Case BriefsHigh Courts

Sikkim High Court: A Division Bench of Vijai Kumar Bist, CJ and Meenakshi Madan Rai, J. dismissed a writ petition filed against the order of the Commissioner of Customs, Central Excise and Service Tax (Appeal I) whereby he had rejected the application for condonation of delay filed by the petitioner along with an appeal from the order of the Joint Commissioner imposing service tax, interest and penalty under provisions of the Finance Act, 1994, on the petitioner.

In the said application for condonation of delay, no efforts were made by the petitioner to explain the delay from 15-08-2015 till 7-10-2016 (the date of filing the appeal before the Commissioner). While rejecting the application, the Commissioner recorded that the reasons for delay assigned by the petitioner were flimsy, and the period delay was also calculated irresponsibly and inaccurably.

Sourav Sen and Rupa Dhakal, Advocates for the petitioner Cooperative Society submitted that the case be considered on merits to subserve the ends of justice. Per contra, B.K. Gupta, Advocate appearing for the Commissioner, supported the impugned order.

The High Court noted that the application for condonation of delay reflected a lackadaisical approach on the part of the petitioner. It was observed: We are conscious and aware that the law of limitation is sufficiently elastic to allow and enable the concerned Authorities to apply it for substantial justice, but at the same time it may be mentioned that merely because a non-pedantic approach should be adopted to an application for condonation of delay it is not essential that every delay including those in which the drafting has been done in a haphazard manner and with nary a care to detail or explanation pertaining to the delay with dates thereof be condoned.”

Reference was made to Supreme Court decision in Esha Bhattacharjee v. Raghunathpur Nafar Academy,(2013) 12 SCC 649, wherein it was, inter alia, held that an application for condonation of delay should be drafted with careful concern and not in a haphazard manner harbouring the notion that the courts are required to condone delay on the bedrock of the principle that adjudication of a lis on merits is seminal to justice dispensation system.

In such view of the matter, the Court was of the opinion that the impugned order suffered no infirmity. Resultantly it was held that the merits of the matter could not be looked into. The petition was thus dismissed.[Singbel GPU Construction Co-Operative Society Ltd. v. CCE, 2019 SCC OnLine Sikk 105, decided on 18-07-2019]

Case BriefsHigh Courts

Bombay High Court: S.C. Dharamadhikari and M.S. Karnik, JJ., dismissed an appeal filed against the order passed by Central Excise and Service Tax Appellate Tribunal, Mumbai (West Zone Bench) whereby it had allowed the respondent’s appeal against the order of the Commissioner of Central Excise and Service Tax confirming the demand of service tax of Rs 10,21,11,359.

The respondent had provided services for construction and upgradation of facilities at Shiv Chatrapati Sports Complex, Pune. According to the appellant, the services were covered under the category of “commercial or industrial services” defined under Section 65 (20 b) of the Finance Act, 1994 (prior to amendment vide Act 14 of 2010) as the said stadium was used for commercial purposes. A demand for payment of service tax was raised on the respondent but no payment was made. Representations were exchanged, and by order dated 15-9-2011, the demand of service tax was confirmed. As against this, the respondent approached CESTAT and the said order dated 15-9-2011 was set aside. Aggrieved thereby, the appellant filed the present appeal.

It was not even the case of the appellant that the stadium was exclusively used for commercial purpose. The relevant agreement itself permitted the Committee to use 1/3rd of the total area for commercial purpose. The question before the High Court was whether the user of stadium area to the extent of 1/3rd of the total area for a commercial purpose would tantamount to “commercial or industrial construction service”?

Perusing Section 65 (25-b), the Court observed, “The language employed in the definition clause is clear and unambiguous. The plain meaning as can be understood from the definition clause, more particularly, the clarification contained in clauses (i), (ii), (iii) is that the construction ipso facto is not leviable to service tax, but it is only when it is used, or to be used, primarily for “commerce” or “industry” or work intended for “commerce” or “industry” that service tax can be levied. Thus, it is only that construction which is to be used or primarily to be used for commerce that is subject to levy of service tax.”

Finding that in the present case, the dominant user of the stadium was non-commercial, the Court held that no service tax was attracted. Therefore, upholding the impugned order, the court dismissed the present appeals. [CCE v. B.J. Shirke Construction Technology (P) Ltd., 2019 SCC OnLine Bom 477, decided on 15-03-2019]

Case BriefsHigh Courts

Delhi High Court: A Division Bench comprising of S. Ravindra Bhat and Anu Malhotra, JJ. allowed an appeal for refund of service tax paid by the appellant under wrong impression.

The appellant was a registered society set up by the Ministry of Finance, Planning Commission, several State Governments and distinguished academicians. It was set up as a centre for research in public economics and policies. Concededly, at the relevant time, service tax was not payable for any of the functions or work undertaken or performed by the appellant-assessee. Tax was levied upon the appellant under a wrong impression that it was liable to pay service tax. Subsequently, upon inquiry, it was informed by the Central Board of Excise and Customs (CBEC) that its activities were non-taxable. Soon thereafter, the appellant sought refund of the tax deposited. The Deputy Commissioner refunded part of the amount but disallowed refund of Rs 11,49,090 on the ground that the application was filed after a lapse of one year and was thus barred by limitation. The appellant unsuccessfully filed an appeal to Customs, Excise and Service Tax Appellate Tribunal (CESTAT). Aggrieved by the same, the appellant preferred the instant appeal.

The High Court perused the record and considered the submissions made by the parties. The Court found favour with the submissions of the appellant that when the amount in question was never payable as there was no levy at all, denying the refund of part payment did not arise and the general principle of limitation would be applicable only from the date of discovery of the fact of mistaken payment. Reference was also made to the Supreme Court decision in CCE v. Krishna Carbon Paper Co., (1989) 1 SCC 150. In the view of the Court, the CESTAT fell into an error while passing the order impugned. Accordingly, the appeal was allowed and the Court set aside the order impugned. The appellant was held entitled to refund of entire amount with proportionate interest. [National Institute of Public Finance and Policy v. CST, 2018 SCC OnLine Del 10812, dated 23-08-2018]

Case BriefsHigh CourtsTaxation

Delhi High Court:  A Division Bench of the Delhi High Court comprising of S.Muralidhar and Vibhu Bakhru, JJ. ruled on whether ‘service tax’ could be charged on a contract regarding ‘construction of a complex’. The petitioners had entered into an agreement with a builder to buy flats being developed in Noida, Uttar Pradesh. The dispute arose when the builder recovered ‘service tax’ from the petitioners in addition to the ‘cost of construction of the complex’.

The issue in contention was apropos the impugned ‘Explanation’ to Section 65(105)(zzz-h) of the Finance Act, 1994. The provision created a legal fiction and expanded the scope of the taxable service by including the ‘construction of the complex’ as a service rendered by the builder to the future buyer.

The petitioners contended that entries related to taxation are present only in Lists 1 and 2 of the Seventh Schedule to the Constitution and, therefore, are mutually exclusive. The Centre is permitted to charge tax on the service component and the States are empowered to charge tax on the transfer of property. As a consequence, in the absence of a service recipient/future buyer, the service rendered by the builder while he is the owner, in the construction of the complex would amount to service to self and cannot be taxed. The petitioners relied on Commissioner Central Excise and Customs, Kerala v. Larsen and Toubro, (2016) 1 SCC 170 to contend that in case ‘construction of a complex’ is a composite contract, the Centre is only authorized to levy tax on the service component of the contract. That being the case, neither the Act, nor the Rules provide for any machinery for ascertaining the service component of a composite contract of the ‘construction of a complex’.

The respondents contended that that development of a project results in substantial value addition on bare land and services such as consulting services, engineering services, management services and architectural services are rendered. And further that only 25% of the base selling price is charged by the builder from the ultimate buyers as service tax.  Therefore, the aforementioned services are subsumed in the composite contract of ‘constructing a complex’ and should be levied with sales tax because a fixed defined amount is levied uniformly on every buyer.

The Court disagreed with the petitioners on the limited point that service tax cannot be charged in a transaction between a developer and a prospective buyer. The Court found that the logic for levying service tax on the prospective buyer of the flat was sound because the activity of construction would be deemed to be a taxable service if the prospective buyer had paid the builder for it in part or full before construction was completed. However, the Court agreed to there being an absence of a statutory mechanism to ascertain the value of the service component in the levy. Thus the challenge to that extent was successful and the impugned ‘Explanation’ to Section 65(105)(zzz-h) was set aside, which brought composite contracts for purchase of units in a building complex within the scope of a taxable service. [Suresh Kumar Bansal v. Union of India, 2016 SCC OnLine Del 3657, decided on June 3, 2016]

Case BriefsHigh Courts

Calcutta High Court: Holding that the show cause notice dated 26th September 2011, demanding service tax from the Petitioner, was barred by limitation, the Court constituted by Justice Arijit Banerjee  quashed it, as well as the Circular of the Central Board for Custom and Excise dated 26th July, 2010 which sought to tax the composite amount of fees paid to IPL players for cricketing and promotional activities, if indistinguishable. The amount of Rs. 1, 51,66,500/- was sought as service tax from Mr Sourav Ganguly, upon amounts received for writing articles in magazines, anchoring TV shows, brand endorsements under ‘business auxiliary services’ [Section 65(19) of the Finance Act, 1994] and IPL fees from KKR as ‘business support service’ under Section 65(105) (zzzq). The Court ordered a refund of the Rs. 1, 51, 66,500/- and Rs. 50 lakhs deposited by the Petitioner.

The Court rejected as ipse dixit grounds of suppression of facts used to extend limitation for demand of service tax, from 1 year to 5 as per Section 73, Finance Act. The Court referred the decision in Simplex Infrastructures Ltd. v. Commissioner of Service Tax, Kolkata 2016 SCC OnLine Cal 571 wherein it was said that question of limitation is a question of jurisdiction and Commission not to have authority to issue notice after a period of limitation. In this connection, the Court held that it cannot be said that the writ petition is not maintainable at all and should not be entertained for adjudication and once a writ petition is admitted, affidavits are invited from respondents and the matter comes up for final hearing before the Court, it would be unjust and unfair to dismiss the writ petition only on the ground of availability of an alternative remedy. and  Commissioner of Central Excise v. Chennai Petroleum Corporation Ltd. 2007 (211) ELT 193 .

Though limitation barred its issue, the notice was quashed on other grounds. The Court noted that the definition of ‘business support services’ was exhaustive and indicated activities promoting business or commercial objectives, inapplicable to the Petitioner’s writing articles or anchoring TV shows. Further, brand promotion/endorsement was taxable under Section 65(105)(zzzzq) from 1st July 2010, after which the Petitioner had paid service tax as Celebrity Brand Ambassador. ‘Brand endorsement’ constituted a different category from ‘business auxiliary service’, as it was settled law that a levy introduced by amendment  to the law did not exist prior to the enactment; hence tax from 1 May 2006 to 30th June 2010 upon endorsements as ‘business auxiliary services’ was not recoverable. The Court approved Commissioner of Service Tax, Delhi v. Shriya Saran 2014 (36) STR 641 where it was held activities prior to 1 July 2010 could not be taxable  and Indian National Shipowners’ Association v. Union of India 2009 (14) STR 289.

The Court drew a parallel with the Order in Appeal No. 330-332/SVS/RTK/2014, dated 6 June 2014, where the Appellant, of Chennai Super Kings, was held to be in the employ of IPL and not an independent worker providing taxable service, as he was constrained by the franchisee.

The Court remonstrated with the Central Board of Excise and Custom not to seek to ‘legislate by issuing circulars/instructions’, citing Commissioner of Central Excise, Bolpur v. Ratan Melting & Wire Industries 2008 (12) STR 416 (an instruction/circular issued by a Ministry could not expand the scope of law, nor create tax liability). It would be de hors the statute to levy tax on composite amount of the fees for match playing and participation in promotional activities. [Sourav Ganguly v. Union of India., 2016 SCC OnLine Cal 3234  decided on 30-06-2016]

 

Case BriefsHigh Courts

Delhi High Court: Disposing of the petition, wherein the challenge was to Rule 5-A(2) of the Service Tax Rules, 1994 [as amended by the Service Tax (Third Amendment) Rules, 2014] to the extent that the amended Rule 5-A(2) empowered departmental officers or audit party deputed by the Commissioner or the Comptroller and Auditor General of India to “demand” production of documents mentioned therein, which is in conflict with Section 72-A of the Finance Act beyond the rule-making power of the Central Government, in a landmark judgment the Court held that the Central Government cannot arrogate to itself powers which were not contemplated to be given to it by Parliament, in the garb of rule-making power.
The petitioner also challenged the constitutional validity of Section 94(2)(k) of the Finance Act and the Circular issued by CBEC as ultra vires. Mr J.K. Mittal, petitioner’s counsel contended that firstly, Rule 5-A(2) expands the list of officers who could seek production of records and none of the safeguards spelt out in Section 72-A are required to be made by the officers under Rule 5-A(2) giving “wide unguided powers” to the officers. Secondly, Section 94(2)(k) of the Finance Act “suffers from the vice of excessive delegation”. Thirdly, the CBEC Circular had no statutory basis. To which Senior Counsel Mrs Sonia Sharma for the respondents contended that Rule 5-A(2) had to be read in continuation with Sections 72, 73, 73-A of the Act and that Section 94(2)(k) only acts as a check on the general powers under unamended Rule 5-A.
Both the notification dated December 28, 2007 inserting Rule 5-A as well as the CBEC Instructions dated January 1, 2008 were challenged in Travelite (India) v. Union of India, 2014 SCC Online Del 3943, whereby the Division Bench of the Delhi High Court struck down Rule 5-A(2) as being ultra vires Section 72-A read with Section 94(2) of the Finance Act. This decision was subsequently stayed by the Supreme Court in a SLP preferred by the Union of India. In the meanwhile the Rules were amended. The Court however in the present petition, examined the constitutional validity of amended Rule 5-A(2) and the circulars and leter in question independent of the decision in Travelite.
The Division Bench comprising of S. Muralidhar and Vibhu Bakhru, JJ. held that Rule 5-A(2) cannot be sustained with reference to Section 94(2)(k) of the Finance Act as the expression “verify” in Section 94(2)(k) cannot be construed as audit of the accounts of an assessee. The Court observed that there is a distinction between auditing the accounts of an assessee and verifying the records of an assessee. Audit is a special function which has to be carried out by duly qualified persons like a Cost Accountant or a Chartered Accountant. It cannot possibly be undertaken by any officer of the Service Tax Department.
The Court categorically held that it had no hesitation in concluding that Rule 5A(2) exceeds the scope of the provisions under the Finance Act. This is the result whether Rule 5-A(2) is tested vis-à -vis Section 72-A of the Finance Act which pertains to special audit or Section 72 which pertains to assessment or Section 73 which pertains to adjudication or even Section 82 which relates to searches. Under the garb of the rule-making power, the Central Government cannot arrogate to itself powers which were not contemplated to be given it by Parliament when it enacted the Finance Act. This is an instance of the Executive using the rule-making power to give itself powers which are far in excess of what was delegated to it by Parliament.
The CBEC Circular No. 995/2/2015-CX dated February 27, 2015 on the subject, Central Excise and Service Tax Audit Norms to be followed by the Audit Commissionerates and the Central Excise and Service Tax Audit Manual, 2015 issued by the Directorate General of Audit of the CBEC was held ultra vires the Act and held to be without statutory backing which cannot be relied upon to legally justify the audit by the officers of the Service Tax Department. [Mega Cabs Pvt. Ltd. v. Union of India, 2016 SCC Online Del 3630, decided on 03.06.2016]

Case BriefsSupreme CourtTaxation

Supreme Court: The Bench comprising of A.K. Sikri and R.F. Nariman JJ. held that Works Contract Service was not a taxable service prior to June 1, 2007 as services classifiable under Commercial or Industrial Construction Service (CICS), Construction of Complex Service (COCS), or Erection, Commissioning or Installation Service (ECIS) covers only such contracts/ transactions which involves pure rendition of service(s), falling within the ambit of the respective definitions and do not comprehend Works Contract Service within their ambit. It was further held that the decision of the Hon’ble Delhi High Court in case of G.D. Builders and Others v. Union of India, 2013 SCC OnLine Del 4543, that a works contract can be vivisected and discernible taxable service elements could be subjected to Service tax prior to June 1, 2007 is erroneous on per incuriam and sub silentio grounds.

The main issue before the bench was that Service elements in a composite/Indivisible works contract (involving transfer of property in goods and rendition of services), where such services are classifiable under CICS, COCS, or ECIS, are subject to levy of service tax even prior to insertion of taxable service ‘Works Contract Service’ under Section 65(105) (zzzza) of the Finance Act, 1994 (“the Finance Act”) i.e. prior to June 1, 2007?

The Bench after elaborate discussion of the various provisions and judicial pronouncements held that the 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. A close look at the Finance Act would show that the taxable services referred to in the charging Section 65(105) thereof would refer only to service contracts simpliciter and not to composite works contracts. This is clear from the very language of Section 65(105) of the Finance Act which defines ‘taxable service’ as “any service provided”. Under Section 67 of the Finance Act, 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. 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 the contention of the Revenue is accepted, each of these excluded Works contracts could be taxed under the sub-heads of Section 65(105) of the Finance Act, which was never the intention of Parliament. In GD Builders case, it was held that the levy of service tax in Section 65(105)(g), (zzd), (zzh), (zzq) and (zzzh) of the Finance Act is good enough to tax indivisible composite works contracts, but in view of the Court’s 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 simpkle 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. The Delhi High Court judgment (In GD Builders case) unfortunately misread the judgment of Supreme Court in the case of Mahim Patram Private Ltd.v. Union of India, (2007) 3 SCC 668 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.

Thus, the SC in no ambiguous terms ruled that works contracts cannot be taxed before June 1, 2007. Accordingly, the appeals filed by the Assessees were allowed and appeals filed by the Revenue were dismissed. Commissioner of Central Excise and Customs, Kerala and Others v. Larsen and Toubro Ltd. and Others, 2015 SCC OnLine SC 738 decided on 20-08-2015