No service tax on pre-2007 composite work contracts: SC

A composite works contract is essentially a contract of service which also involves supply of goods in the execution of the contract.

No service tax on pre-2007 composite work contracts: SC
The Finance Act 2007 had imposed tax on work contracts by amending the 1994 law.

The Supreme Court on Tuesday ruled that no service tax will be levied on composite work contracts that were executed before 2007.

Setting aside various judgements, given by high courts and tax tribunals across the country, that ruled to the contrary, a Bench comprising justices M R Shah and B V Nagarathna said that assesses are not liable to pay the service tax for the contracts performed prior to the introduction of the Finance Act, 2007.

The Finance Act 2007 had imposed tax on work contracts by amending the 1994 law. A composite works contract is essentially a contract of service which also involves supply of goods in the execution of the contract.

The apex court had in 2016, in the case of Commissioner, Central Excise and Customs, Kerala Vs. Larsen and Toubro, also held that no such tax could be levied, but the government had asked the apex court to have a re-look into the issue. The SC had then specifically overruled the judgment of the Delhi High Court in the case of G.D. Builders and held that the observations made by the HC was wholly inaccurate in its conclusion.

While hearing a large batch of appeals led by Total Environment Building Systems against various HC and tribunal orders passed around 2008-2009, the apex court aid that “…assessment orders/orders in originals levying the service tax on the respective assesses on the indivisible/Composite Works Contracts for the period prior to pre-2007 are hereby quashed and set aside. Necessary consequences shall follow.”

“…impugned judgments and orders passed by the respective High Courts/Tribunals taking the view that for the period pre-Finance Act, 2007, the respective assesses are/were liable to pay the service tax on indivisible/composite works contracts are hereby quashed and set aside,” Justice Shah said in his order.

Additional Solicitor General Madhavi Divan had argued that even prior to Finance Act, 2007, there was an elaborate mechanism for segregating the value of the goods component and the service component in a Works Contract. Therefore, it cannot be said that there was no machinery provision to charge as such the service component in a Composite Works Contracts in order to make it excisable service tax, she added.

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