Works Contracts are liable to Service Tax even before June 1, 2007

NEW DELHI, : NETIZENS may recall the order of Tribunal referring the issue whether the service portion in execution of Works Contract is taxable under the pre- 01.06.2007 services of Commercial or Industrial Construction service (CICS), Construction of Complex Service (COCS) and Erection,

Commissioning or Installation service (ECIS) to the Five Member Bench (2013-TIOL-1458-CESTAT-DEL) . The Miscellaneous Application filed by the Commissioner (Service Tax), Delhi against this referral order was also dismissed by the Tribunal vide 2014-TIOL-1782-CESTAT-DEL . Thereafter, the Commissioner filed an appeal before the High Court of Delhi which was disposed of, allowing the parties to raise contentions on the orders passed by the Delhi High Court in G D Builders case (2013-TIOL-908-HC-DEL-ST) relied on by the revenue and the Madras and Karnataka High Court decisions in Strategic Engineering Pvt Ltd (2011-TIOL-547-HC-MAD-ST) and Turbotech Precision Engineering (2010-TIOL-498-HC-KAR-ST) respectively. The Five Member Bench has now issued the order on this important issue. Interestingly, the Bench is divided in the ratio of 3:2 with the President and the other Judicial Member holding that prior to 01.06.2007 no service tax is leviable, that the Delhi High Court ruling in G D Builders case is in error on the principles of per incurium and subsilentio and overruling the CESTAT larger Bench decision in case of BSBK Pvt Ltd. However, the three Technical Members differed with the judicial Members and were unanimous in holding the contrary. Though the issue has been decided in favour of revenue by 3:2 ratio, it is undisputedly, the findings of the President of CESTAT which makes an interesting reading and it is like a text book on various legal principles, the Constitution of India and the distribution of powers of taxation between the Union and the States and how to interpret the precedent decisions.

The main issue to be decided by the Bench is whether components of a composite transaction amounting to supply of labour /rendition of service(s), under a works contract ought to be classified only under Section 65(105)(zzzza) of the Finance Act, 1994 (the Act) - inserted by the Finance Act, 2007, w.e.f 01-06-2007; or are also comprehended within the ambit of existing (as on 01-06-2007) taxable services such as Commercial or Industrial Construction Service (CICS); Construction of Complex Service(COCS); or Erection, Commissioning or Installation Service (ECIS).

Some excerpts from the findings of the President on various issues:

Whether the ratio of G D Builders was based on concession made by the party:

Since the Hon'ble High Court adverted to the pre and post 01-06-2007 provisions of the Act; referred to certain judgments and the observations therein; and rested its conclusions on the discussion and precedents referred to (albeit despite the concession, even if there were one such), the contention that G. D. Builders is devoid of precedential vitality, for being the product of concessions by a party to that lis (on a question of law in issue), does not commend acceptance. We reject this argument.

Four essential components for imposition of tax:

The first component is the character of the imposition, the second is the person on whom the levy is imposed, the third is the rate at which tax is imposed and the fourth is the value to which the rate is applied for computing tax liability. It was further held that if there is ambiguity in any of the four concepts then levy would fail. In this case, we are concerned with the fourth concept.

Distribution of power to tax Works Contract under The Constitution of India:

The legislative field authorizing taxation of sale and purchase of goods (whether as goods or in any other form involved in the execution of a works contract), stands exclusively assigned to States under Entry 54, List II (on expansion of the locii of this Entry, qua the 46th Amendment). The legislative field for taxation of inter-State sales (and post the 46th Amendment, deemed inter-State sales as well) stands exclusively assigned to the Union vide Entry 92-A, List I. The Legislative field of taxation of services falls within the exclusive domain of Parliament qua Entry 97 of List I, r/w Article 248 (the residuary legislative field).

The contention that the 46th Amendment has application to and impacts exclusively the legislative power of States under Entry 54 of List I (but has no effect whatsoever on the Union's legislative powers/fields), is fallacious and the result of inadequate analyses of the holistic dynamics of constitutional space and the inexorable alteration of the scope of the Union (Entry 97, List I - residuary) and State (Entry 54, List II), exclusive taxation field allocations, consequent on the 46th amendatory exertion. It is axiomatic that the locii of allocations and distributions of legislative fields/powers, particularly those commitments which are exclusive and not concurrent, is dependent on the scope of allocations to each of the federal partners in our constitutional design, of distribution of powers. When therefore, there occurs an accretion of legislative field(s) assigned to States (as by the 46th Amendment), there must and does consequently occur a corresponding and resonating constriction of the legislative space including of those assigned to the Union, in relation to the fields enumerated in the several Entries in Lists I & II. This is the essence of the geometry of federal power distribution; of the cartography of constitutional landscape; and its complex and dynamic spatial arrangement.

Union cannot levy service tax on deemed sale in works contract:

Since the wall of separation and exclusivity drawn in the Constitution, for Union and State legislative exertions in the matter of taxation (including on a works contract), is a common boundary, it logically follows that what is forbidden to States is a fortiori forbidden and complementarily, to the Union as well. Thus, the Act (a Union legislation referable to Entry 97, List I) cannot legitimately levy service tax on the deemed sale of goods components and associate elements, involved in the execution of a works contract.

Union's legislative intention, to levy tax only on labour /service elements must be categorically expressed in the charging provision per se; or in the charging provision read together with the definition of the relevant taxable service and the valuation provision. Such intention is explicated only by Section 65(105)(zzzza); but not in the cornucopia of (pre 01-06-2007) charging, definition and valuation provisions, insofar as these relate to CICS, COCS&ECIS

Norms of valuation of services in Works Contract must be firmly embedded in the Act or Rules made thereunder:

The taxable value of a works contract, including the measure of it, reckoned for the levy (of service tax) must (by or under the Act) clearly exclude/deduct (deemed or accretion) sale of goods and associate elements, in computation of the taxable value thereunder. Further, appropriate valuation/computation norms must be firmly embedded in the Act or (where the legislation so authorizes by clear textual exposition or a compelling implication thereof, that the taxing trajectory thereunder is restricted to service elements alone and does not extend to deemed sale of goods elements), by Rules made thereunder, - vide the second Gannon Dunkerley; the second Builders Association of India; Mahim Patram; and Voltas Ltd judgments of the apex Court; reiterated in Larsen and Toubro Ltd. judgments of Patna, Madras and Orissa High Courts.

exhypothesi, assuming that definitions of CICS, COCS or ECIS r/w the charging provisions in Section 66 of the Act could authorize levy of service tax on a works contract, even so the charge would fail for sterility in the supporting architecture. This is the consequence of the demonstrable deficit of appropriate valuation/computation provisions in the Act and in the statutory rules made thereunder, prior to 01-06-2007

Heydon's Rule:

It is an established interpretive principle that where two constructions are fairly possible, the construction which sustains the legislation should be adopted instead of one which renders it invalid (known variously as Heydon's rule; rule of purposive construction; absurdity, inconsistency or repugnancy avoidance rule; rule of harmonious construction; principle of reading down etc.,),

On abatements prior to 01.06.2007:

There are a very large number of appeals pending before CESTAT where departmental adjudicating authorities had interpreted Section 67 as enjoining the total consideration received under composite transactions by a service provider to be the taxable value and have rejected claims for exclusion of the value of accretion sale of goods.

This is the inexorable pathology which results on accommodating a minimalistic legislative/statutory framework administered by and under a maximized executive discretion albeit of the quasi judicial variety, frowned upon in Jagannath Baksh Singh; Rai Ramkrishna; the second Gannon Dunkerley; B.C. Srinivasa Setty; Mathuram Agrawal; K. Damodarasamy Naidu; Govind Saran Ganga Saran; Voltas Ltd.; Infosys Technologies Ltd.; PNB Finance Ltd.; Tata Sky Ltd.; and in the Larsen & Toubro Ltd. rulings of the Patna, Madras and Orissa High Courts;

Exemption Notification Nos. 12/2003-ST, 15/2004-ST, and 1/2006-ST, attest to the fact that the Central Government was clearly of the view that the value of goods and materials sold by a service provider to the recipient of service during the course of provision of a taxable service is included in the taxable value under Section 67. It would be incredulous to assume that pure sale transactions were sought to be excluded by these exemption notifications, since a transaction of sale of goods simplicitor (whether intra-State or inter-State) is always (even prior to the 46 th Amendment), beyond the legislative scope of the Union's residuary legislative powers, vide the first Gannon dunkerley (1958);

Even Notification No. 12/2003-ST does not indicate the methodology for valuation of the goods and materials sold during the course of execution of a works contract. The second Gannon Dunkerley categorically ordained that the value of goods sold during execution of a works contract is the value at the time of incorporation; that the profit margin on the purchase value of the goods (booked while incorporating into a works contract); and the cost of storage, transportation etc on the goods component would be taxable as sale value and these are thus necessarily excluded from the value attributable to labour /service and associate component(s). None of these incontestably excludable factors are integrated into any of the exemption notifications. There is not even a Board or TRU circular pointing to or even hinting at such exclusions.

This is perhaps the inevitable consequence of relegating constitutional limits on legislative powers problematics to discretionary executive curatives. Precedents considered by us caution against such interpretive extravagances;

There is an established principle of statutory interpretation that the legislature is presumed (not conclusively though) to be aware of the contemporaneous state of the law. Applying this principle, we infer that with the insertion of sub-clause (zzzza), Parliament, by adopting a drafting shorthand had incorporated the whole of post 46th Amendment jurisprudence on works contract into the scheme of the Act.

If revenue's contention was correct, insertion of Works Contract Service in Finance Act, 1994 would have been unnecessary:

Even after 01-06-2007, CICS, COCS&ECIS continue to be taxable services, since there is neither a repeal/omission of these provisions nor are these excluded from the list of taxable services catalogued in the charging provision, Section 66.

If, as Revenue contends and would invite us so to assume, the scope of CICS, COCS&ECIS include rendition of these services qua a works contract mode as well and provisions of the Act including the charging and valuation provisions read with the exemption notifications do confine the levy (of service tax) to those components of a works contract as are clearly within the competence of the Union, what was the need for the insertion of sub-clause (zzzza), while continuing existing provisions? Revenue does not offer an explanation. Legislature does not engage in vacuous and avoidable exertions is also an interpretive presumption.

On its terms therefore, Rule 2-A has no application to CICS, COCS or ECIS, even after 01-06-2007. Revenue neither suggests nor contends, that Rule 2-A applies to CICS, COCS&ECIS as well, at least post 01-06-2007.

Thus a wholly unnecessary amendment (inserting WCS in the Act); and a wholly unnecessary rule (Rule 2-A, inserted in the 2006 Rules) to cater to a situation admirably administered by existing legislative and statutory provisions, as contended by Revenue!

WCS is not a re-location, but a new levy:

From the interface of paras 154 and 158, of the FM speech (2007 Budget), it is clear that WCS is not a relocation, expansion or re-definition exercise with respect to ingredients of any extant taxable service. In our considered view the Budget speech adverted to supra signals the understanding of the Union political executive and is so presented to the House, that (a) the transfer of goods component involved in the execution of a works contract is being subjected to (sales) tax by State Governments; (b) service components of a works contract were hitherto not charged to service tax; (c) that ‘works contract' was not an extant taxable service; (d) that WCS is proposed as a new levy; and (e) that along therewith a composition scheme is also being introduced

The Hon'ble Finance Minister, in the Budget speech categorically stated that a new levy is proposed, to impose service tax on works contract;

All the above contemporaneous signals converge to compel the singular and inescapable conclusion, that works contract [as defined and enumerated in sub-clause (zzzza) of Section 65(105)] is a new taxable service operative only since 0-06-2007. A works contract was neither a taxable service earlier thereto nor was integral to extant taxable services such as CICS, COCS or ECIS. WCS is not a carve out or an extraction from pre-existing taxable services; nor even a mere separate/distinctive enumeration, say for statistical purposes (a premise not advanced by Revenue either);

On Revenue's contention of Exemption Notifications' validity:

Revenue argues that exemption/composition/abatement notifications (issued by the Central Government), in exercise of powers conferred by Section 93 of the Act are species of delegated/subordinate legislation, since the laying (before Parliament) requirement for such notifications is the same as it is for rules issued under Section 94, - vide Section 94(4) of the Act. This is a contention that is stated to be rejected.

On text (Section 94(1) of the Act), on principle and settled authority, rules framed under a legislation must be in conformity with and are intended to give effect to the legislative purposes, not to transgress the legislative mandate. Rules may be made to regulate interstitial hiatus in a legislation but in conformity with the ratio legis; and not to override or smother the parent legislation

The above proposition of Revenue is extravagant and invites peremptory rejection. We accept the invitation and reject this proposition

The Findings:

+ Works contract was not a taxable service prior to 01-06-2007;

+ Definitions of CICS, COCS and/or ECIS r/w the charging provision (Section 66) and the valuation provision (Section 67) do not comprehend works contract (comprising an amalgam of deemed/accretion sale of goods and supply of labour/service) within their ambit;

+ There was no charge of service tax on works contract prior to insertion of sub-clause (zzzza) in Section 65(105);

+ That prior to 01-06-2007, there were no valuation/computation provisions in the Act or the rules authorized thereby and made thereunder which enable computation/valuation of works contract so as to confine levy of service tax to service and associate components in such a contract, thus comprising an integrated code of charging and computation provisions;

+ That works contract is enacted as a taxable service (WCS) only by the Finance Act, 2007 and w.e.f 01-06-2007 vide sub-clause (zzzza) of Section 65(105), specifically defined with a legislated signification of intent to levy service tax on this distinct commercial entity, which inheres components which are exclusively allocated to States; and introduced with an integrated package of computation/valuation rules (Rule 2-A of the 2006 Rules),specially tailored to cater to this special category of transaction which has exclusive and competing taxation elements/components and a composition rules matrix (the 2007 Rules), enacted/framed in fidelity to the second Gannon Dunkerley ruling of the constitution Bench.

On G D Builders:

The conclusion of the G D Builders case

+ that works contract is a taxable service even prior to 01-06-2007(under CICS, COCS&ECIS);

+ that merely because no rules are framed for computation, it does not follow that no tax is leviable;

+ that the measure of the levy per se and in all contexts has no impact on the competence of the legislative exaction; and

+ that a deficit in a Central legislation with respect to computation/valuation provisions is offset by existence of such provisions in a State legislation,

are contrary to settled and binding expositions of relevant principles qua binding precedents which have either not been brought to the notice of the Hon'ble High Court; or the critical analyses whereunder were not sensitized to the Court in the appropriate internal legal and factual matrices of the particular precedents. The G. D. Builders decision (to the extent of the conclusions set out as (i) to (iv) supra), is thus and with great respect to the formidable weight accorded to a jurisdictional High Court, in error on per incuriam and sub silentio grounds.

The decisions of the Karnataka and Madras High Courts, in Turbotech Precision Engineering Pvt. Ltd. and in Strategic Engineering Pvt. Ltd. have clearly concluded that a works contract is not leviable to service tax prior to 01-06-2007. Though, with respect there is not discernible a holistic analyses of the relevant statutory framework involved nor of the several precedents which support the conclusion recorded (in Turbotech and Strategic), as is found in the painstaking effort apparent in G.D. Builders , in our respectful view the conclusion that a works contract is defined, charged and is subject to the levy of service tax only w.e.f 01-06-2007 (on insertion of sub-clause (zzzza) in Section 65(105) of the Act), is consistent with the overwhelming catena of binding precedents considered and analysed by us.

Conclusion by the Judicial Members:

+ Neither CICS, COCS nor ECIS, as these services are defined in respective clauses of Section 65, read with the charging provisions in Section 66, the valuation provisions in Section 67 of the Act, the 2006 Rules (prior to insertion of Rule 2-A therein, w.e.f 01-06-2007)) and exemption notification Nos -12/2003-ST, 15/2004-ST, 04/2005-ST and 01/2006-ST, authorize a charge of Service Tax on a works contract (which is a distinct contractual arrangement inhering integrated elements of accretion sale of goods and of exertion of labour /rendition of services);

+ Taxable services defined and enumerated as CICS, COCS&ECIS cover only such contracts/transactions which involve pure supply of labour or rendition of service(s), falling within the ambit of the respective definitions;

+ Only since the insertion of sub-clause (zzzza) in clause (105) of Section 65, w.e.f 01-06-2007, complemented by the amended 2006 Rules (inserting Rule 2-A therein) and the 2007 Composition Rules, that the requisite and appropriate statutory framework, for charging, levy, collection and assessment of Service Tax, supported by appropriate computation/valuation machinery on a works contract stands incorporated. This framework defines ‘works contract' (in the Act) by clearly enacting the legislative recognition that this distinct species of contractual arrangements inheres components of sale of goods which fall within the (exclusive) taxation domain of States, for levy of sales tax;

+ Rule 2-A of the 2006 Rules [applied exclusively to 'works contract' referred to in sub-clause (zzzza)] inserted w.e.f 01-06-2007, mandates specified exclusions/deductions from the gross amount received on execution of a works contract (in terms of the principles/norms particularized and catalogued in the second Gannon Dunkerley ruling and reiterated in subsequent precedents); and

+ The 2007 Composition Rules, also introduced w.e.f 01-06-2007 (and made explicitly applicable only to WCS),provide an optional composition protocol which enables availment of calibrated deductions, particularly appropriate to situations where proof of the value of sale of goods by accretion/incorporation cannot be furnished or the nature of the transaction is such as to render the necessary accounting process cumbersome, impractical or inadequate;

+ The enactment of a specific legislative provision - sub-clause (zzzza); and the simultaneously introduced supportive and reinforcing provisions of the 2006 and 2007 Rules (all w.e.f 01-06-2007) signal (1) the enactment of a charge of Service Tax on a works contract; and (2)incorporation of the requisite computation, valuation and machinery provisions, which facilitate a coherent, fair, rational, stable and legitimate exaction of tax, confined to such components/elements of this composite, facially indivisible transaction as fall within the taxation domain of the Union, under Entry 97, List I of the Seventh Schedule of the Constitution of India. Only upon introduction of such integrated statutory architecture, w.e.f 01-06-2007, has uncanalized executive/quasi-judicial discretion been, substantially eliminated; and assessment of service components and associate components/elements involved in the execution of a works contract, by lawful and intra vires valuation, levy and collection of Service Tax, ensured to be non-discriminatory and rational; and

+ Consequently, the CESTAT larger Bench decision in C.C.E. vs. B.S.B.K. Pvt Ltd , to the extent it rules that a works contract is a taxable service prior to 01-06-2007 as well is, with respect, declared to be in error; and is overruled.

Contra by Technical Members: The Three Members (Technical) did not agree with the above views.

Per: P.R.Chandrasekharan , Member (T):

Futility of Five Member Bench : The present reference has arisen in view of the conflicting views expressed by three Larger Benches of this Tribunal. In the case of Jyoti Ltd. and Indian Oil Tanking Ltd., two larger benches of this Tribunal held the view that ‘a works contract service' is not leviable to service tax prior to 1-6-2007, when a specific entry was introduced in the taxable service list in Budget 2007. However, in BSBK case, another Larger Bench took a contrary view and held that a works contract service can be vivisected and discernible service elements can be subjected to service tax prior to 1-6-2007, provided the services involved are taxable services. The decisions in the Jyoti Ltd. and Indian Oil Tanking case have been challenged by the Revenue before the Supreme Court and the appeals have been admitted in July, 2008 and August, 2010 and have been pending disposal since then. Therefore , when the hon'ble apex court is seized of the matter, I am not sure what useful purpose would be served by the present larger bench considering the very same matter. Secondly, it is seen that the hon'ble Delhi High Court, on two occasions, has considered the very same matter in the GD Builders and M/s YFC Projects (P) Ltd. case and has taken a view that a works contract can be vivisected and discernible taxable service elements could be subjected to service tax prior to 1-6-2007. This Tribunal being sub-ordinate to both the apex Court and the High Court would be bound by these decisions. Besides, the issue before the larger bench is not a recurring matter which needs some finality at the Tribunal level. After 1-6-2007, there is no dispute at all pending which needs a resolution. The dispute essentially relates to cases arising during 2004 - 2007 concerning the taxability or other-wise of CICS, COCS and ECIS services involved in a composite contract.

GD Builders already followed by Tribunal Judicial Somersault ? : The CESTAT in several cases had followed the decision of the Delhi High Court in GD Builders. After consistently holding that the GD Builders decision is not per incuriam and is a good law, that too, after making the present reference, can the Tribunal take a different view now and perform a judicial somersault? The frequent change of views by the Tribunal only adds to the uncertainty and might impact the institutional integrity. Not only the legality but also the propriety of rendering a decision is equally important and should weigh.

GD Builders, binding on the Tribunal: Tribunal being sub-ordinate to the High Court in the judicial hierarchy cannot sit in judgment on the correctness of a decision passed by the High Court notwithstanding the liberty granted. The liberty granted is conditional, that is, the larger bench has to consider first as to whether the decision in the GD Builder's case covers the issue before it and if so, the matter shall be closed. It cannot be said that any contrary view (to GD Builders case) was expressed either by Karnataka High Court or by the Madras High Court. In other words, the ratio decidendi of the G D Builders case stands uncontroverted as of now and therefore, the same is binding on all sub-ordinate courts including this Tribunal (irrespective of the strength of the bench which hears the matter).

Validity of Law and valuation : there cannot be any challenge whatsoever to the levy of service tax, merely because there are no machinery provisions to compute or quantify the amount of tax. In my considered view section 67 itself provides the measure of the levy. Further there are several exemption notifications such as 12/2003-ST, 15/2004-ST and 1/2006-ST which provide for an alternative, optional, hassle free method of quantification of the tax liability subject to satisfaction of conditions stipulated therein.

Since 2004, the provisions of Cenvat Credit Rules, 2004, have been made applicable to service tax also. As per these provisions, duties/taxes paid on inputs (goods used in rendering of services) and input services (services used for rendering of services) are available as credit for payment of service tax on the output service. The tax credit mechanism is a significant means of determination of value addition, both in respect of supply of goods as well as supply of services. The tax credit mechanism ensures that the tax on the output service is charged only on the value addition involved on account of rendering of service. Therefore, even in the absence of a specific machinery provision, the value of the service rendered is automatically captured through the Cenvat credit mechanism.

The three taxable services involved in the present dispute are ECIS, CICS and COCS. Sales tax /VAT is leviable on the sale value of goods involved in the works contract involving these services either on actual basis or composition basis as per the various State ST/VAT laws. Therefore, the value of goods supplied in a composite works contract is well known or determined. From the total value of the composite contract, if the value for the supply of goods is deducted, the remainder would be the value of the service component. Therefore, at the practical level of implementation, there is absolutely no difficulty in determination of value of service rendered. Therefore, the argument of lack of machinery provision for determination of tax liability is only a figment of imagination and has no practical relevance. Therefore, the challenge to the levy on this ground is clearly unsustainable

Vivisection of a composite contract : the issue referred to the Larger Bench is fully and squarely covered by the G D Builders case decided by the Hon'ble Delhi High Court and the matter should rest there. Consequently, it has to be held that a composite works contract can be vivisected and discernible service elements therein can be levied to service tax provided such elements are declared as taxable services in the law, even prior to 1-6-2007 when a specific entry was created for certain type of works contract services. The reference should be answered accordingly and returned to the referring benches.

Per: RK Singh, Member (T): The Member calls the President his judicial guru and proceeds to disagree with the guru.

Services Taxable for the earlier period : Merely because CCS, CICS, ECIS, provided as part of Works Contracts and hence becoming classifiable under Works Contract Service [S.65 (105)(zzzza)] w.e.f . 01.06.2007 in no way means that these services (as part of works contracts) were not taxable earlier (i.e. prior to 01.06.2007) under Section 65 (105) (zzzh), 65 (105)(zzq), 65 (105) (zzd) respectively because classification of a service is to be determined as per the definitions of various taxable services prevalent during the relevant period and merely because the classification changes with the introduction of a taxable service under which an existing service gets more specifically covered (by virtue of Section 65A), does not mean that the said service was not taxable during the period prior thereto. When works contracts are held to be divisible in the wake of the 46th Constitutional Amendment, it becomes immaterial for the purpose of charging service tax whether a taxable service is rendered under a pure service contract or as part of a works contract. Incidentally, it may be mentioned in passing that if it was to be held that works contracts were not taxable under Finance Act, 1994 prior to 01.06.2007, the consequence would be that a works contract (to construct a commercial building) which involved (for the sake of argument) transfer of property in goods in the form of a single ordinary brick (of say value Rs.10) will not be taxable under CICS before 01.06.2007 and taxable service (like photography service) provided as a part of works contract of the type not covered under Works Contracts Service [65 (105) (zzzza)] would neither be taxable prior to 01.06.2007, nor with effect from 01.06.2007 even if the transfer of property in goods in such works contract is a tiny fraction of the total value thereof.

Per: Rakesh Kumar, Member (T): While agreeing with his Technical brothers, he looked at the question as to whether the service component of an indivisible works contract could be taxed during the period prior to 01/6/07, from another angle.

Works Contract - Divided - vivisected : In the world of trade and commerce, the transactions of sale of goods and sale of service are so intermixed that insisting on absolute separation of goods and services for taxation by the State Government and the Central Government respectively would be only a futile exercise - some overlap in this regard is inevitable, which has to be ignored in the interests of smooth functioning of the laws governing the levy of tax on sale of goods by the State Government and levy of service tax on the service by the Central Government. For example the price of the goods sold by a dealer on which sales tax is charged may include the cost of a number of service like freight and transit insurance in case of FOR sales, advertisement expenses, installation and warranty repair charges etc. Similarly the amount charged by a service provider for the service on which service tax is payable may involve the cost of the goods used for providing the service. The principle of non encroachment by the centre into the taxation territory of States and vice versa does not mean that each service transaction should be examined with a microscope for removing the goods component or each sales transaction should be examined with a microscope to remove the service component.

Separate and specific constitutional provision together with the machinery for determining the measure is required only when State Government wants to tax goods portion in a service transaction or the Central Government wants to tax service portion in a sales transaction. But for charging of service tax by the Central Government on a service transaction including a works contract, no machinery for excluding the value of the goods involved in the provision of service is required and for the lack of such machinery provision, the levy cannot be held to be invalid.

Finally the erudite conclusions arrived at by the President after extensive research into the amazing realms of judicial interpretation of various shades of legislation - was overruled by three technical members interpreting legislative principles.

Held by Majority - Three to two : Service elements in a composite (works) contract (involving transfer of property in goods and rendition of services), where such services are classifiable under "Commercial or Industrial Construction"; "Construction of Complex" or "Erection, Commissioning or Installation" (as defined), are subject to levy of service tax even prior to (01.06.2007) insertion of sub-clause (zzzza) in Section 65(105) of the Finance Act, 1994.