifications in question and pay -tax accordingly,' as seeking • QQverage under the notification is voluntary. An assessee. can state that the service component of a composite contract should be computed in a fair and reasonable manlier aiid accordingly. (8)The notifications meet the tests laid down under Section 93 and. 94 sf the Act because they relate to manner and. mode.ofcomputation of service tax'in a composite 'Contract. -The objecjt. and purpose is not to. tax as non-service element or to include ' non=taxabIe part ofthe composite contracts. (9)It has not been shown and established that the formula or! the value prescribed in the notifications is absurd or irrational. The said' notifications are- not per se an arbitrary exercise,and contrary to. data of formula for computing service element.; ha taxation matters, classification should not be struck down a.s' discriminatory unless there are strong and compelling reasons ", P'age'49,of 53: V #, •• that show absurdity and, therefore, v.iolation,of Article'14,ofthe ' Constitution. • •; • ': 37.[1] ifcearagd' cou^§el for the.: petitioners have, relied;• upon tWo, judgments of this./ Court,• in Gdmultants -\Ar TechnQcrats Pvt. Ltd. Vs. Union, ofIndia 20,13. (29) STR 9.(Del.)-and. JDeUti Chit-Fund Association Vs.iUnion ofIndia, 20i3'p0)' STR;47' (Del), The.'Said judgments have.no application' to the facts of:.the present: case, ' In the case • Intercontinental C()nmitants \&^ Technogrdts Pvt. Ltd (supra) ifwas held that'the Rule in question-was beyond the-scope and.ambit of the charging section of the main' enaQtment,.,The quantification.^of the value /of-service.can hever "exceed, what. Qan be brought to charge.. The- said jud'gment has iio,- •application as the notifications are not beyond.and do-not:extend the scope of the' charging section. "An asse.ssee need not seek and can; reject the option available under the notifications and can claim and: opt before the; authorities that he.:sh'ou!d not, be taxed on'the basis pf,.quantification or measure which-is mentioned, in the'notifications, but,on the basis Qf seryiQe component which may be.calculated/computed. • Thus, the nQtlficatioiiLS do not seek to overwrite and expand its scope:' and are not beyond the charging, section..Similarly, in Delhi Chit Fund Association (supra),.a:Division B.ench of this.Gpurt.examined • the-VstatutQry='- provision and. came to the: conclusion, that, the. trarisaetioiri/lifeiM.ce -in. questiori Was; exempt and thus,. the noti-fication.issued was. contrary•to.the •principal enactment as it taxed servic'es, beyond the chap.-ging section. The notiiication.-vvas accordingly struck dOWHi The said decisignhas no application.-;....j • |.. Page 50 of pi":'• _i4i nv r! • 38. In view oftlie aforesaid discussion, we do not fmd any merit in the present writ petitions and the same are dismissed-but with the obseiTatiQn and finding'recofded above. No costs.. November (3,2013 Kkb/NA/VICR JUDGE. Page '51of5i I