The Supreme Court ruled that composite works contracts could not be subject to service tax before the Finance Act of 2007, which amended the Finance Act of 1994 and added Section 65(105)(zzzza) defining works contracts. The Apex Court in case of M/s. Total Environment Building Systems Pvt. Ltd. v. Deputy Commissioner of Commercial Taxes And Ors. stated that service tax cannot be assessed on the service component of a works contract in the absence of a charge provision and the procedures to levy and assess.
In its ruling in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Ltd. (2016), the Apex Court came to the same conclusion. The Revenue had, however, requested reconsideration of the same verdict in the current proceedings.
The two parts of a works contract are the sales component and the service component. Only the service component is subject to service tax, whereas the sales component is subject to the applicable State's sales tax legislation. For service tax to be imposed on the service component of a works contract, both the sale and service components must be present.
In Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Ltd., the Apex Court's ruling was challenged by Additional Solicitor General Madhavi Divan on behalf of the Revenue. In the aforementioned case, it was decided that before the 2007 change to the Finance Act of 1994, service tax on composite works contracts was not leviable. She said that before the 2007 amendment, service tax was already due on composite works contracts. She further claimed that the 2007 amendment's addition of Section 65(105)(zzzza) was just clarifying in nature. Conversely, attorneys representing the assessees made the argument that the aforementioned judgment is not worthy of consideration.
Whether service tax on composite works contracts was leviable prior to the 2007 change to the Finance Act was the question before the Court in Larsen & Toubro (supra). The Apex Court had underlined that a charge provision and a system for levying and assessing service tax on service elements of works contracts ought to be included in order to levy service tax. Prior to the 2007 modification, the Finance Act of 1994 did not, however, provide the same. It was decided that works contracts should be taxed separately because they are a different type of contract from service simpliciter contracts. The Apex Court had ruled in Larsen and Toubro that G.D. Builders v. The Union of India was incorrectly decided.
The court stated that the aforementioned decision has held up over time. The Apex Court and other High Courts have continuously upheld it since 2015. The Court feared that changing its mind would have an impact on the assessments in favor of whom the decision had already been made. It decided not to change the law because it was bound by the principle of stare decisis established by the Apex Court in the cases of Indra Sawhney v. Union of India and Keshav Mills Co. Ltd. v. Commissioner of Income Tax, Bombay North, Ahmedabad. This was especially true given that revenue had made no attempt to request a review of the aforementioned judgement and the court noted that "It was categorically observed that since the Finance Act, 1994 lays down no charge or machinery to levy and assess service tax on indivisible composite works contract, therefore, service tax was not existent at all under the Act and hence any exemption qua service tax "levied" did not arise at all."