# KERALA v. MIS LARSEN & TOUBRO LTD

- **Citation:** [2015] 8 S.C.R. 1046
- **Court:** Supreme Court of India
- **Decided:** 2015
- **Case number:** Civil Appeal No. 6770 of 2004
- **Bench:** A. K. Sikri, R. F. Nariman
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/kerala-v-mis-larsen-toubro-ltd-30953
- **Pages:** 53

## Headnote

c
Service tax (as introduced by Finance Act, 1994) -
Whether leviable on indivisible works contract, prior to
introduction of Finance Act, 2007 - Held: A works contract is
a separate species of contract distinct from contracts of
services simpliciter and need to be taxed separately as such
D - The service tax charging section itself must lay down with
specificity that the levy of service tax can only be on works
contract- 1994 Act lays down charge of tax only for the service
tax simpliciter- It does not lay down charge or machinery to
levy and assess service tax on indivisible composite works
E contracts - Where there is no machinery for assessment,
the law being vague, it would not be opef'/ to the assessing
authority to arbitrarily assess the subject to tax -Therefore,
service tax could not have been levied on composite
indivisible works contract, prior to Finance Act, 2007 which
F expressly makes such works contracts liable to service tax -
Finance Act, 1994 - s. 65 (105)(zzzza) [as inserted by
Finance Act, 2007]- s. 67 [as amended by Finance Act 2006]
- Service Tax (Determination of Value) Rules, 2006- r. 2AG Constitution of India, 1950- Schedule VII Lists I & II.
Contract- Composite indivisible works contract entered
after enactment of Finance Act, 1994 - Whether contrary to
public policy, being hit by s.23 of Contract Act and hit by
*Mcdowel/'s case - Held: No, because the 1994 Act does
H
1046
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1047
KERALA v. M/S LARSEN & TOUBRO
not lay down charge or machinery to levy and assess service A
tax on indivisible composite works contracts -Also beca't.ise
there is no subterfuge in entering into composite works
contracts - Contract Act, 1872 - s. 23 - Finance Act, 1994.
Constitution o; India, 1950-Art. 248; Schedule VII, List B
I and List II - Taxation powers of Centre and the States -
Taxation powers of Centre and the States are mutually
exclusive - The moment the levy contained in a taxing statute
transgresses into a prohibited exclusive field, it is liable to
be struck down - In composite indivisible works contracts, C
Parliament can only tax the service element and the States
can only tax the transfer of property in goods element - If
element of transfer of property in goods remains, when a
service tax is levied, the said levy would be found to be
constitutionally infinn- Therefore, it is important to segregate D
the two elements completely
Allowing the appeals filed by the assessees and
dismissing those filed by the Revenue, the Court ·
HELD: 1. In the lists contained in the 7th Schedule
to the Constitution, taxation entries are to be found only
E
in lists I and II. This is for the reason that in the
Constitutional scheme, taxation powers of the Centre
and the States are mutually exclusive. There is·no F
concurrent power of taxation. This being the case; the
moment the levy contained in a taxing statute
transgresses into a prohibited exclusive field, it is liable
to be struck down. In the present case, the dichotomy
is between sales tax leviable by the States and service G
tax leviable by the Centre. When it comes to composite
indivisible works contracts, such contracts can be taxed
by Parliament as well as State legislatures. Parliament
can only tax the service element contained in these
contracts, and the States can only tax the transfer of H
1048
SUPREME COURT REPORTS
(2015] 8 S.C.R.
A property in goods element contained in these contracts.
Thus, it becomes very important to segregate the two
elements completely for if some element of transfer of
property in goods remains when a service tax is levied,
the said levy would be found to be constitutionally infirm.
B [Para 16] [1072-H; 1073-A-D]
c
D
E
Bharat Sanchar Nigam Limited v. Union of India (2006)
3 SCC 1: 2006 (2) SCR 823 - relied on.
2. A works contract is a separate species of contract
distinct from contracts for services simpliciter recognized
by the world of commerce and law as such, and has to
be taxed separately as such.

## Text

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[2015] 8 S.C.R. 1046
A
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
B
KERALA
v.
MIS LARSEN & TOUBRO LTD.
(Civil Appeal No. 6770 of 2004 etc.)
AUGUST20, 2015
[A. K. SIKRI AND R. F. NARIMAN, JJ.]
c
Service tax (as introduced by Finance Act, 1994) -
Whether leviable on indivisible works contract, prior to
introduction of Finance Act, 2007 - Held: A works contract is
a separate species of contract distinct from contracts of
services simpliciter and need to be taxed separately as such
D - The service tax charging section itself must lay down with
specificity that the levy of service tax can only be on works
contract- 1994 Act lays down charge of tax only for the service
tax simpliciter- It does not lay down charge or machinery to
levy and assess service tax on indivisible composite works
E contracts - Where there is no machinery for assessment,
the law being vague, it would not be opef'/ to the assessing
authority to arbitrarily assess the subject to tax -Therefore,
service tax could not have been levied on composite
indivisible works contract, prior to Finance Act, 2007 which
F expressly makes such works contracts liable to service tax -
Finance Act, 1994 - s. 65 (105)(zzzza) [as inserted by
Finance Act, 2007]- s. 67 [as amended by Finance Act 2006]
- Service Tax (Determination of Value) Rules, 2006- r. 2AG Constitution of India, 1950- Schedule VII Lists I & II.
Contract- Composite indivisible works contract entered
after enactment of Finance Act, 1994 - Whether contrary to
public policy, being hit by s.23 of Contract Act and hit by
*Mcdowel/'s case - Held: No, because the 1994 Act does
H
1046
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1047
KERALA v. M/S LARSEN & TOUBRO
not lay down charge or machinery to levy and assess service A
tax on indivisible composite works contracts -Also beca't.ise
there is no subterfuge in entering into composite works
contracts - Contract Act, 1872 - s. 23 - Finance Act, 1994.
Constitution o; India, 1950-Art. 248; Schedule VII, List B
I and List II - Taxation powers of Centre and the States -
Taxation powers of Centre and the States are mutually
exclusive - The moment the levy contained in a taxing statute
transgresses into a prohibited exclusive field, it is liable to
be struck down - In composite indivisible works contracts, C
Parliament can only tax the service element and the States
can only tax the transfer of property in goods element - If
element of transfer of property in goods remains, when a
service tax is levied, the said levy would be found to be
constitutionally infinn- Therefore, it is important to segregate D
the two elements completely
Allowing the appeals filed by the assessees and
dismissing those filed by the Revenue, the Court ·
HELD: 1. In the lists contained in the 7th Schedule
to the Constitution, taxation entries are to be found only
E
in lists I and II. This is for the reason that in the
Constitutional scheme, taxation powers of the Centre
and the States are mutually exclusive. There is·no F
concurrent power of taxation. This being the case; the
moment the levy contained in a taxing statute
transgresses into a prohibited exclusive field, it is liable
to be struck down. In the present case, the dichotomy
is between sales tax leviable by the States and service G
tax leviable by the Centre. When it comes to composite
indivisible works contracts, such contracts can be taxed
by Parliament as well as State legislatures. Parliament
can only tax the service element contained in these
contracts, and the States can only tax the transfer of H
1048
SUPREME COURT REPORTS
(2015] 8 S.C.R.
A property in goods element contained in these contracts.
Thus, it becomes very important to segregate the two
elements completely for if some element of transfer of
property in goods remains when a service tax is levied,
the said levy would be found to be constitutionally infirm.
B [Para 16] [1072-H; 1073-A-D]
c
D
E
Bharat Sanchar Nigam Limited v. Union of India (2006)
3 SCC 1: 2006 (2) SCR 823 - relied on.
2. A works contract is a separate species of contract
distinct from contracts for services simpliciter recognized
by the world of commerce and law as such, and has to
be taxed separately as such. [Para 17] [1074-F]
State of Madras v. Gannon Dunkerley and Co. (Madras)
Ltd. 1959 SCR 379; Kone Elevator India (P) Ltd. v. State
of T.N. (2014) 7 SCC 1; Larsen & Toubro Ltd. v. State of
Kamataka (2014) 1 SCC 708; MathuramAgrawal v. State
of M.P. (1999) 8 sec 667: 1999 (4) Suppl. SCR 195;
Govind Saran Ganga Saran v. CST 1985 Supp SCC
205: 1985 SCR 985; CIT v. B. C. Srinivasa Setty (1981)
2 SCC 460: 1981 (2) SCR 938 - relied on.
3. The serVice tax charging section itself must lay
F down with specificity that the levy of service tax can only
be on works contracts, and the measure of tax can only
be on that portion of works contracts which contain a
serviCe element which is to be derived from the gross
amount charged for the works contract less the value of
G property in goods transferred in the execution of the
works contract. This not having been done by the.
Finance Act, 1994, it is clear that any charge to tax under
the five heads in Section 65(105)would only be of service
contracts simp.liciter and not composite indivisible works
H contracts. [Para15] [1072-E-G]
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1049
KERALA v. M/S LARSEN & TOUBRO
~~....
·~.
Gannon Durikerleyv. State of Rajasthan (1993) 1 SCC
A
364: 1992 (3) Suppl. SCR 103 - relied on.
:r;f>.
4. 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~ B
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, the value of a taxable service C
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 D
the facts of the present cases. 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 E
the execution of a works contract. [Para 24] [1080-G-H;
1081-A-B]
,, .
5. By way of con.trast, Section 67 post amendment
(by the Finance Act, 2006) for the first time prescribes, i.n
F
cases like the present, where the prov·ision of servic~ is
,, ii
for a consideration which is not ascertainable, to be the
....
amount as may be determined in the prescribed manner.
Rule 2(A) of Service Tax (Determination of Value) Rules,
2006 framed pursuant to this power has followed the. G
second **Gannon Dunkerley case in segregating the
'service' component of a works contract from the 'goods'
component. It is this scheme and this scheme alone
which complies with constitutional requirements in that H
it bifurcates a composite indivisible works contract and
1050
SUPREME COURT REPORTS
[2015) 8 S.C.R.
A takes care to see that no element attributable to the
property in goods transferred pursuant ~o such contract,
enters into computation of service tax. [Paras 25, 26 and
21) [1081-D-E; 1082-A-B]
B
**Gannon Dunkerley v. State of Rajasthan (1993) 1 SCC
364: 1992 (3) Suppl. SCR 103 - referred to.
6. While introducing the concept of service tax on
indivisible works contracts various exclusions are also
c 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. It shows that such
o contracts were never intended to be the subject matter
of service tax. [Para 29) [1082-G-H; 1083-A-B]
7. It is not correctthatthe Finance Act, 1994 contains
both the charge and machinery for levy and assessment
E of service tax on indivisible works contracts. 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 [Paras 35 and 41)
[1097-C-D; 1086-A-B]
F
G
Mahim Patram Private Ltd. v. Union of India 2007 (3)
S&C 668: 2007 (3) SCR 73 ; Heinz India (P) Ltd. v.
state of u.P. 2012 (5) sec 443 2012 (3) SCR 898;
Shabina Abraham & Ors. v. Collector of Central Excise
& Customs 2015 (8) SCALE 314-relied on.
· 8. Since the Finance Act, 1994 lays down no charge
or machinery to levy and assess service tax on
indivisible composite works contracts, it is not correct
to say that post 1994, all indivisible works contracts
H would be contrary to public policy, being hit by Section
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1051
KERALA v. M/S LARSEN & TOUBRO
23-of the Contract Act, and hit by *Mcdowell's case. This A
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. [Paras 42 and 43] [1097-E-F]
*Mcdowell and Company Ltd. v. Commercial Tax Officer
1985 (2) sec 230 - referred to.
B
9. The exemption notifications granted qua service
tax "levied" by the 1994 Finance Act, have to be c
disregarded, because the levy itself of service tax has
been found to be non-existent. [Para 44] [1097-G-H; 1098A)
.
Builders' Assn. of India v. Union of India (1989) 2 SCC
645; 1989 (2) SCR 320; GD. Builders v. UOI andAnr.
2013 [32] S.T.R. 673 (Del.); M/s Larsen & Toubro Ltd.
v. CST, Delhi2015-TIOL-527-C.ESTAT-DEL-LB; State
of Jharkhand v. Vo/fas .Ltd. East Singhbhum (2007) 9
SCC 266: 2007 (6) SCR 276; Larsen and Toubro Ltd.
v. State of Tamil Nadu and Ors. (1993) 88 STC 289;
Larsen & Turbo v. State of Orissa (2008) 012 VST 0031
- referred to.
Case Law Reference
. ,,,
'
.
1959 SCR 379
referred to. Para 2
1989 (2) SCR 320
referred to. Para'4':
1985 (2) sec 230
referred to. Para 1
2013 [32] S.T.R. 673 (Del.)
referred to. Para 8
2015-TIOL-527CESTAT-DEL-LB
referred to. Para 8
1992 ( 3) Suppl. SCR 103
relied on.
Para 14
1959 SCR 379
relied on.
Para 17
· (2014) 1 sec 1
relied on.
Para 18
(2014) 1 sec 108
relied on.
Para 19
D
E
F
G
H
1052
-SUPREME COURT REPORTS
[2015] 8 S.C.R.
A
1999 ( 4) Suppl. SCR 195
relied on.
Para 21
19S5 SCR 9S5
relied on.
Para 22
19i,1 (2) SCR 93S
relied on.
Para 23
2007 (3 ) SCR 73
relied on
Para 31
B 2012 (3) SCR S9S.
relied on. · Para 35
2015 (S) SCALE 314
relied on.
Para 36
2007 (6 ) SCR 276
referred to. Para 37
(1993) SS STC 2S9
referred to. Para 3S
c (200S) 012 VST 0031
referred to. Para 39
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
6770 of2004
From the Judgment and Ori;:!er No. 18/2003-NB(A) dated
D 20.11.2003 of the Customs, Excise and Sel'llice Tax Appellate
Tribunal New Delhi in Appeal No. ST/12/03/NB(A).
WITH
E C.A. NOS. 4468 OF 2006, 6434 OF 2015, 2798 OF 2009,
4234 OF 2009, 4281 OF 2009, 6429 OF 2015, 4893 OF 2011,
6084 OF 2011, 8477 OF 2011, 732 OF 2012, 1627 OF 2012,
6430 OF 2015, 5841 OF 2011
N. Venkataraman, B. Krishna Prasad,Anil Katiyar, P. K.
F Sahu, Radha Shyam Jena, J. Sama!, Prasant Shukla, V.
Lakshmikumaran, M.P. Devanath, Vivek Sharma, L.
Charanaya, R. Ramchandran,Aditya Bhattacharya, Hemant
Bajaj, Anandh K., Karan Sachdeva, Kedar Nath Tripathy, J.K.
G Mittal, Rajveer Singh, Praveen Swarup, Sanand
Ramakrishnan, Jay Savla, Prasad Paranjape, Mihir Mehta,
Renuka Shahu, Ravi Mishra, Anand Sukumar, S. Sukumaran,
Bhupesh Kumar Pathak, Meera Mathur, Praveena Gautam,
L.K. Asthana, ReenaAsthana, Deepak Tyagi for the appearing
H parties.
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1053
KERALA v. MIS LARSEN & TOUBRO
The Judgment of the Court was delivered by
A
R.F. NARIMAN, J. 1. This group of appeals is by both
assessees and the revenue and concerns itself with whether
service tax can be levied on indivisible works contracts prior
to the introduction, on 151 June, 2007, of the FinanC:eAct, 2007 B
which expressly makes such works contracts liable' to service
tax.
2. It all began with State of Madras· v. Gannon
Dunkerley & Co. (Madras) Ltd., 1959 SCR 379. A c
Constitution Bench of this Court held that in a building contract
which was one and entirely indivisible, there was no sale of
goods and it was not within the competence of the State
Provincial Legislature to impose a tax on the supply of
materials used in such a contract, treating it as a sale. The o
above statement was founded on the premise that a works
contract is a composite contract which is ins~parable and
indivisible, and which consists of several elements which
include not only a transfer of property in goods but labour and
service elements as well. Entry 48 of Lis~ II to the 7'h Schedule · E
to the Government of India Act, 1935 was what was under
consideration before this Court in Gannon Dunkerley's case.
It was observed that the expression "sale of goods" in that entry
has become "nomen juris" and that therefore it has the same
meaning as the said expression had in the Sale of Goods Act,
F
1930. In other words, the essential ingredients of a sale of
goods, namely, that there has to be an agreement to sell
movables for a price, and property must pass therein pursuant
to such agreement, are both preconditions t:i ,the taxation G
power of the State~ under the said entry. This Court, after
considering a large number of judgments, ultimately came to
the following conclusion:-
'To sum up, the expression "sale of goods" in Entry 48 is
a nomen juris, its essential ingredients being an
H
1054
A
B
SUPREME COURT REPORTS
(2015] 8 S.C.R.
agreement to sell movables for a price and property
passing therein pursuant to that agreement. In a building
contract which is, as in the present case, one, entire and
indivisible -
and that is its norm, there is no sale of
goods,· and it is not within the competence of the
Provincial Legislature under Entry 48 to impose a tax on
the supply of the materials used in such a contract treating
it as a sale." (at page 425)1
3.The Law Commission of India in its 61'1 Report
C elaborately examined the law laid down in Gannon
Dunkerley's case and suggested that the relevant entry
contained in the 7th Schedule to List II to the Constitution of
India - Entry 54 - could either be amended; or a fresh entry in
the State List could be added; or Article 366 which is a definition
D clause could be amended so as to widen the definition of
"sale", and include therein indivisible composite works
contracts. Having regard to the said recommendation of the
Law Commission, the Constitution (46'"Amendment)Actwas
passed in 1983 by which Parliament accepted the 3rd
E alternative of the Law Commission, and amended Article 366
by adding sub-clause (29A). We are concerned with subclause (b) of Article 366 (29A) which reads as follows:-
366 (29A) ''tax on the sale or purchase of goods" includesF
1 It is interesting to note that a 7 Judge Bench in M/s. Vishnu Agencies (Pvt.) Ltd.
vs. Commercial Tax Officer and Ors., 1978 (1) SCC 520, doubted Gannon
Dunkerley 's case by stating that its correctness would have to await a more suitable
occasion in that the entry, namely, 48 of List II of the 71t1 Schedule to the Government of
India Act had been narrowly construed. It may be Pointed out that H.M. Seervai's
G
Constitutional Law of India, Vol. Ill, page 2326, had this to say:
H
"This decision was rendered in 1959 and was repeatealy followed, till a doubt was
cast on its correctness in Vishnu Agencies by the obiter observations of Chandrachud
J. In my submisslOn, the judgment in Gannon Dunkertey's Case is clearly right, and
requires no reco_nsideration. Therefore, it becomes necessary to consider Gannon
Dunkerley's Case more fully than in the earlier editions of this book.
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1055
KERALA v. MIS LARSEN & TOUBRO [R. F.'NARIMAN, J.)
(b) a tax on the transfer of property in goods (whether as
A
goods.or in some other form) involved in the execution of
a works contract;
and such transfer, delivery or supply of any goods shall
be deemed to be a sale of those goods by the person
B
making the transfer, delivery or supply and a pyrchase of
those goods by the person to whom such transfer, delivery
or supply is made;
·'
4. The Constitutional amendment so passed was the c
subject matter of a challenge in Builders' Assn. of India v.
Union of India, (1989) 2 SCC 645. This ~hallenge was
ultimately repelled and this Court stated:-
,
" ... After the 46th Amendment, it has beconi·e possible
for the States to levy sales tax on the valu_e of goods
involved in a works contract in the same way in which the
sales tax was leviable on the price of the g·oods and
materials supplied in a building contract which had been
entered into in two distinct and separate parts as. stated
above." (at para 36)
5. This is the historical setting within which the present
controversy arises.
D
E
6. Service tax was introduced by the Finance Act, 1994 F
and various services were set out in Section 65 thereof as
·being amenable to tax. The legislative competence of such
tax is to be found in Article 248 read with Entry 97 of List I of
the 7th Schedule to the Constitution of India. All the present
. cases are cases which arise before the 2007 amendment was G
made, which introduced the concept of "works.contract" as
being a separate subject matter of taxation. Various
amendments were made in the sections of the.Finance Act by
which "works contracts" which were indivisible ~nd composite H
1056
SUPREME COURT REPORTS
[2015] 8 S.C.R.
A were split so that only the labour and service element of such
contracts would be taxed under the heading "Service Tax".
7. Learned counsel for the revenue has essentially raised
four arguments before us in which he assails the judgments of
B various Tribunals and High Courts which have decided against
the revenue on this point. According to him, the 46111 Amendment
has itself divided works contracts by Article 366 (29A)(b). After
taking out the "goods" element from such contracts, what
remains is the "labour and service" element which, according
C to him, has been subjected to tax by various entries in the
Finance Act, 1994. Further, relying upon Section 23 of the
Contract Act and Mcdowell and Company Ltd. v.
Commercial Tax Officer, 1985 (2) SCC 230, he went on to
argue that post 1994 all indivisible works contracts ..vere made
D with a view to evade or avoid tax and that therefore being
contrary to public policy, the principles in Mcdowell's judgment
should apply to make such so-called indivisible contracts
taxable under the Finance Act, 1994. According to him, the
Finance Act, 1994 itself contains both the charge of tax as
E well as the machinery by which only the labour and service
element in these indivisible contracts is taxable, i.t being his
contention that the statute need not do what the constitutional
amendment has already done - namely, split the indivisible
F works contract into a separate contract of transfer of property
in goods involved in the execution of the works contract on the
one hand, which 1s taxable by the States, and the labour and.
services element on the other, which is taxable, according to
him, by the Central Government. Further, he argued that the
G fact that the 2007 Amendment Act has, in fact, defined works
contract for the first time and sought to split it, and tax only the.
element of labour and service would make no difference
because, according to him, whatever elements of works
contracts were taxable under the Finance Act, 1994 would
H continue to be taxable and would be untouched by the said
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1057
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]
amendment.
A
8. On the other hand, learned counsel for the assessees
assailed the judgments of the Tribunals and the High Courts
against them, in particular the judgment in G.D~Builders v.
UOI and Anr., 2013 [32] S.T.R. 673 (Del.), of ttie·Oelhi High B
Court. ln answer to revenue's contention, learned counsel
l
"'"'l qr
argued that a works contract is a separate species known to
the world of commerce and law as such. That being so, an
indivisible works contract would have to be split into its
constituent parts by necessary legislation which would then C
contain, post splitting, a charge to service tax together with
the necessary machinery to enforce such charge. According
to learned counsel, not only was there no sucti'charge pre2007 but there were no machinery provisions as well to bring
indivisible works contracts under the service tax net'.' According D
to learned counsel, what was taxable under the~Finance Act,
1994 was only cases of pure service in. which there was no
goods element involved. Further, according to them: for various
reasons, the sheet anchor of revenue's case, the Delhi High
Court judgment in G.D. Builders (supra), was wholly incorrect, E
and the minority judgment of the judicial members of a Full
Bench of the Delhi Tribunal in M/s Larsen & Toubro Ltd. v.
CST, Delhi, 201 5- Tl 0 L-52 7-C ESTAT-D EL-LB,
comprehensively discussed all the authorities that were relevant F
to this issue and arrived at the correct conclusion.
9. We have heard learned counsel for the parties. Before
examining the contentions made on the both sides, it will be
necessary to set out the Finance Act, 1994 irisofar as it
· pertains to the levy of se1vice tax.
-, _, ~
G
10. Section 64. Extent, commencement and application.
(1) This Chapter extends to the whole of lndta'except
the State of Jammu and Kashmir.
H
1058
SUPREME COURT REPORTS
[2015) 8 S.C.R.
A
· (2) It shall come into force on such date as the Central
Government may, by notification in the Official Gazette,
appoint.
(3) It shall apply to taxable services provided on or after
B 1
the commencement of this Chapter.
c
D
E
F
Section 65. Definitions. In this Chapter, unless the
context otherwise requires, -----
(105) "taxable service" means any service provided-.
(g) to a client, by a consulting engineer in relation to
advice, consultancy or technical assistance in any
manner in one or more disciplines of engineering [but
not in the discipline of computer hardware engineering
or computer software engineering;
(zzd) to a customer, by a commissioning and installation
agency in relation to erection, commissioning or
installation;
(zzh) to any person, by a technical testing and analysis
agency, in relation to technical testing and analysis;
(zzq) to any person, by a commercial concern, in relation
to construction service;
(zzzh) to any person, by any other person, in relation to
construction of a complex;
Explanation : For the purposes of this sub-clause,
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construction of a complex which is intended for sale,
wholly or partly, by a builder or any person authorized by
the builder before, during or after construction (except in
cases for which no sum is received from or on behalf of
the prospective buyer by the builder or a person
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authorized by the builder before the grant of completion
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1059
KERALA v. M/S LARSEN & TOUBRO [R. F. NARI MAN, J.]
certificate by the authority competent to issue such
A
certificate under any law for the time being in force) shall
be deemed to be service provided by the builder to the
buyer;"
Section 66. Charge of service tax
There shall be levied a tax (hereinafter referred to as
the service tax) at the rate of ten per cent. Of the value of
the taxable services referred to in sub-clauses (a), (b),
(c), (d), (e), (f), (g), (h), (i), (j), (k), (I), (m), (n), (o), (p), (q),
(r), (s), (t), (u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zd), (ze),
(zf), (zg), (zh), (zi), (zj), (zk), (zl), (zm), (zn), (zo), (zq), (zr),
(zs), (zt), (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc),
(zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzj), (zzk), (zz_I), (zzm),
(zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu), (zzv), (zzw),
(zzx), and (zzy) of clause (105) of section 65 ancfoollected
in such manner as may be prescribed.
Section 67. Valuation of taxable services for,charging
service tax.- For the purposes of this Chapter, the value
of any taxable service shall be the gross amount charged
by the service provider for such service rendered by him.
Explanation.1- For the removal of doubts, it is hereby
declared that the value of a taxable service, as the case
may be, includes,~
(a) the aggregate of commission or brokerage charged
by a broker on the sale or purchase of securities including
the commission or brokerage paid by the stock-broker
to any sub-broker;
,,;.;..
(b) the adjustments made by the telegraph authority from
any deposits made by the subscriber at the .time of
application for telephone connection or pager or facsimile .
or telegraph or telex orfor leased circuit;
,,,
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(c) the amount of premium charged by the insurerfrom
the policy holder;
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( d) the commission received by the air travel agent from
the airline;
(e) the commission received by an actuary, or
intermediary or insurance intermediary or insurance
agent from the insurer;
(f)the reimbursement received by the authorized service
station from manufacturer for carrying out any service of
any automobile manufactured by such manufacturer; and
(g) the commission or any amount received by the rail
travel agent from the Railways or the customer,
but does not include, -
(i)initial deposit made by the subscriber at the time of
application for telephone connection or pager or facsimile
(FAX) or telegraph or telex or for leased circuit:
(ii) the cost of unexposed photography film, unrecorded
magnetic tape or such other storage devices, if any, sold
to the client during th.e course of providing the service;
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(iii) the cost of parts or accessories, or consumables
such as lubricants and coolants, if any, sold to the
customer during the course of service or repair of motor
cars, light motor vehicle or two wheeled motor vehicles;
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(iv) the airfare collected by air travel agent in respect Of
service provided by him;
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(v) the rail fare collected by rail travel agent in respect
of service provided by him;
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
1061
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.] .
(vi) the cost of parts or other material, if any, sold to the
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customer during the course of providing maintenance or
repair service;
(vii) the cost of parts or other material, if any, sold to the
customer during the course of providing erecti'on,
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commissioning or installation service; and
(viii) interest on loans.
Explanation 2. - Where the gross amount charged by a
service provider is inclusive of service tax payable, the
value of taxable service shall be such amount as with the
addition of tax payable, is equal to the gross amount
charged."
_
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11. By the Finance Act, 2007, for the first time, Section D
65 (105)( zzzza) set outto tax the following:-
"(zzzza)
to any person, by any other person in relation
to the execution of a works contract, excluding works
contract in respect of roads, airports, railways, transport
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terminals, bridges, tunnels and dams.
Explanation : For the purposes of this sub-clause, ''works
contract" means a contract wherein,-
(i) Transfer of property in goods involved in the execution
of such contract is leviable to tax as sale of goods, and
(ii) Such ·contract is for the purposes of carrying out,-
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(a) Erection, commissioning or installation of plant,
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machinery, equipment or structures, whether prefabricated or otherwise, installation of electrical and
electronic devices, plumbing, drain laying or other
installations for transport of fluids, heating, ventilation or
air-conditioning including related pipe work, duct work
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and sheet metal work, thermal insulation, sound
insulation, fire proofing or water proofing, lift and escalator,
fire escape staircases or elevators; or
(b) Construction of a new building or a civil structure or
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a part thereof, or of a pipeline or conduit, primarily for the
purposes of commerce or industry; or
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(c) Construction of a new residential complex or a part
thereof; or
(d) Completion and finishing services, repair, alteration,
renovation or restoration of, or similar services, in relation
to (b) and (c); or
(e) Turnkey projects including engineering, procurement
and construction or commissioning (EPC) projects;"
· 12. Section 67 of the Finance Act 1994 was amended to
read as follows:-
"Valuation of taxable services for charging Service tax-
(1) Subject to the provisions of this Chapter, service tax
chargeable on any taxable service with reference to its
value shall,-
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(i) in a case where the provision of service is for a
consideration in money, be the gross amount charged
by the service provider for such service provided or to
be provided by him;
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(ii) in a case where the provision of service is for a
consideration not wholly or partly consisting of money,
be such amount in money, with the addition of service
tax charged, is equivalent to the consideration;
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(iii) in a case where the provision of service is for a
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]
consideration which is not ascertainable, be the amount
as may be determined in the prescribed manner."
13. Pursuant to the aforesaid, the Service Tax
{Determination of Value) Rules, 2006were made, Rule 2Aof
which reads as under:-
"2A. Subject to the provisions of section 67, the value of
service portion in the execution of a works contract,
referred to in clause {h) of section 66E of the Act, shall
be determined in the following manner, name1y:-
(i) Value of service portjon in the execution of a works
contract shall be equivalent to the gross amount charged
for the. works contract less the value of property in goods
transferred in the execution of the said works contract. ·
Explanation.-For the purposes of this clause,-
{a) gross amount charged for the works contract shall>
not include value added tax or sales tax, as the case
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may be, paid or payable, if any, on transfer of property in
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goods involved in the execution of the said works contract;
(b) value of works contract service shall include, -
(i) labour charges for execution of the works;
(ii) amount paid to a sub-contractor for labour and
services;
{iii) charges for planning, designing and architect's fees;
{iv) charges for obtaining on hire _or otherwise, machinery
and tools used for the execution of the works contract;
(v) cost of consumables such as water, electricity, fuel
used in the execution of the works contract;
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(vi) cost of establishment of the contractor relatable to
supply of labour and services;
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(vii) other similar expenses relatable to supply of labour
and services; and
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(viii) profit earned by the service provider relatable to
supply of labour and services;
( c) where value added tax or sales tax has been paid or
payable on the actual value of property in goods
transferred in the execution of the works contract, then,
such value adopted for the purposes of payment of value
added tax or sales tax, shall be taken as the value of
property in goods transferred in the execution of the said
works contract for determination of the value of service
portion in the execution of works contract under this
clause.
(ii) Where the value has not been determined under
clause (i), the person liable to pay tax on the service
portion involved in the execution of the works contract
shall determine the service tax payable in the following
manner, namely:-
(A) in case of works contracts entered into for execution
of original works, service tax shall be payable on forty
per cent of the total amount charged for the works
contract;
(B) in case of works contract entered into for maintenance
or repair or reconditioning or restoration or servicing of
any goods, service tax shall be payable on seventy per
cent of the total amount charged for the works contract;
(C) in case of other works contracts, not covered under
sub-clauses (A) and (B) including maintenance, repair,
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
KERALA v~ M/S LARSEN & TOUBRO [R. F. NARI MAN, J.]
completion and finishing services· such as glazing,
plastering, floor and wall tiling, installation of electrical
fittings of an immovable' property, service tax shall be
payable on sixty per cent of the total amount charged for
the works contract.
Explanation 1.-Forthe purposes of this rule,-
(a) "original works" means-
(!) all new constructions;
(ii) all types of additions and alterations to abandoned or
damaged structures on land that are required to make
them workable;
(iii) erection, commissioning or installation of plant,
machinery or equipment or structures, whether prefabricated or otherwise;
(d) 'total amount" means the sum total of the gross amount
charged for the works contract and the fair market value
of all goods and services supplied in or in relation to the
execution of the works contract, whether or not supplied
under the same cohtract or any other contract, after
deducting-
(i) the amount charged for such goods or services, if any;
and
(ii) the value added tax or sales tax, if any, levied thereon:
1065
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Provided that the fair market value of goods and services
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so supplied may be determined in accordance with the
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generally accepted accounting principles.
Explanation 2.-For the removal of doubts, it is clarified
thatthe provider of taxable service shall not take CENVAT
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credit of duties or cess paid on any inputs, used in or in
relation to the said works contract, under the provisions
of CENVAT Credit Rules, 2004."2
14. Crucial to the understanding and determination of the
B
issue at hand is the second Gannon Dunkerley judgment
which is reported in (1993) 1 SCC 364. By the aforesaid
judgment, the modalities of taxing composite indivisible works
contracts was gone into. This Court said:-
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"On behalf of the contractors, it has been urged that under
a law imposing a tax on the transfer of property in goods
involved in the execution of a works contract under Entry
54 of the State List read with Article 366(29-A)(b), the
tax is imposed on the goods which are involved in the
execution of a works contracf and the measure for levying
such a tax can only be the value of the goods so involved
and the value of the works contract cannot be made the
measure for levying the tax. The submission is further
that the value of such goods would be the cost of
acquisition of the goods by the contractor and, therefore,
the measur~ for levy of tax can only be the cost at which
the goods involved in the execution of a works contract
were obtained by the contractor. On behalf of the States,
it has been submitted that since the property in goods
which are involved in the execution of a works contract
passes only when the goods are incorporated in the
works, the measure for the levy of the tax would be the
value of the goods at the time of their incorporation in the
works as well as the cost of incorporation of the goods in
the works. We are in agreement with the submission that
measure for the levy of the tax contemplated by Article
366(29-A)(b) is the value of the goods involved in the
2 The said Rule was substituted by the Service Tax (Determination of Value) Rules,
H
2012 with effect from 01.07.2012. which substituted Rule has been set out
hereinabove.
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]
execution of a works contract. In Builders' Association
case [(1989) 2 sec 645: 1989 sec (Tax) 317: (1989)
2 SCR 320] it has been pointed out that in Article 366(29A)(b), "[t]he emphasis is on the transfer of property in
goods (whether as goods or in some other form)". (SCC
p. 669, para 32: SCR p. 347), This indicates that though
the tax is imposed on the transfer of property in goods
involved in the execution of a works contract, the measure
for levy of such imposition is the value of the goods
involved in the execution of a works contract. We are,
however, unable to agree with the contention urged on
behalf of the contractors that the value of such goods for
levying the tax can be assessed only on the basis of the
cost of acquisition of the goods by the contractor. Since
the taxable event is the transfer of property in goods
involved in the execution of a works contract and the said '
transfer of property in such goods takes place when the,.
goods are incorporated in the works, the value of the
goods which can constitute the measure for the levy of .
the tax has to be the value of the goods at the time of
incorporation of the goods in the works and not the cost
of acquisition of the goods by the contractor. We are also
unable to accept the contention urged on behalf.of the
States that in addition to the value of the goods involved
in the execution of the works contract the cost of
incorporation of the goods in the.works can be included
in the measure for levy of tax. Incorporation of the goods
in the works forms part of the contract relating to work
and labour which is distinct from the contract for transfer
of property in goods and, therefore, the cost of
incorporation of the goods in the works cannot be made
a part of the measure for levy of tax contemplated by
Article 366(29-A)(b).
Keeping in view the legal fiction introduced by the Forty1067
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[2015] 8 S.C.R.
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sixth Amendment whereby the works contract which was
entire and indivisible has been altered into a contract
which is divisible into one for sale of goods and other for
supply of labour and services, the value of the goods
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involved in the execution of a works contract on which
tax is leviable must exclude the charges which appertain
to the contract for supply of labour and services. This
would mean that labour charges for execution of works,
[item No. (1)], amounts paid to a sub-contractor for labour
and services [item No. (i1)], charges for planning,
designing and architect's fees (item No. (iii)], charges
for obtaining on hire or otherwise machinery and tools
used in the execution of a works contract [item No. (iv)],
and the cost of consumables such as water, electricity,
fuel, etc. which are consumed in the process of execution
of a works contract [item No: (v)] and other similar
expenses for labour and services will have to be excluded
as charges for supply of labour and services. The charges
mentioned in item No. (v1) cannot, however, be excluded.
The position of a contractor in relation to a transfer of
property in goods in the execution of a works contract is
not different from that of a dealer in goods who is liable
to pay sales tax on the sale price charged by him from
the customer for the goods sold. The said price includes
the cost of bringing the goods to the place of sale.
Similarly, for the purpos~ of ascertaining the value of
goods which are involved in the execution of a works
contract for the purpose of imposition of tax, the cost of
transportation of the goods to the place of works has to
be taken as part of the value of the said goods. The
charges mentioned in item No. (vii) relate to the various
expenses which form part of the cost of establishment of
the contractor. Ordinarily the cost of establishment is
included in the sale price charged by a dealer from the
customer for the goods sold. Since a composite works
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
KERALA v. M/S LARSEN & TOUBRO [R. F.