Contract involving both supply of raw material and provision of service is works contract taxable from 01.06.2007

Vrutika Enterprise Vs Commissioner of Central Excise & ST (CESTAT Ahmedabad)

CESTAT Ahmedabad held that single invisible contract involving supply of raw material and construction activity is classified under works contract hence taxable only from 01.06.2007. However, in case of divisible works contract clearly defining value of service portion and raw material is classifiable under ‘Commercial and Industrial Construction’ prior to 01.06.2007.

Facts- On the basis of an intelligence, enquiry was conducted against the appellant who were engaged in providing “Commercial or Industrial Construction” service falling u/s. 65(105)(zzq) of the Act. On the basis of investigation, it was found that during the period 2004-05 to 2008-09, the appellant had failed to pay the service tax for the services of “Commercial and Industrial Construction” provided to various customers and accordingly the demand of Rs. 2,12,91,371/- was made vide show cause notice dated 23.10.2009 which has been confirmed vide the impugned order.

Conclusion- We find adjudicating authority has not correctly examined the classification whether the impugned goods fall under the category of “Commercial or Industrial Construction” or “Works Contract” during the relevant time. Hon’ble Apex Court in the case of 2022 (63) G.S.T.L. 257 (S.C.) TOTAL ENVIRONMENT BUILDING SYSTEMS PVT. LIMITED vs. DEPUTY COMMISSIONER OF COMMERCIAL TAXES has held that prior to 01.06.2007, service tax levy was applicable to service contracts simpliciter and not to indivisible works contract which contained both the elements of transfer of property in goods as well as labour and services and same were brought under the service tax net for the first time on 01.06.2007.

As regards admissibility of benefit of cum-tax value for determination of assessable value, we are of the considered view that where the appellant has not issued a taxable invoice, andthe services have been held to be taxable later-on as a result of investigation, the gross value charged by the appellant has be considered as “cum-tax value” under rule 67(2) of the Act.

Further, held that TDS is nothing but part of the taxable value which comes back to the service provider in terms of the income tax deposited by the recipient. Thus the same is taxable and shall be part of the “gross amount charged” as given in explanation (c) to Section 67 of the Act.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

1. The appellant has filed this appeal against the impugned order vide which Ld. Commissioner, Customs and Central Excise, Rajkot has confirmed a demand of Rs. 2,12,91,371/- under proviso to Section 73(1) of the Finance Act, 1994 (herein after referred to as “The Act”) with interest under Section 75 and imposing penalties under Section 78, 76 and 77(2) of the Act.

2. Briefly stated facts of the case are that on the basis of an intelligence, enquiry was conducted against the appellant who were engaged in providing “Commercial or Industrial Construction” service falling under Section 65(105)(zzq) of the Act by the Officers of Head Quarters Preventive Unit, Central Excise Commissionerate, Rajkot. On the basis of investigation, it was found that during the period 2004-05 to 2008-09, the appellant had failed to pay the service tax for the services of “Commercial and Industrial Construction” provided to various customers and accordingly the demand of Rs. 2,12,91,371/- was made vide show cause notice dated 23.10.2009 which has been confirmed vide the impugned order. The details of the demand confirmed are mentioned in the table below:-

3. It has been held in the impugned order that the appellant charged and collected Service tax amounting to Rs. 63,34,748/- from M/s. Suzlon Infrastructure Limited during the period from 2006-07 to 2008-09 and Rs. 79,39,987/- from M/s. Suzlon Infrastructure Services Limited during the period from 2007-08 to 2008-09 but failed to deposit the same in Government account. The appellant had not collected and paid Service tax leviable on the services provided to M/s. Vyavsayi Vidya Pratishthanam, Rajkot, M/s. Rajkot Nagrik Sahakari Bank Limited, Rajkot, M/s. Tanna Cranktech Pvt. Limited Rajkot, M/s. Precision Industrial Component, Rajkot and M/s. Sevabharti, Ahmedabad.

4. The appellant had made the following submissions during the course of adjudication proceedings:-

(i) The services provided by them are classifiable under three different services i.e. (a) Service provided by them to M/s. Rajkot Nagrik Sahkari Bank Limited, M/s. Tanna Cranktech Pvt. Limited and M/s. Precision Industrial Component are classifiable under the “Commercial or Industrial Construction” as defined under Section 65(30a) and 65(25b) read with Section65(105)(zzq) of the Act; (b)Service provided by them to M/s. Suzlon Infrastructure Limited and M/s. Suzlon Infrastructure Service Limited are classifiable under the category of “Erection, Commissioning or Installation” service under Section 65(105)(zzd) Act, in addition to “Commercial or Industrial Construction” service;(c) Service provided by them are also classifiable under the category of “Works Contract” under Section 65(105)(zzzza) of the Act. That services provided to M/s. Suzlon Infrastructure Limited, Pune and M/s. Suzlon Infrastructure Services Limited merit classification under all the aforesaid three categories. However, they agreed with the classification under the category of “Commercial or Industrial Construction” for services provided by them to M/s. Suzlon Infrastructure Limited, Pune during the period2006-07 to 2008-09 and services provided by them to M/s. Suzlon Infrastructure Service Limited during the years 2007-08 and 2008-09 (upto25.8.2009) but they do not agree to classify the services provided by them to the said firm during 2008-09 (with effect from 25.08.2008 but incorrectly mentioned in reply as 25.08.2009) under the category of “Commercial or Industrial Construction” service. They wish to classify the service under the category of “Works Contract” as per the invoices raised by them during the period and charge/collect the Service tax @ 4.12%. The appellant has submitted that the services provided to both the above named companies were under different contracts executed from time to time; that the levy of tax is service specific and not person specific; that each service have to be classified under appropriate category suitable to the service provider on contract to contract basis; that therefore, if the service provider wish to classify his service under one of the categories and avail benefit of Cenvat or Notification granting partial exemption or full exemption subject to condition or conditions of Notification, it is upto him to choose whichever is more beneficial to him for a particular contract and service. That, they wish to pay Service tax at full rate applicable from time to time for the receipts during the period 2006-07 and 2007-08 under the category of “Commercial or Industrial Commercial” service for the services provided to M/s. Suzlon Infrastructure Limited and M/s. Suzlon Infrastructure Service Limited and avail CENVAT credit on inputs and input services. The Service tax payable by them on account of services provided by them to M/s. Suzlon Infrastructure Limited and M/s. Suzlon Infrastructure Service Limited is not computed in a correct manner in the show cause notice; that they have made fresh calculation of Service tax payable @ 67% of the receipts and by applying cum-duty principle to the amount received against 9 invoices raised on M/s. Suzlon Infrastructure Limited, Pune where they issued invoices by claiming this abatement. They had purchased cement and steel for use as input for providing the services to M/s. Suzlon Infrastructure Limited and M/s. Suzlon Infrastructure Service Limited and they may be permitted to take Cenvat credit on the inputs, capital goods and input services during the period 2006-07 and 2007-08 once they have agreed to pay Service tax at full rate without claim of any abatement under any of the Notifications. They have further submitted that Service tax is demanded on 2 invoices bearing Nos. Extra 10 &11 / Suz/ Kadoki/06-07 both dated 15.3.2007 under the category of “Commercial or Industrial Construction” service in spite of the fact that both the invoices were raised for use of JCB and tractors on rental basis; that such service is “supply of tangible goods for use” service, which came into effect from 16.5.2008 cannot be considered as taxable under the category of “Commercial or Industrial Construction” service; They have further submitted that benefit of concessional rate of duty under the category of Work’s contract may not be denied on account of procedural or technical lapse on their part involved in failure to take registration under the Work’s contract category and non-fling of contract with the Department, particularly, when they ‘were already registered under one of the categories and had also submitted copy of the contract to the Department at a later stage.

(ii) With regard to their taxability towards services provided to other parties, they have submitted that they have re-calculated Service tax on receipt basis by taking the receipts in respect of service rendered after10.9.2004 and by applying abatement as provided under Notification Nos. 15/2004-S.T., dated 10.9.2004 and 1/2006-S.T., dated 1.3.2006 for the years 2004-05 and 2005-06 after adding the value of raw material supplied by the recipient and also by applying the cum-duty principle. On this basis, they have submitted that their Service tax liability comes to Rs. 18,223/- and Rs. 1,25,357/- for service provided by them to M/s. Rajkot Nagarik Sahkari Bank Limited during the years 2004-05 and 2005-06 respectively. They have also submitted that they were not liable to pay Service tax on the amount of Rs. 3,000/- (Entry No. I of Annexure-“E” to the show cause notice) as the same related to service provided for the period prior to 10.9.2004. They have further submitted that service provided by them to Vyavsayi Vidya Pratishthan (VVP), Rajkot and Sevabharti, Ahmedabad for construction of VVP Engineering College and Saraswati Shishu Mandir School building at Paddhari are not covered under the “Commercial or Industrial Construction” service as both these buildings were not meant for any commercial or industrial purpose. In support of this plea, they have relied upon Board’s circular No. 80/ 10/2004-S.T., dated 17.9.2004. With regard to demand of Service tax on service provided to M/s. Tanna Cranktech Pvt. Limited, they have submitted that they have recalculated Service tax on receipt basis on amounts received in respect of service provided after 10.9.2004 by applying abatement provided under Notification Nos. 15/2004-S.T., dated 10.9.2004 and 1/2006-S.T., dated 1.3.2006 for the years 2004- 05, 2005-06 and 2006-07. According to them, their Service tax liability for the years 2004-05, 2005-06 and 2006-07 comes to Rs. 20,770/-, Rs. 3,48,129/- and Rs. 28,107/- respectively at full rate after applying the cum-duty principle. They have further submitted that they are not liable to pay Service tax on the first two entries of Rs. 4.0 lakh as the same pertains to the services provided by them prior to 10.9.2004 (Bill No. 6 dated 22.09.2004) and further, the amount shown in the invoice is taken twice for computing the demand. With regard to demand of Service tax on service provided to M/s. Precision Industrial Component, Rajkot, they have submitted that they have re-calculated Service tax on receipt basis on amounts received in respect of service provided after 10.9.2004 by applying abatement provided under Notification Nos. 15/2004-ST dated10.9.2004 and 1/2006-ST dated 01.03.2006. According to them, their Service tax liability comes to Rs. 6,567/- after applying the cum-duty principle. They have further submitted that benefit of Notification No. 15/2004-ST, dated 10.09.2004 and 1/2006-S.T., dated 1.3.2006 cannot be denied to them. They have further submitted that during the period from 10.90.2004 to 28.2.2005, there was no condition to include value of goods and materials supplied or provided or used by the provider of construction services; that Notification No. 15/2004-ST dated 10.9.2004 was amended by Notification No. 4/2005-ST dated 01.03.2005, whereby, explanation to the effect that ‘gross amount charged’ shall include the value of goods and materials supplied or provided or used by the provider or the construction service for providing such service, was inserted; that as this explanation was 3 absent during the period prior to 01.03.2005, there was no legal requirement for inclusion of the value of goods and materials supplied or provided or used by the provider of services during the said period. They have further submitted that value of raw material supplied by the recipients of service is not includible in the value of taxable services. In support of this plea, they have relied upon the

(iii) They have further submitted that as per show cause notice, they have not collected and paid Service tax on the service provided to M/s. VVP, Rajkot, M/s. Rajkot Nagrik Sahakari Bank Limited, Rajkot, M/s. Tanna Cranktech Pvt. Limited, Rajkot, M/s. Precision Industrial Component, Rajkot and M/s. Sevabharti, Ahmedabad. Therefore, demand of Service tax is required to be re-computed by applying the cum-tax principle. They have also submitted that simultaneous invocation of Section 73 and 73A of the Finance Act, 1994, by invoking extended period of limitation is not tenable in the eyes of law. They have also submitted that demand of Service tax shown in Annexure-“B” to “I” of the show cause notice by invoking extended period is not sustainable in the eyes of law as the appellant had already filed returns in 2006-07 and the activity of the appellant was already in the knowledge of the department. They have also paid Rs. 85.0 lakh during the course of investigation. They have further submitted that simultaneous penalty under Section 76 and Section 78 of the Finance Act, 1994 is not sustainable. They have further submitted that they are not liable for penalty under Section 77 of the Finance Act, 1994.

5. We find that in the impugned order, Ld. Commissioner has denied the Cenvat credit as claimed by the appellant on the ground that the appellant did not declare the same in their returns and as such the department did not have opportunity to verify the same. That the appellant have not cited any legal provision and any evidence on the basis of which the amount being claimed as Cenvat credit can be claimed. Merely by submitting some figures the appellant cannot claim Cenvat credit, which was neither accounted for in any record nor declared in the periodical returns that they were required to file in accordance with the statutory provisions governing the Cenvat credit scheme. Therefore the same cannot be directly adjusted against the demand of Service tax that was evaded by them for the period from 2004­05 to 2008-09 (up to 31.12.2008).Thus, at the material time, they did not give any opportunity to the Department to carry out any verification in this regard. Therefore, unless and until it is shown that the statutory provisions allow them the to avail the Cenvat credit as per law and by accounting the same in the prescribed manner and making the statutory declarations in Conformity with the prescribed limit are complied with, the claim for Cenvat credit that is made entirely on the basis of exhibits that were submitted in response to demand of Service tax which the appellant was busy evading during the entire period covered by the show cause notice does not merit any consideration . Regarding option to avail the classification of works contract services with effect from 25.08.2009, it was mentioned that the demand itself was upto 31.12.2008, therefore the same could not be applicable. Regarding two invoices bearing Nos. Extra 10 & 11 / Suz/ Kadoki/06-07 both dated 15.03.2007 under the category of “Commercial or Industrial Construction” service in spite of the fact that both the invoices were raised for use of JCB and tractors on rental basis, it has been mentioned in the impugned order that the copies of invoices produced are dated 8.6.2007 & 10.06.2007 and not 15.03.2007, therefore they do not support the claim of the appellant. The deduction on account of TDS has not been allowed as those were considered to part of the assessable value. The claim of abatement with regard to construction service provided to M/S Rajkot Nagrik Sahkari Bank Limited has been denied on the ground that the appellant did not provide any documentary evidence to establish the correctness of their claim with regard to the value of raw material claimed as received by them from the recipient of service. The claim of the appellant with respect to the service provided to Vyavasayi Vidhya Pratisthan (VVP), Rajkot and Sewa Bharti, Ahmedabad for construction of VVP Engineering college and Saraswati Shishu Mandir has been denied on the ground that both the recipients could not be considered as non-commercial undertakings as they were charging fees from the students for imparting education as those could not be considered that those were not for the purposes of profit. Further, claim of the appellant to avail abatement from the value in terms of Notification 15/2004-ST dated 10.09.2004 and notification 1/2006-ST dated 01.03.2006 was rejected on the ground that the above notifications were subject to the conditions that no Cenvat credit has been availed and value of raw materials sold to the recipient should not have been excluded from the assessable value. It was further held that the claim of the appellant that they were not liable to pay tax on amount of Rs. 800000/-received from M/s. Tanna Cranktech Pvt. Limited as the service was provided prior to 10.09.2004i.e. prior to the levy of service tax on construction service and that the amount has been computed twice cannot be accepted as the invoice produced for the same runs into print out taken on 5 plain papers and does not bear the name of M/s. Vrutika or any signatures of any person representing M/s. Vrutika and none of these papers bear Sl. No. 6 and date as 22.9.2004 and therefore, the claim made by M/s. Vrutika is unsubstantiated. With regard to appellants’ claim to consider extending cum-tax benefit it has been held that that the appellant has mentioned that they had not collected and paid the Service tax leviable on the services provided by them to M/s. Vyavasayi Vidya Pratishthan, M/s. Rajkot Nagrik Sahakari Bank Limited, M/s. Tanna Cranktech Pvt. Limited, M/s. Precision Industrial Component and M/s. Seva Bharti; that the above provision would apply only where it is shown that the gross amount charged by the service provider is inclusive of service tax payable. M/s. Vrutika have not provided any documentary evidence in the form of contract, invoice, etc. showing that the amount charged by them from the above named service recipients was inclusive of service tax payable. Further, it has been held that provisions of Section 73A and proviso to Section 73(1) of the Act can be simultaneously invoked as Section 73A can be invoked for the reason that the appellant has collected the amounts from the recipients and not paid to the Govt. and further section 73(1) can be invoked for the reason that they neither filed any returns nor paid applicable Service tax of for these years. These facts clearly establish the malafide intention of the appellant and mere act of taking registration and filing isolated returns cannot act as any mitigating factor and provide a shield against invocation of extended period in accordance with the proviso to Section 73(1) of the Finance Act, 1994. That decision in the case of M/s. Avenue Regent, 2010 (17) STR 284 (Tri. Bang.) was not applicable as this decision was rendered on a completely different footing inasmuch as it involved reclassification of the service provided by the applicant as convention services where they had taken the registration under Mandap Keeper and filed returns annually. In stark contrast, in spite of having taken the registration under construction service, M/s. Vrutika neither filed returns nor paid Ser-vice tax for over five years, except for one year, i.e. 2006-07 for which they filed false returns and paid Service tax of Rs. 4,18,679/- against their liability of Rs. 60,61,386/- for the said year and against the total liability of Rs. 2,12,91,371/- for the period from 10.09.2004 to 31.12.2008 covered by the show cause notice. Thus, no parallel can be drawn between the decision relied upon. That, the facts of the case clearly establish that M/s. Vrutika deliberately evaded payment of Service during the period covered by the show cause notice and therefore, extended period is rightly invoked against them for demanding the same.

6. Ld. Advocate Sh. PD Rachchh appearing on behalf of the appellant has reiterated all these submissions during the course of personal hearing. Besides, he further stated that they have deposited Rs. 85,00,000/- during the course of investigation. On the other had learned Authorised Representative of the Revenue has reiterated the findings in the adjudication order.

7. We have carefully gone through the rival arguments. We find adjudicating authority has not correctly examined the classification whether the impugned goods fall under the category of “Commercial or Industrial Construction” or “Works Contract” during the relevant time. Hon’ble Apex Court in the case of 2022 (63) G.S.T.L. 257 (S.C.) TOTAL ENVIRONMENT BUILDING SYSTEMS PVT. LIMITED vs. DEPUTY COMMISSIONER OF COMMERCIAL TAXES has held that prior to 01.06.2007, service tax levy was applicable to service contracts simpliciter and not to indivisible works contract which contained both the elements of transfer of property in goods as well as labour and services and same were brought under the service tax net for the first time on 01.06.2007. The relevant paras of the judgment are reproduced below:-

“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 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 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 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, 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 sub­heads 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 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. 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 D. Builders (supra) went on to quote from the judgment in Mahim Patram Private Limited v. Union of India, 2007 (3) SCC 668 = 2007 (7) S.T.R. 110 (S.C.), 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 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 :-

“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 :-

“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 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) Limited 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 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 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, 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 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) Limited 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 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. Collector of Central Excise & Customs, judgment dated 29th July, 2015, in Civil Appeal No. 5802 of 2005 = 2015 (322) E.L.T. 372 (S.C.), 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 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 Jharkhand Voltas Limited, East Singhbhum, (2007) 9 SCC 266 = 2007 (7) S.T.R. 106 (S.C.). 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 13A of the Bihar Sales Tax Rules which was also amended by a notification dated 1-2-2000 reads as follows :

“13A. 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 Limited v. State of Bihar [(2004) 134 STC 354]. The Patna High Court in the said decision observed as under :

“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. In Gannon Dunkerley & Co. [(1993) 1 SCC 364 : (1993) 88 STC 204] the Supreme Court observed that as sub­section (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 Limited 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 :-

“… 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 relevant rules. In exercise of rule-making power conferred under section 53(1) and (2)(bb), rules 6-A and 6-B came to be made and published. The rules miserably failed to provide the procedure and principles for effectively determining the taxable turnover, after excluding the items of turnover relating to such works contract which could not be subjected to levy of tax by the State in exercise of its power of legislation under entry 64 of the State List. Rule 6 by its own operation had no application in the matter of determination of liability under section 3-B since it has been made applicable only in respect of determining the taxable turnover of a dealer under section 3, 3-A, 4 or 5. Consequently, with our decision above striking down rules 6-A and 6-B of the Rules, there is no proper machinery provisions to determine the taxable turnover for purposes of section 3­B. The provisions of section 3-B, therefore, in the absence of the necessary rules for enforcing the same and determining the taxable turnover for the purposes of section 3-B is rendered dormant, ineffective and unenforceable. Such would be the position till sufficient provisions are made either in the Act itself or in the rules by virtue of the rule-making power to ignite, activate and give life and force to section 3-B of the Act.” (at paras 32, 33)

39. And the Orissa High Court in Larsen & Turbo State of Orissa, (2008) 012 VST 0031, held that machinery provisions cannot be provided by circulars and held that therefore the statute in question, being unworkable, assessments thereunder would be of no effect.

40. Finally, in para 31, the Delhi High Court holds :-

“The contention of the petitioners that the impugned notifications 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, the valuation provisions of the Finance 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(105)(zzq) and (zzzh), service tax is payable and chargeable on 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/commercial 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 section is not applicable to composite contracts under clauses (zzq) and (zzzh) of Section 65(105) stands rejected. But the petitioners have rightly submitted that only the service component can be brought to tax as per provisions of 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 customers of service provider and the service tax cannot be charged on the value of the goods used in the contract.”

41. We are afraid that there are several errors in this paragraph. The High Court first correctly holds that in the case 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

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, 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 assessee before us and dismiss all the appeals of the revenue.”

8. We do not agree to the contention of the appellant that service provided by them to M/s. Suzlon Infrastructure Limited and M/s. Suzlon Infrastructure Service Limited are also classifiable under the category of “Erection, Commissioning or Installation” service under Section 65(105)(zzd) Act, in addition to “Commercial or Industrial Construction” service; (c) Service provided by them are also classifiable under the category of “Works Contract” under Section 65(105)(zzzza) of the Act and it was there option to choose any one of them. The service provided by an assessee has to be classified under most appropriate heading according to Section 65A of the Act. Going by the above decision of the Hon’ble Apex Court in the case of TOTAL ENVIRONMENT BUILDING SYSTEMS PVT. LIMITED, the services provided by the appellant have to be classified as under :-

(i) Where there is a single invisible contract for the service containing supply of raw materials and the construction activity, there was no taxability prior to 01.06.2007 and such contracts necessarily fall under the service of “Works Contract” with effect from 01.06.2007 and there is no option to pay duty under the category of “Commercial and Industrial Construction” service. The appellant may be given an option subject to production of supporting documents to pay duty on a value determined under Rule 2A of the Service Tax (Determination of Value) Rules, 2006 or Works Contract (Composition Scheme for payment of Service Tax), 2007 and they will be allowed Cenvat credit as available under the respective provisions;

(ii) Where there is a divisible work contract clearly defining value for the service portion and the value of raw materials, the service portion of the contract will be charged under the service of “Commercial and Industrial Construction” prior to 01.06.2007 and value of raw materials will not be added for determination of taxable value. The appellant shall be allowed cenvat credit on “input services” and capital goods” where they have charged tax at full value in the invoices on proportionate basis vis-à-vis the services where the appellant has already availed abatement of 33% under the respective notifications subject to submission of supporting documentary evidence. No cenvat shall be admissible for use of raw materials.

(iii) Where there is a divisible work contract clearly defining value for the service portion and the value of raw materials, the taxability will be determined under “works contract” service after 01.06.2007. The appellant may be given an option subject to production of supporting documents to pay duty on a value determined under Rule 2A of the Service Tax (Determination of Value) Rules, 2006 or Works Contract (Composition Scheme for payment of Service Tax), 2007.

(iv) Where there is a contract simplicitor for “Commercial and Industrial Construction” service without supply of any raw material by the appellant, the taxability will be determined under this service only without adding the value of raw materials. Cenvat credit is admissible on input services and capital goods where abatement is not claimed subject to production of necessary documents.

9. We do not agree with the findings of the Learned Commissioner that service provided to Vyavasayi Vidhya Pratisthan (VVP), Rajkot and Sewa Bharti, Ahmedabad for construction of VVP Engineering college and Saraswati Shishu Mandir has to be denied on the ground that both the recipients could not be considered as non-commercial undertakings as they were charging fees from the students for imparting education as those could not be considered that those were not for the purposes of profit. Both the organizations have been registered as a trust with the Charity Commissioner as non-profit organisation. Merely for the reason that some fee is charged by them from the students does not make them “commercial organizations”. These organizations need to charge fees from the students to meet their organizational expenses and the same cannot be criteria for determination that the same is for purposes of profit. No evidence has been brought on record that the profits are appropriated for benefits of the individuals or trustees of the organisation. Therefore, we have a considered view that construction services provided Vyavasayi Vidhya Pratisthan (VVP), Rajkot and Sewa Bharti, Ahmedabad were not taxable.

10. As regards admissibility of benefit of cum-tax value for determination of assessable value, we are of the considered view that where the appellant has not issued a taxable invoice, andthe services have been held to be taxable later-on as a result of investigation, the gross value charged by the appellant has be considered as “cum-tax value” under rule 67(2) of the Act which reads as“where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged”

11. The next issue to be decided is whether TDS deducted by the recipient has to be considered as part of the taxable value or not. We are of the considered view that TDS is nothing but part of the taxable value which comes back to the service provider in terms of the income tax deposited by the recipient. Thus the same is taxable and shall be part of the “gross amount charged” as given in explanation (c) to Section 67 of the Act.

12. The appellant has further disputed the taxability of the two invoices which they claimed that the same were for raised for use of JCB and tractors on rental basis and were covered under the service of “”supply of tangible goods for use” which was not covered under the Act at the relevant time. The Ld. Commissioner has rejected the claim on the ground that invoices produced are dated 8.6.2007 & 10.06.2007 and not 15.03.2007 as claimed by the appellant. We are of the considered view that the appellant should be given a chance to clarify to the adjudicating, the above discrepancy.

13. Appellant has further claimed that an invoice Rs. 3000/- and invoice Rs. 4,00,000/- which has been computed twice pertain the service was provided prior to 10.09.2004 when the impugned service of “construction” was brought into the service tax net. The claim has been rejected by the Ld. Commissioner on the ground that the appellant could not produce documents that the service was provided prior to 10.09.2004. We are of the considered view that the appellant should be given a chance to submit necessary evidence to the adjudicating authority.

14. Regarding applicability of proviso to Section 73(1) of the Act, we hold the extended period is applicable qua the demand which would be worked out keeping in view the above observations as there is a clear cut case where the appellant had deliberately chosen not to pay the tax whereas he was fully aware of his tax liability. Interest provisions under Section 75 of the Act and Penalty provisions under Section 78 and 76 of the Act will also be attracted. However, penalty under Section 76 of the Act will not be attracted for demand which may pertain to the period from 10.05.2008 in view of the amendment to Section 78 by the Finance Act, 2008. Penalty under Section 77(2) is also held to be imposable for failure to file the service tax returns.

15. The service tax charged from the recipients in the invoices but not paid to the Govt. on the services which may be held not taxable on the basis of above observations would be deposited by the appellant under the provisions of Section 73A of the Act along with applicable interest under Section 73B of the Act. Penalty on such tax deposited will not be imposed under Section 78 and Section 76 of the Act.

16. In view of the above discussions, we are of the considered view that the matter be remanded back to the original adjudicating authority for re­determination of the demand in view of the above findings. The appellant would be allowed to produce any documents which may be required in the interest of justice. We further direct that the adjudication proceedings will be completed expeditiously preferably within four months and the appellant would file any documents which he want to rely in their defense within 45 days of the receipt of this order.

(Pronounced in the open court on 08.08.2023)