This Tax Alert gives an update on the decision 1 of the five member Larger Bench of the Delhi Tribunal.

Transcription

1 25 March 2015 EY Tax Alert Delhi Tribunal (Larger Bench) rules by way of majority decision that service element in works contract would be subject to Service tax even prior to the introduction of Works Contract Service w.e.f. 1 June 2007 Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert gives an update on the decision 1 of the five member Larger Bench of the Delhi Tribunal. The issue referred to the Larger Bench was regarding the taxability of service component in a composite contract, involving supply of goods and rendition of services, prior to 1 June 2007, when works contract service was introduced by way of insertion of sub-clause (zzzza) in Section 65(105) of the Finance Act, Out of the five members, the President and the Judicial member concluded that such a composite contract cannot be vivisected so as to make the service components in the works contract subject to Service tax prior to 1 June The service component in works contract is to be made taxable only under Works contract service which was introduced w.e.f. 1 June The other three Technical members vide distinct orders concluded to the contrary. It was held in view of the majority decisions (3-2), that service element in a composite contract could be made liable to Service tax prior to 1 June 2007 as well, if these are appropriately classifiable under Commercial or Industrial construction services, Construction of Complex services or Erection, Commissioning or Installation services VIL-147-CESTAT-DEL-ST-LB

2 Background During the period from 2004 to 2007, the assessees had undertaken certain turnkey contracts. Works contract services (WCS) were introduced as a taxable service only w.e.f. 1 June 2007, by insertion of subclause (zzzza) in Section 65(105). Prior to 1 June 2007, services such as Commercial or Industrial Construction Services (CICS), Construction of Complex Service (COCS) and Erection, Commissioning or Installation Service (ECIS) were specified as taxable services. The issue before the Tribunal was whether the composite contract can be vivisected, so as to make the service component therein subject to Service tax prior to 1 June The Tribunal noticed a conflict between Larger Bench (three members) decisions in the cases of Jyoti Ltd. 2, Indian Oil Tanking Ltd. 3 And BSBK Ltd. 4 Act, 1994 w.e.f 1 June 2007, was also taxable prior to 1 June 2007? In this background, it may also be noted that the Delhi High Court, on two occasions, had dealt with the same matter in the case of G.D. Builders 5 and YFC Projects 6, and had taken a view that works contract can be vivisected and discernible service elements could be subject to Service tax even prior to 1 June The decision to constitute a Larger Bench (five members) was earlier disputed by the Revenue before the Delhi High Court on the ground that the issue referred to the Larger Bench was already resolved in the case of G.D. Builders. Accordingly, the High Court passed an order observing that the Larger Bench (five members) can examine the facts as a preliminary issue as to whether the question raised is covered by the G.D. Builders case, and if it is covered, then the matter can be closed. In the case of Jyoti Ltd. and Indian Oil Tanking Ltd. it was held that WCS is not leviable to Service tax prior to 1 June However, in BSBK case, a contrary view was taken and it was held that a works contract can be vivisected and discernible service elements can be subjected to Service tax prior to 1 June 2007, provided the services involved are taxable services. In view of the conflicting decisions, the matter was referred to Larger Bench of five members. Majority order The Technical members of the Bench held that the ratio decidendi of the G.D. Builders case stands uncontroverted and therefore, it is binding on all subordinate courts, including the Delhi Tribunal (irrespective of the strength of the Bench). Only a Court of a higher status can set aside the said decision. Even a Court of equal status, if it wants to disagree with the decision, should refer the matter to a Larger Bench. Thus, the issue for consideration for the Larger Bench (five members) was whether the activity of civil and industrial construction and erection, installation and commissioning, although taxable as works contract service under Section 65(105)(zzzza) of the Finance It was observed that the High Court, in the case of G.D. Builders, had examined the issue in depth, analysed the provisions of law, considered the binding precedents and thereafter passed a detailed order. The ratio laid down in this case was also followed by another bench 2 Jyoti Ltd v. CCE; 2007-TIOL-2337-CESTAT-AHM 3 CCE v.indian Oil Tanking Ltd; 2010-TIOL CESTAT-MUM 4 CCE v. BSBK Ltd; 2010-TIOL-646-CESTAT-Del-LB 5 G.D. Builders & Ors. Vs. UoI & Anr. [2013 (32) STR 673] 6 YFC Projects (P) Ltd. Vs. UoI [2014 (44) gst 334/43 taxmann.com 219 (Delhi)]

3 of the Delhi High Court and by several benches of the Delhi Tribunal, including a Larger Bench. Thus, the contention of the assessees that the G.D. Builders decision was given by way of a concession cannot hold good. Similarly, the contention of the assessees that the decision in case of G.D. Builders should be considered as per incuriam in as much as several decisions which should have been placed before the High Court were not so placed, was also considered. However, it was concluded that the decision in G.D. Builders case was neither passed inadvertently nor in ignorance of judicial precedents on the subject matter as the Delhi Court had concluded on the case only after examining the ratio decidendi in 14 decisions (including 11 Supreme Court decisions). The assessees had advanced an argument that the G.D. Builders decision cannot be considered as final and binding, in view of the conflicting decisions of the Karnataka and Madras High Court on similar issues in the cases of Turbotech Precision Engineering 7 and Strategy Engineering 8. However this argument was rejected by the members, as these cases were distinguishable on basis of facts. It was observed that these cases did not deal with the issue of vivisection of works contract at all. The members also considered the contention that in absence of a machinery provision for valuation of service element in a composite contract, levy of Service tax on the service element therein, is not legally tenable. However, it was observed by the members that Section 67 itself provides the measure of levy. Further, several exemption notifications have been issued by the Central Government under Section 93, providing for abatement of the taxable value of specified services (like CICS, COCS and ECIS), so as to exclude the value of goods from the gross amount charged for such service contracts. Thus, the view that prior to 1 June 2007, Service tax could not be levied on the service element in a works contract in the absence of machinery provision for determining the value of service, is not correct. Thus, the view of three members (Technical members) of the Bench was that the issue referred to the Larger Bench was fully and squarely covered by the G.D. Builders case and consequently, it has to be held that a composite works contract can be vivisected and discernible service elements therein can be made liable to Service tax even prior to 1 June 2007, provided such elements are declared as taxable services. It was also concluded that reliance cannot be placed on the Finance Minister s speech to argue that works contract is leviable only w.e.f. 1 June Relying on several judicial precedents 9, it was observed that the statutes have to be interpreted on the basis of language used by the legislature and not on the basis of the Finance Minister s speech. 7 CST vs. Turbotech Precision Engineering Pvt. Ltd. [2010 (18) STR 545 (Kar.)] 8 Strategy Engineering Pvt. Ltd. Vs. CCE [2011 (24) STR 387 (Mad.)] 9 Doypack Systems Pvt. Ltd. Vs. UoI [1988 (36) ELT 201 (SC)]; CCE, Salem vs. Subramania Siva Co-op Sugar Mills Ltd. [2014 (35) STR 500 (Mad.)] Minority order The President and the Judicial member observed that even after the introduction of WCS as a taxable service w.e.f. 1 June 2007, the existing services such as CICS, COCS and ECIS were neither repealed nor excluded from the list of taxable services. Thus, had the scope of CICS, COCS and ECIS also included rendition of services in works contracts, then there would have been no need for the insertion of sub-clause (zzzza) for WCS, while continuing with the existing provisions. Also, Rule 2A, which was inserted in the Service Tax (Determination of Valuation) Rules, 2006 (2006 Rules), w.e.f. 1 June 2007, is applicable exclusively for works

4 contract. It mandates specified exclusions /deductions from the gross amount received on account of works contract, in line with the principles laid down in the Gannon Dunkerley 10 ruling. Further, Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 (2007 Rules) were introduced w.e.f. 1 June 2007 which enabled the assessee to pay Service tax at a certain percentage of the gross amount charged for works contract. Thus, the insertion of sub-clause (zzzza) for WCS, supported by the 2006 Rules and the 2007 Rules (which were introduced simultaneously), brought in the requisite and statutory framework for charging, levy, collection and assessment of Service tax on the service element in composite contracts. Prior to 1 June 2007, neither the provisions of the Finance Act, 1994, nor any rule made thereunder nor any of the exemption notifications issued under Section 93, indicated how the value of goods used in execution of works contract, is to be arrived at for applying deductions. As regards the decision in the case of G.D. Builders, it was observed that the conclusions arrived at in this case, were contrary to the settled and binding expositions of relevant principles qua precedents. Hence, the members concluded that G.D. Builders decision was in error on per incuriam and sub silentio grounds. Thus, it was concluded by two members of the Bench (President and the Judicial member) that a works contract is defined, charged and subject to levy of Service tax only w.e.f. 1 June It cannot be vivisected so as to make the service element therein subject to Service tax by classifying it as CICS, COCS or ECIS. The service component in works contract is taxable only under WCS which was introduced w.e.f. 1 June Final order In view of the majority opinions, it was held that the service element in the execution of works contract, is subject to Service tax, even prior to the insertion of sub clause (zzzza) in Section 65(105) on 1 June 2007, provided that such services are classifiable as CICS, COCS or ECIS. Comments Though this decision relates to the period prior to 1 June 2007, it would adversely impact all the pending litigation in respect of identical matters. It is relevant to draw a distinction between the contracts which are of divisible nature - as was the admitted position in BSBK case and the ones which are of indivisible nature and for lumpsum value. The Supreme Court had an occasion to deal with a similar issue in Daelim Ltd. s 11 case, where it upheld the Tribunal s decision in favour of the assessee. It is important to note that the Tribunal decisions in the cases of Jyoti Ltd. and Indian Oil Tanking, have been challenged by the Revenue before the Supreme Court. The decision is still awaited. The verdict of the Apex Court would finally resolve the disputes relating to taxability of composite works contracts entered into prior to 1 June Gannon Dunkerley & Co. & Ors. Vs. State of Rajasthan & Ors. [1993 (088) STC 0204] 11 Commissioner vs. Daelim Industrial Co. Ltd. [2004 (170) ELT A181 (SC)]

5 Our offices Ahmedabad 2nd floor, Shivalik Ishaan Near. C.N Vidhyalaya Ambawadi, Ahmedabad Tel: Fax: Bengaluru 12th & 13th floor U B City Canberra Block No.24, Vittal Mallya Road Bengaluru Tel: Fax: Prestige Emerald, No. 4, 1st Floor, Madras Bank Road, Lavelle Road Junction, Bangalore Chandigarh 1st Floor SCO: Sectr 9-C, Madhya Marg Chandigarh Tel: Fax: Chennai Tidel Park, 6th & 7th Floor A Block (Module 601, ) No.4, Rajiv Gandhi Salai Taramani Chennai Tel: Fax: Hyderabad Oval Office 18, ilabs Centre, Hitech City, Madhapur, Hyderabad Tel: Fax: Kochi 9th Floor ABAD Nucleus NH-49, Maradu PO, Kochi Tel: Fax: Mumbai 14th Floor, The Ruby 29 Senapati Bapat Marg Dadar (west) Mumbai Tel Fax th Floor Block B-2, Nirlon Knowledge Park Off. Western Express Highway Goregaon (E) Mumbai Tel: Fax: NCR Golf View Corporate Tower B Near DLF Golf Course, Sector 42 Gurgaon Tel: Fax: th floor, HT House Kasturba Gandhi Marg New Delhi Tel: Fax: th & 5th Floor, Plot No 2B, Tower 2, Sector 126, Noida Gautam Budh Nagar, U.P. India Tel: Fax: Pune C 401, 4th floor Panchshil Tech Park Yerwada (Near Don Bosco School) Pune Tel: Fax: Ernst & Young LLP EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata Ernst & Young LLP. Published in India. All Rights Reserved. ED None This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Kolkata 22, Camac Street 3rd Floor, Block C Kolkata Tel: Fax: EY refers to global organization, and/or one or more of the independent member firms of Ernst & Young Global Limited Join India Tax Insights from EY on