Holding

The Finance Act, 1994 does not provide a charge or assessment machinery for service tax on indivisible works contracts, so such tax could not be levied before the 2007 amendment.

Summary

The Supreme Court examined whether service tax could be levied on indivisible works contracts entered into after the Finance Act, 1994 but before the 2007 amendment that expressly made such contracts taxable. It held that the 1994 Act neither charged nor provided machinery to assess service tax on composite works contracts, and therefore the levy was unconstitutional prior to the 2007 amendment. The Court emphasized that works contracts are a distinct species of contract and must be taxed separately, with the service element taxed by the Centre and the goods element by the States, in line with the constitutional division of taxing powers. It rejected the revenue's argument that the contracts were contrary to public policy under Section 23 of the Contract Act and the McDowell case. Consequently, the Court allowed the assessees' appeals and dismissed the revenue's appeals, striking down the service tax liability on the contracts in question.

Issues considered

The Finance Act, 1994, whether it contains a charge and machinery to levy service tax on indivisible works contracts.
Whether service tax can be levied on such contracts prior to the Finance Act, 2007 amendment.
Constitutional validity of levying service tax on works contracts given the exclusive taxation powers of Centre and States.
Whether indivisible works contracts are void as contrary to public policy under Section 23 of the Contract Act and the McDowell precedent.

Legislation cited

Central Excise and Salt Act, 1944
Central Sales Tax Act
Constitution of Indias. Art. 248, s. Art. 366(29A), s. Schedule VII List I, s. Schedule VII List II
Finance Act, 1994s. 64, s. 65(105), s. 66, s. 67
Finance Act, 2007s. 65(105)(zzzza)
Service Tax (Determination of Value) Rules, 2006s. Rule 2A

Subjects

service taxworks contractindivisible contracttaxation lawconstitutional lawFinance Act 1994Finance Act 2007valuation rulesassessment machinerypublic policySection 23 Contract ActMcDowell case

Judgment

[2015] 8 S.C.R. 1046

A COMMISSIONER, CENTRAL EXCISE & CUSTOMS,
KERALA
v.
MIS LARSEN & TOUBRO LTD.
B (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. 2A-
G 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.

o;
Constitution 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 ·
E
HELD: 1. In the lists contained in the 7th Schedule
to the Constitution, taxation entries are to be found only
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]

Bharat Sanchar Nigam Limited v. Union of India (2006)
3 SCC 1: 2006 (2) SCR 823 - relied on.

c 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)
D
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;
E 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~,, ii
is
....
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 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.
G
· 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]
B
*Mcdowell and Company Ltd. v. Commercial Tax Officer
1985 (2) sec 230 - referred to.

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; 1098-
A) .

Builders' Assn. of India v. Union of India (1989) 2 SCC
645; 1989 (2) SCR 320; GD. Builders v. UOI andAnr. D
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.
E
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 .,,,
' . F
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
G
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
H
(2014) 1 sec 108 relied on. Para 19
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 SUPREME COURT REPORTS (2015] 8 S.C.R.

A 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
B 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 sub-
clause (b) of Article 366 (29A) which reads as follows:-

366 (29A) ''tax on the sale or purchase of goods" includes-
F 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:
"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
H 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
D
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 E
above." (at para 36)

5. This is the historical setting within which the present
controversy arises.

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 l "'"'l qr
counsel
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 pre-
2007 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
B1 the commencement of this Chapter.

Section 65. Definitions. In this Chapter, unless the
context otherwise requires, -----

(105) "taxable service" means any service provided-.
c
(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
D or computer software engineering;

(zzd) to a customer, by a commissioning and installation
agency in relation to erection, commissioning or
installation;
E
(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;
F
(zzzh) to any person, by any other person, in relation to
construction of a complex;

Explanation : For the purposes of this sub-clause,
G 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
. H 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 B
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), c
(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), D
(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 E
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
F
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; ,,;.;.. G

(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; ,,, H
1060 SUPREME COURT REPORTS [2015] 8 S.C.R.

A (c) the amount of premium charged by the insurerfrom
the policy holder;

(d) the commission received by the air travel agent from
the airline;
B
(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
c 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,
D
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:
E
(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;

F (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;

G (iv) the airfare collected by air travel agent in respect Of
service provided by him;

(v) the rail fare collected by rail travel agent in respect
of service provided by him;
H
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 A
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, B
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 ·C
value of taxable service shall be such amount as with the
addition of tax payable, is equal to the gross amount
charged." _

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 E
terminals, bridges, tunnels and dams.

Explanation : For the purposes of this sub-clause, ''works
contract" means a contract wherein,-
F
(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,-

(a) Erection, commissioning or installation of plant, G
machinery, equipment or structures, whether pre-
fabricated 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 H
1062 SUPREME COURT REPORTS [2015] 8 S.C.R.

A 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
B a part thereof, or of a pipeline or conduit, primarily for the
purposes of commerce or industry; or

(c) Construction of a new residential complex or a part
thereof; or
c (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
D 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-
E
(1) Subject to the provisions of this Chapter, service tax
chargeable on any taxable service with reference to its
value shall,-

F (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; ·

G (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;

H (iii) in a case where the provision of service is for a
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1063
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]

consideration which is not ascertainable, be the amount A
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:- B

"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:- c
(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. ·
D
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
may be, paid or payable, if any, on transfer of property in E
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;
F
(ii) amount paid to a sub-contractor for labour and
services;

{iii) charges for planning, designing and architect's fees;
G
{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;
H
1064 SUPREME COURT REPORTS [2015] 8 S.C.R.

A (vi) cost of establishment of the contractor relatable to
supply of labour and services;

(vii) other similar expenses relatable to supply of labour
and services; and ·
B
(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
c 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
D
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
E 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
F 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
G 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
H sub-clauses (A) and (B) including maintenance, repair,
COMMISSIONER, CENTRAL EXCISE &CUSTOMS, 1065
KERALA v~ M/S LARSEN &TOUBRO [R. F. NARI MAN, J.]

completion and finishing services· such as glazing, A
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.
B-
Explanation 1.-Forthe purposes of this rule,-

(a) "original works" means-

(!) all new constructions;
c
(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, D
machinery or equipment or structures, whether pre-
fabricated or otherwise;

(d) 'total amount" means the sum total of the gross amount
charged for the works contract and the fair market value E
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-
F
(i) the amount charged for such goods or services, if any;
and

(ii) the value added tax or sales tax, if any, levied thereon:

Provided that the fair market value of goods and services G
so supplied may be determined in accordance with the
•
generally accepted accounting principles.

Explanation 2.-For the removal of doubts, it is clarified
thatthe provider of taxable service shall not take CENVAT H
1066 SUPREME COURT REPORTS (2015] 8 S.C.R.

A 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:-

c "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
D 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
E 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
F 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
G 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, 1067
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]

execution of a works contract. In Builders' Association A
case [(1989) 2 sec 645: 1989 sec (Tax) 317: (1989)
2 SCR 320] it has been pointed out that in Article 366(29-
A)(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 B
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 c
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
D
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 E
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 F
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 G
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 Forty- H
1068 SUPREME COURT REPORTS [2015] 8 S.C.R.

A 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
involved in the execution of a works contract on which
8 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,
c 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
D
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.
E 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
F 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
G 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
H customer for the goods sold. Since a composite works
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1069
KERALA v. M/S LARSEN & TOUBRO [R. F. NARI MAN, J.)

contract involves supply of materials as well as supply of A
labour and services, the cost of establishment of the
contractor would have to be apportioned between the
part of the contract involving supply of materials and the
part involving supply of labour and services: The cost of
establishment of the contractor which is relatable to supply B
of labour and services cannot be included in the value of
the goods involved in the execution of a contract and the
cost of establishment which is r~latable to supply of
material involved in the execution of the works contract
only can be included in the value of the goods. Similar c
apportionment will have to be made in respect of item
No. (viii) relating to profits. The profits which are relatable
to the supply of materials can be included in the value of
the goods and the profits which are relatable to supply of
D
labour and services will have to be excluded. This means
that in respect of charges mentioned in item Nos. (vit)
and (viii), the cost of establishment of the contractor as
well as the profit earned by him to the extent the same
are relatable to supply of labour and services will have to E
be excluded. The amount so deductible would have to
be determined in the light of the facts of a particular case
on the basis of the material produced by the contractor.
The value of the goods involved in the execution of a works
contract will, therefore, have to be determined by taking F
into account the value of the entire works contract and
deducting therefrom the charges towards labour and
. services which would cover-

(a) Labour charges for execution of the works;

(b) amount paid to a sub-contractor for labour and
services;

(c) charges for planning, designing .and architect's fees;
H
1070 SUPREME COURT REPORTS [2015] 8 S.C.R.

A (cf) charges for obt:iining on hire or otherwise machinery
and tools used for the execution of the works contract;

(e) cost of consumables such as water, electricity, fuel,
etc. used in the execution of the works contract the
B property in which is not transferred in the course of
execution of a works contract; and

(f) cost of establishment of the contractor to the extent it ·
is relatable to supply oflabour and services;
c (g) other similar expenses relatable to supply of labour
and services;

(h) profit earned by the contractor to the extent it is
relatable to supply of labour and services.
D
The amounts deductible under these heads will have to
be determined in the light of the facts of a particular case
on the basis of the material produced by the contractor.

E Normally, the contractor will be in a position to furnish
the necessary material to establish the expemjes that
were incurred under the aforesaid heads of deduction
for labour and services. But there may be cases where
the contractor has not maintained proper accounts or the
F accounts maintained by him are not found to be worthy
of credence by the assessing authority. In that event, a
question would arise as to how the deduction towards
the aforesaid heads may be made. On behalf of the
States, it has been urged that it would be permissible for
G the State to prescribe a formula on the basis of a fixed
percentage of the value of the contract as expenses
towards labour and services and the same may be
deducted from the value of the works contract and that
the said formula need not be uniform for all works
H contracts and may depend on the nature of the works
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1071
KERALA v. MIS LARSEN & TOUBRO [R. F. NARI MAN, J.]

contract. We find merit in· this submission. In cases where A
the contractor does not maintain proper accounts or the
accounts maintained by him are not found worthy of
credence it would, in our view, be permissibleforthe State
legislation to prescribe a formula for determining the
charges for labour and services by fixing a particular B
percentage of the value of the works contract and to allow
deduction of the amount thus determined from the value
of the works contract for the purpose of determining the
value of the goods involved in the execution of the works
contract. It must, however, be ensured that the amount c
deductible under the formula that is prescribed for
deduction towards charges for labour and services does
not differ appreciably from the expenses for labour and
services that would be incurred in normal circumstances
D
in respect of that particular type of works contract. Since
the expenses for labour and services would depend on
the nature of the works contract and would not be the
same for all types of works contracts, it would be
permissible, indeed necessary, to prescribe varying E
scales for deduction on account of cost of labour and
services for various types of works contracts."( at paras
45, 47 and 49)
"'*:>r
15. Areading of this judgment, on which counsel forthe F
assessees heavily relied, would go to showthaUhe separation
of the value of goods contained in the execution of a works
contract will have to be determined by working from the value
of theentire works contract and deducting theJ~from charges
towards labour and services. Such deduction~, are stated by G
the Constitution Bench to be eight in number. What is
important in particular is the deductions which 31re to be made
under sub-paras (f), (g) and (h). Under each of.these paras, a
bifurcation has to pe made by the charging Section itself so
that the cost of establishment of the contractor is bifurcated H
1072 SUPREME COURT REPORTS [2015] 8 S.C.R.

A into what is relatable to supply of labour and services. Similarly,
all other expenses have also to be bifurcated insofar as they
are relatable to supply of labour and services, and the same
goes for the profit that is earned by the contractor. These
deductions are ordinarily to be made from the contractor's
B accounts. However, if it is found that contractors have not
maintained proper accounts, or their accounts are found to be
not worthy of credence, it is left to the legislature to prescribe
a formula on the basis of a fixed percentage of the value of the
entire works contract as relatable to the labour and service
C element of it. This judgment, therefore, clearly and
unmistakably holds that unless the splitting of an indivisible
works contract is done taking into account the eight heads of
deduction, the charge to tax that would be made would
D otherwise contain, apart from other things, the entire cost of
establishment, other expenses, and profit earned by the
contractor and would transgress into forbidden territory namely
into such portion of such cost, expenses and profit as would
be attributable in the works contract to the transfer of property
E in goods in such contract. This being the case, we feel that the
learned counsel for the assessees are on firm ground when
they state that the service tax charging section itself must lay
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
F 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 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
G tax under the five heads in Section 65(105) noticed abo~
would only be of service contracts simpliciter and not composite
indivisible works contracts.

16. At this stage, it is important to note the scheme of
H taxation under our Constitution. In trot': i1sts c:Ontained in the ?lh
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1073
KERALA v. MIS LARSEN & TOUBRO [R. F. NARIMAN, J.]

Schedule to the Constitution, taxation entries are to be found A
only in lists I and II. This is for the reason that in our
Constitutional scheme, taxation powers of the Centre and the
States are mutually exclusive. There is no concurrent power
of taxation. This being the case, the moment the levy contained
in a taxing statute transgresses into a prohibited exclusive field, B
it is liable to be struck down. In the present case,, the dichotomy
is between sales tax leviable by the States and service 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 t
service element contained in these contracts, and the States
can only tax the transfer of property in goods element contained
in these contracts. Thus, it becomes very important to
segregate the two elements completely for if some element of
0
transfer of property in goods ren:iains when a service tax is
levied, the said levy would be found to be constitutionally infirm.
This position is well reflected ·in Bharat Sanchar Nigam
Limited v. Union of India, (2006) 3 SCC 1, as follows:-

"No one denies the legislative competence of the States .E
to levy sales tax on sales provided that the necessary
concomitants of a sale are present in the transaction and
the sale is distinctly discernible in the transaction. This
does not however allow the State to entrench upon the
F
Union List and tax services by including the cost of such
service in the value of the goods. Even in those composite
contracts which are by legal fiction deemed to be divisible
under Article 366(29-A), the value of the goods involved
in the execution of the whole transaction cannot be .G
assessed to sales tax. As was said in Larsen &
Toubro v. Union of lndia[(1993) 1 SCC 364]: (SCC p.
395, para 47) :-"The cost of establishment of the
contractor which is relatable to supply of labour and
services cannot be included in the value of the goods H
1074 SUPREME COURT REPORTS [2015] 8 S.C.R.

A involved in the execution of a contract and the cost of
establishment which is relatable to supply of material
involved in the execution of the works contract only can
be included in the value of the goods."

B For the same reason the Centre cannot include the value
of the SIM cards, if they are found ultimately to be goods,
in the cost of the service. As was held by us in Gujarat
Ambuja Cements Ltd. v. Union of India [(2005) 4 SCC
214], SCC at p. 228, para 23:-"This mutual exclusivity
c which has been reflected in Article 246(1) means that
taxing entries must be construed so as to maintain
exclusivity. Although generally speaking, a liberal
interpretation must be given to taxing entries, this would
not bring within its purview a tax on subject-matter which
D a fair reading of the entry does not cover. If in substance,
the statute is not referable to a field given to the State,
the court will not by any principle of interpretation allow a
statute not covered by it to intrude upon this field." (at
paras 88 and 89)
E
17. We find that the assessees are correct in their
submission that 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
F has to be taxed separately as such. In Gannon Dunkerley,
1959 SCR 379, this Court recognized works contracts as a
separate species of contract as follows:-

"To avoid misconception, it must be stated that the above
G conclusion has reference to works contracts, which are
entire and indivisible, as the contracts of the respondents
have been held by the learned Judges of the Court below
to be. The several forms which such kinds of contracts
can assume are set out in Hudson on Building Contracts,
H at p. 165. It is possible that the parties might enter into
COMMISSIONER, CENTRAL EXCISE &CUSTOMS, 1075
KERALA v. M/S LARSEN & TOUBRO [R. F. NARI MAN, J.]

distinct and separate contracts, one for the transfer of A
materials for money consideration, and the other for
payment of remuneration for services and for work done.
In such a case, there are really two agreements, though
there is a single instrument embodying them, and the
power of the State to separate the agreement to sell, B
from the agreement to do work and render se_rvice and
to impose a tax thereon cannot be questioned, and will
stand untouched by the present judgment." (at page 427)

18. Similarly, in Kone Elevator India (P) Ltd. v. State C
of T.N., (2014) 7 SCC 1, this Court held:-

"Coming to the stand and stance of the State of Haryana,
as put forth by Mr Mishra, the same suffers from two basic
fallacies, first, the supply and installation of lift treating it D
as a contract for sale on the basis of the overwhelming
component test, b~cause there is a stipulation in the
contract that the customer is obliged to undertake the
work of civil construction and the bulk of the material used
in construction belongs to·the manufacturer, is not correct, E
as the subsequent discussion would show; and second;
the Notification dated 17-5-2010 issued by the
Government of Haryana, Excise and Taxation
Department, whereby certain rules of the Haryana Value
Added Tax Rules, 2003 have been amended and a table F
has been annexed providing for "Percentages for Works
Contract and Job Works" under the heading "Labour,
service and other like charges as percentage of total
value of the contract" specifying 15% for fabrication and
installation of elevators (lifts) and escalators, is self- G
contradictory, for once it is treated as a composite
contract invoking labour and service, as a natural
corollary, it would be works contract and not a contract
for sale. To elaborate, the submission that the element of
H
1076 SUPREME COURT REPORTS (2015] 8 S.C.R.

A labour and service can be deducted from the total contract
value without treating the composite contract as a works
contract is absolutely fallacious. In fact, it is an innovative
subterfuge. We are inclined to think so as it would be
frustrating the constitutional provision and, accordingly,
B we unhesitatingly repel the same." (at para 60)°

19. In Larsen & Toubro Ltd. v. State of Karnataka,
(2014) 1 SCC 708, this Court stated:-

c "ln our opinion, the term "works contract" in Article 366(29-
A)(b) is amply wide and cannot be confined to a particular
understanding of the term or to a particular form. The
te'rm encompasses a wide range and many varieties of
contract. Parliament had such wide meaning of "works
D contract" in its view at the time of the Forty-sixth
Amendment. The object of insertion of clause (29-A) in
Article 366 was to enlarge the scope of the expression
"tax on sale or purchase of goods" and
overcome Gannon Dunkerley (1) [State of
E Madras v. Gannon Dunkerley and Co. (Madras) Ltd.,
AIR 1958 SC 560: 1959 SCR 379]. Seen thus, even if
in a contract, besides the obligations of supply of goods
and materials and performance of labour and services,
some additional obligations are imposed, such contract
F does not cease to be works contract. The additional
obligations in the contract would not alter the nature of
contract so long as the contract provides for a contract
for works and satisfies the primary description of works
contract. Once the characteristics or elements of works
G contract are satisfied in a contract then irrespective of
additional obligations, such contract would be covered
by the term "works contract". Nothing in Article 366(29-
A)(b) limits the term "works contract" to contract for labour
and service only. The learned Advocate General for
H
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1077
KERALA v. MIS LARSEN & TOUBRO [R. F. NARIMAN, J.)

Maharashtra was right in his submission that the term A
"works contract" cannot be confined to a contract to
provide labour and services but is a contract for
undertaking or bringing into existence some "works". We
are also in agreement with the. submission of Mr K.N.
Bhat that the term "works contract" in Article 366(29-A)(b) B
takes within its fold all genre of works contract and is not
restricted to one specie of contract to provide for labour
and services alone. Parliament had all genre of works
contract in view when clause (29-A) was inserted in Article
366." (at para 72) c
20. We also find that the assessees' argument thatthere
is no charge to tax of works contracts in the Finance Act, 1994
is correct in view of what has been stated above.
D
21. This Court in Mathuram Agrawal v. State of M.P.,
(1999) asec 667, held:-

"Another question that arises for consideration in this
connection is whether sub-section (1) of Section 127-A E
and the proviso to sub-section (2)(b) should be construed
together and the annual letting values of all the buildings
owned by a person to be taken together for determining
the amount to be paid as tax in respect of each building.
In our considered view this position cannot be accepted. f
The intention of the legislature in a taxation statute is to
be gathered from the language of the provisions
particularly where the language is plain and
unambiguous. In a taxing Act it is not possible to assume
any intention or governing purpose of the statute more G
than what is stated in the plain language. It is not the
economic results sought to be obtained by making the
provision which is relevant in interpreting a fiscal statute.
Equally impermissible is an interpretation which does
not follow from the plain, unambiguous language of the H
1078 SUPREME COURT REPORTS [2015] 8 S.C.R.

A statute. Words cannot be added to or substituted so as
to give a meaning to the statute which will serve the spirit
and intention of the legislature. The statute should clearly
and unambiguously convey the three components of the
tax law i.e. the subject of the tax. the person who is liable
B to pay the tax and the rate at which the tax is to be paid.
If there is any ambiguity regarding any of these
ingredients in a taxation statute then there is no tax in
law. Then it is for the legislature to do the needful in the
matter.
c
This construction, in our considered view, amounts to
supplementing the charging section by including
something which the provision does not state. The
construction placed on the said provision does not flow
D from the plain language of the provision. The proviso
requires the exempted property to be subjected to tax
and for the purpose of valuing that property alone the
value of the other properties is to be taken into
consideration. But, if in doing so, the said property
E becomes taxable, the Act does not provide at what rate
it would be taxable. One cannot determine the rateable
value of the small property by aggregating and adding
the value of other properties, and arrive at a figure which
is more than possibly the value of the property itself.
F
Moreover, what rate of tax is to be applied to such a
property is also not indicated." (at paras 12 and 16)

22. Equally, this Court in Govind Saran Ganga Saran
v. CST, 1985 Supp sec 205, held:-
G
"The components which enter into the concept of a tax
are well known. The first is the character of the imposition
known by its nature which prescribes the taxable event
attracting the levy, the second is a clear indication of the
H person on whom the levy is imposed and who is obliged
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1079
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]

to pay the tax, the third is the rate at which the tax is A
imposed, and the fourth is the measure or value to which
the rate will be applied for computing the tax liability. If
those components are not clearly and definitely
ascertainable, it is difficult to say that the levy exists in
point of law. Any uncertainty or vagueness in the B
legislative scheme defining any of those components of
the levy will be fatal to its validity." (at para 6)

23. To similar effect is this Court's judgment in CIT v. B.C.
Srinivasa Setty, (1981) 2 SCC 460, held:c c
"Section 45 charges the profits or gains arising from the
transfer of a capital asset to income tax. The asset must
be one which falls within the contemplation of the section.
It must bear that quality which brings Section 45 into play. D
To determine whether the goodwill of a new business is
such an asset, it is permissible, as we shall prasently
show, to refer to certain other sections of the head,
"Capital gains". Section 45 is a charging section. For
the purpose of imposing the charge. Parliament has E
enacted detailed provisions in order to compute the
profits or gains under that head. No existing principle or
provision at variance with them can be applied for
determining the chargeable profits _and gains. All
transactions encompassed by Section 45 must fall under F
the governance of its computation provisions. A
transaction to which those provisions cannot be applied
must be regarded as never intended by Section 45 to be
the subject of the charge. This inference flows from the
general arrangement of the provisions in the Income Tax G
Act, where under each head of income the charging
provision is accompanied by a set of provisions for
computing the income subject to that charge. The
character of the computation provisions in eac.h case
H
1080 SUPREME COURT REPORTS [2015] 8 S.C.R.

A bears a relationship to the nature of the charge. Thus the
charging section and the computation provisions together
constitute an integrated code. When there is a case to
which the computation provisions cannot apply at all, it is
evident that such a case was not intended to fall within
B the charging section. Otherwise one would be driven to
conclude that while a certain income seems to fall within
the charging section there is no scheme of computation
for quantifying it. The legislative pattern discernible in the
Act is against such a conclusion. It must be borne in mind
c that the legislative intent is presumed to run uniformly
through the entire conspectus of provisions pertaining to
each head of income. No doubt there is a qualitative
difference between the charging provision and a
computation provision. And ordinarily the operation of
D
the charging provision cannot be affected by the
construction of a particular computation provision. But
the question here is whether it is possible to apply the
computation provision at all if a certain interpretation is
E pressed on the charging provision. That pertains to the
fundamental integrality of the statutory scheme provided
for each head." (at para 10)

24. A close look at the Finance Act, 1994 would show
F that the five taxable services referred to in the charging Section
65(105) would refer only to service contracts simpliciter and
not to composite works contracts. 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
G said sub-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, as has been pointed out above, the value of a taxable
H service is the gross amount charged by the service provider
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1081
KERALA v. M/S LARSEN &TOUBRO [R. F. NARIMAN, J.]

for such service rendered by him. This would unmistakably A
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. It will also be noticed that no attempt to remove
the non-service elements from the composite works contracts B
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 the execution of a works contract.

25. In fac~ by way of contrast, Section 67 post amendment C
(by the Finance Act, 2006) for the first time prescribes, in cases
like the present, where the provision of service is for a
consideration which is not ascertainable, to be the amount as
may be determined in the prescribed manner.
D
26. We have already seen that Rule 2(A) framed pursuant
· to this power has followed the second Gannon Dunkerley
case in segregating the 'service' component of a works contract
from the 'goods' component. It begins by working downwards
from the gross amount charged for the entire works contract E
and minusing from it the value of the property in goods
transferred in the execution of such works contract. . This is
done by adopting the value that is adopted for the purpose of
payment of VAT The rule goes on to say that the service
component of the works contract is to include the eight F
elements laid down in the second Gannon Dunkerley case
including apportionment of the cost of establishment, other
expenses and profit earned by the service provider as is
relatable only to supply of labour and services. And, where value
is not determined having regard to the aforesaid parameters, G
(namely, in those cases where the books of account of the
contractor are not looked into for any reason) by determining
in different works contracts how much shall be the percentage
of the total amount charged for the works contract, attributable
.H
1082 SUPREME COURT REPORTS [2015] 8 S.C.R.

A to the service element in such contracts. It is this scheme and
this scheme alone which complies with constitutional
requirements in that it bifurcates a composite indivisible works
contract and takes care to see that no element attributable to
the property in goods transferred pursuant to such contract,
B enters into computation of service tax.

27. In fact, the speech made by the Hon'ble Finance
Minister in moving the Bill to tax Composite Indivisible Works
Contracts specifically stated:-
c
"State Governments levy a tax on the transfer of property
in goods involved in the execution of a works contract.
The value of services in a works contract should attract
service tax. Hence, I propose to levy service tax on
.o services involved in the execution of a works contract.
However, I also propose an optional composition scheme
under which service tax will be levied at only 2 per cent of
the total value of the works contract."

E 28. Pursuant to the aforesaid speech, not only was the
statute amended and rules framed, but a Works Contract
(Composition Scheme for Payment of Service Tax) Rules,
2007 was also notified in which service providers could opt to
pay service tax at percentages ranging from 2 to 4 of the gross
F value of the works contract.

29. It is interesting to note that while introducing the
concept of service tax on indivisible works contracts various
exclusions are also made such as works contracts in respect
G 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 learned counsel for the
revenue were right, each of these excluded works contracts
H could be taxed under the five sub-heads of Section 65(105)
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1083
KERALA v. M/S LARSEN &TOUBRO [R. F. NARIMAN, J.]

contained in the Finance Act, 1994. For example, a works A
contract involving the construction of a bridge or dam or tunnel
would presumqblyfall within Section 65(105)(zzd) as a contract
which relates to erection, commissioning or installation. It is
clear that such contracts were never intended to be the subject
matter of service tax. Yet, if learned counsel for the revenue is B
right, such contracts, not being exempt under the Finance Act,
1994, would fall within its tentacles, which was never the
intention of Parliament.

30. It now remains to consider the judgment of the Delhi C
High Court in G.D. Builders.

31. In the aforesaid judgment, it was held that the levy of
service tax in Section 65(105)(g), (zzd), (zzh), (zzq) and (zzzh)
is good enough to tax indivisible composite works contracts. D
Various judgments were referred to which have no direct
bearing on the point at issue. In paragraph 23 of this judgment,
the second Gannon Dunkerley judgment is referred to in
passing without noticing any of the key paragraphs set out
hereinabove in our judgment. Also, we find that the judgment E
in G.D. Builders (supra) went on to quote from_the judgment
in Mahim Patram Private Ltd. v: Union of India, 2007 (3) ·
SCC 668, to arrive at the proposition that even when rules are
not framed for computation of tax, tax would be leviable.
F
32. We are afraid that the Delhi High Court completely
misread the judgment in Mahim Patram's case. This judgment
concerned itself with works contracts being taxed under the
Central Sales Tax Act. What was argued in that case was that
in the absence of any rule under the provisions of the Central G
Act, the determination of sale price would be left to the whims
and fancies of the assessing authority. This argument was
repelled by this Court after setting out Sections 2(g) and 2Qa),
which define "sale" and ''works contract". The Court then went
on to discuss Sections 9(2) and 13(3) of the Central Sales Tax H
1084 SUPREME COURT REPORTS [2015] 8 S.C.R.

A Act. Section 9(2) of the Central Sales Tax Act provides:-

"Section 9. Levy and collection of tax and penalties.-

(2) Subject to the other provisions of this Act and the rules
made thereunder, the authorities for the time being
B
empowered to assess, reassess, collect and enforce
payment of any tax under the general sales tax Jaw of the
appropriate State shall, on behalf of the Government of
India, assess, reassess, collect and enforce payment of
c tax, including any interest or penalty, payable by a dealer
under this Act as if the tax or interest or penalty payable
by such a dealer under this Act is a tax or interest or
penalty payable under the general sales tax law of the
State; and for this purpose they may exercise all or any
D of the powers they have under the general sales tax Jaw
of the State; and the provisions of such law, including
provisions relating to returns, provisional assessment,
advance payment of tax, registration of the transferee of
any business, imposition of the tax liability of a person
carrying on business on the transferee of, or successor
to, such business, transfer of liability of any firm or Hindu
undivided family to pay tax in the event of the dissolution
of such firm or partition of such family, recovery of tax
from third parties, appeals, reviews, revisions,
F references, refunds, rebates, penalties, charging or
payment of interest, compounding of offences and
treatment of documents furnished by a dealer as
confidential, shall apply accordingly:

G Provided that if in any State or part thereof there is no
general sales tax Jaw in force', the Central Government
may, by rules made in this behalf make necessary
provision for all or any of the matters specified in this
sub-section."
H
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1085
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]

33. Section 13(3) of the Central Sales Tax Act says:- A

"The State Government may make rules, not inconsistent
with the provisions· of this Act and the rules made under
sub-section (1), to carry out the"purposes of this Act."
B
34. In the aforesaid judgment it was found that Section
9(2) of the Central Sales Tax Act conferred powers on officers
of the various States to utilize the machinery provisions of the
States' sales tax statutes for purposes of levy and assessment
of central sales tax under the Central Act. It was also noticed c
that the State Government itself had been given power to make
rules to carry out the purposes of the Central Act so long as
the said rules we~e not inconsistent with the provisions of the .
Central Act. It was found that, in fact, the State of Uttar Pradesh
had framed such rules in exercise of powers under Section D
13(3) of the Central Act as a result of which the necessary
machinery for the assessment of central sales tax was found
to be there. The Delhi High Court judgment unfortunately
misread the aforesaid judgment of this Court to arrive at the
conclusion that it was an authority for the proposition that a tax E
is leviable even if no rules are framed for assessment of such
tax, which is wholly incorrect. The extracted passage from
Mahim Patram's case only referred to rules not being framed
under the Central Act and·not to rules not being framed at all.
The conclusion therefore in paragraph 36(2) of the Delhi High F
Court judgment is wholly incorrect. Para 36(2) reads as
follows:-

"(2) Service tax can be levied on the service component
of any contract involving service with sale of goods etc. G
Computation of service comppnent is a matter of detail
and not a matter relating to validity of imposition of service
tax. It is procedural and a matter of calculation. Merely
because no rules are framed for computation, it does
not follow that no tax is leviable." [at para 36] H
1086 SUPREME COURT REPORTS [2015] 8 S.C.R.

A 35. The aforesaid finding is in fact contrary to a long line
of decisions which have held that 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.
Various judgments of this Court have been referred to in the
B following passages from Heinz India (P) Ltd. v. State of
U.P., (2012) 5 SCC 443. This Court said:-

"This Court has in a long line of decisions rendered from
time to time, emphasised the importance of machinery
c provisions for assessment of taxes and fees recoverable
under a taxing statute. In one of the earlier decisions on
the subject a Constitution Bench of this Court in K. T.
Moopil Nair v. State of Kera/a [Al R 1.961 SC 552]
examined the constitutional validity of the Travancore-
D Cochin Land Tax Act (15 of 1955). While recognising
what is now well-settled principle of law that a taxing
statute is not wholly immune from attack on the ground
that it infringes the equality clause in Article 14, this Court
found that the enactment in question was violative of
E Article 14 of the Constitution for inequality was writ large
on the Act and inherent in the very provisions under the
taxing section thereof. Having said so, this Court also
noticed that the Act was silent as to the machinery and
the procedure to be followed in making the assessment.
F
It was left to the executive to evolve the requisite
machinery and procedure thereby making the whole thing,
from beginning to end, purely administrative in character
completely ignoring the legal position that the assessment
G of a tax on person or property is a quasi-judicial exercise."

Speaking for the majority Sinha, C.J. said: (K. T. Moopil
case [AIR 1961SC552) ,AIR p. 559, para 9)

"9 .... Ordinarily, a taxing statute lays down a regular
H machinery for making assessm.:::nt of the tax proposed
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1087
KERALA v. M/S LARSEN & TOL)BRO [R. F. NARIMAN, J.]

to be imposed by the statute. It lays down detailed A
procedure as to notice to the proposed assessee.to
make a return in respect of property proposed to be taxed,
prescribes the authority and the procedure for hearing
any objections to the liability for taxation or as to the extent
of the tax proposed to be levied, and finally, as to the B
right to challenge the regularity of assessment made, by
recourse to proceedings in a higher civil court. The Act
merely declares the competence of the Government to
make a provisional assessment, and by virtue of Section
3 of the Madras Revenue Recovery. Act, 1864, the c
landholders may be liable to pay the tax. The Act being
silent as to the machinery and procedure to be followed
in making the assessment leaves it to the Executive to
evolve the requisite machinery and procedure. The
D
whole thing, from beginning to end, is treated as of a
purely administrative character, completely ignoring the
legal position that the assessment of a tax on person
or property is at least of a quasi-judicial character."
(emphasis supplied) E
In Rai Ramkrishna v. State of Bihar [AIR 1963 SC 1667]
this Court was examining the constitutional validity of the
Bihar Taxation on Passengers and Goods (Carried by
Public Service Motor Vehicles) Act, 1961. Reiterating F
the view taken in K. T. Moopil Nair (AIR 1961 SC 552]
this Court held that a statute is not beyond the pale of
limitations prescribed by Articles 14 and 19 of the
Constitution and that the test pf reasonableness
prescribed by Arti.cle 304(b) is justiciable. However, in G
cases where the statute was completely discriminatory
or provides no procedural machinery for assessment and
levy of tax or where it was confiscatory, the Court would
be justified in striking it down as unconstitutiorial. In such
cases the character of the material provisions of the H
1088 SUPREME COURT REPORTS [2015] 8 S.C.R.

A impugned statute may be such as may justify the Court
taking the view that in substance the taxing statute is a
cloak adopted by the legislature for achieving its
confiscatory purpose.

B In Jagannath Baksh Singh v. State of U.P [AIR 1962 SC
1563] this Court was exam·1n'1ng the constitutional validity
of the U.P. Large Land Holdings Tax Act (31of1957).
Dealing with the argument that the Act did not make a
specific provision about the machinery for assessment
C or recovery of tax, this Court held: (AIR pp. 1570-71, para
17)

"17 . ... if a taxing statute makes no specific provision
about the machinery to recover tax and the procedure to
D make the assessment of the tax and leaves it entirely to
the executive to devise such machinery as it thinks fit
and to prescribe such procedure as appears to it to be
fair, an occasion may arise for the courts to consider
whether the failure to provide for a machinery and to
E prescribe a procedure does not tend to make the
imposition of the tax an unreasonable restriction within
the meaning of Article 19(5). An imposition of tax which
in the absence of a prescribed machinery and the
prescribed procedure would parlake of the character of
F a purely administrative affair can, in a proper sense, be
challenged as contravening Arlicle 19(1)(f)."
(emphasis supplied)

In StateofA.P v. Na/la RajaReddy[AIR 1967SC1458]
G this Court was examining the constitutional validity of the
Andhra Pradesh Land Revenue (Additional Assessment)
and Cess Revision Act, 1962 (22 of 1962) as amended
by the Amendment Act (23 of 1962). Noticing the
absence of machinery provisi0:;s in the impugned
H
COMMISSIONER, CENTRAL ~XCISE &CUSTOMS, 1089
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]

enactments this Court observed: (AIR p. 1468, para 22) A

"22 . ... if Section 6 is put aside, there is absolutely no
provision in the Act prescribing the mode of assessment.
Sections 3 and 4 are charging sections and they say in
effect that a person will have to pay an additional B
assessment per acre in respect of both dry and wet lands.
They do not lay down how the assessment should be .
levied. No notice has been prescribed, no opportunity
is given to the person to question the assessment on
his land. There is no procedure for him to agitate the c
correctness of the classification made by placing his
land in a particular class with reference to ayacut,
acreage or even taram. The Act does not even nominate
the appropriate officer to make the assessment to deal
with questions arising in respect of assessments and D
does not prescribe the procedure for assessment. The
whole thing is left in a nebulous form. Briefly stated under
the Act there is no procedure for assessment and
however grievous the blunder made there is no way for
the aggrieved party to get it corrected. This is a typical E
case where a taxing statute does not provide any
machinery of assessment." (emphasis supplied)

The appeals filed by the State against the judgment of
the High Court striking down the enactment were on the F
above basis dismissed.'

Reference may also be made to Vishnu Dayal
Mahendra Palv. State of U.P ((1974) 2 SCC 306)
and D.G. Gose and Co. (Agents) (P) Ltd. v.. State of G
Kera/a ((1980) 2 SCC 410] where this Court held that
sufficient guidance was available from the Preamble and
other provisions of the Act. The members of the
committee owe a duty to be conversant with the same
and discharge their functions in accordance with the
1090 SUPREME COURT REPORTS [2015) 8 S.C.R.

A provisions of the Act and the Rules and that in cases
where the machinery for determining annual value has
been provided in the Act and the rules of the local authority,
there is no reason or necessity of providing the same or
similar provisions in the other Act or Rules.
B
There is no gainsaying that a total absence of machinery
provisions for assessment/recovery of the tax levied
·under an enactment, which has the effect of making the
entire process of assessment and recovery of tax and
C adjudication of disputes relating thereto administrative
in character, is open to challenge before a writ court in
appropriate proceedings. Whether or not the enactment
levying the tax makes a machinery provision either by
itself or in terms of the Rules that may be framed under it
D is, however, a mafter that would have to be examined in
each case." (at paras 15-21)

36. In a recent judgment by one of us, namely, Shabina
Abraham & Ors. v. Collector of Central Excise &
E Customs, judgment dated 29'" July, 2015, in Civil Appeal
No.5802 of 2005, this Court held:-

"It is clear on a reading of the aforesaid paragraph that
what revenue is asking us to do is to stretch the machinery
F provisions of the Central Excises and Salt Act, 1944 on
the basis of surmises and conjectures. This we are
afraid is not possible. Before leaving the judgment in
Murarilal's case (supra), we wish to add that so far as
partnership firms are concerned, the Income Tax Act
G contains a specific provision in Section 189(1) which
introduces a fiction qua dissolved firms. It states that
where a firm is dissolved, the Assessing Officer shall
make an assessment of the total income of the firm as if
no such dissolution had taken place and all the provisions
H of the Income Tax Act would apply to assessment of such
COMMISSIONER, CENTRAL EXCISE &CUSTOMS, 1091
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]

dissolved firm. lnterestinglX enough, this provision is A
referred to only in the minority judgment in M/s. Murarilal's
case (supra).

The impugned judgment in the present case has referred
to Ellis C. Reid's case but has not extracted the real ratio B
contained therein. It then goes on to say that this is a
case of short levy which has been noticed during the
lifetime of the deceased and then goes on to state that
equally therefore legal representatives of a manufacturer
who had paid excess duty would not by the self-same c
reasoning be able to claim such excess amount paid by
the deceased. Neither of these reasons are reasons
which refer to any provision of law. Apart from this, the
High Court went into morality and said that the moral
principle of unlawful enrichment would also apply and D
since the law will not permit this, the Act needs to be
interpreted accordingly. We wholly disapprove of the
approach of the High Court. It flies in the face of first
principle when it comes to taxing statutes. It is therefore
necessary to reiterate the law as it stands. In Partington E
v.A.G., (1869) LR4 HL 100at122, Lord Cairns stated:

"If the person sought to be taxed comes within the letter
of the law he must be taxed, however great the hardship
may appear to the judicial mind to be. On the other F
hand, if the Crown seeking to recover the tax, cannot bring
the subject within the letter of the law, the subject is free,
however apparently within the spirit of law the case might
otherwise appear to be. In other words, if there be
admissible in any statute, what is called an equitable, G
construction, certainly, such a construction is not
admissible in a taxing statute where you can simply
adhere to the words of the statute". (at paras 26 and 31)

37. We find that the Patna, Madras and Orissa High H
1092 SUPREME COURT REPORTS [2015] 8 S.C.R.

A Courts have, in fact, either struck down machinery provisions
or held machinery provisions to bring indivisible works
contracts into the service tax net, as inadequate. The Patna
High Court judgment was expressly approved by this Court in
State of Jharkhand v. Voltas Ltd., East Singhbhum, (2007)
B 9 SCC 266. This Court held:-

"Section 21 of the Bihar Finance Act, 1981, as
amended states:

c "21. Taxable turnover.-(1) For the purpose of this part
the taxable turnover of the dealer shall be that part of his
gross turnover which remains after deducting therefrom-

(a) (1) in the case of the works contract the amount of
labour and any other charges in the manner and to the
D
extent prescribed;"

Rule 13-A of the Bihar Sales Tax Rules which was also
amended by a notification dated 1-2-2000 reads as
follows:
E
"13-A. Deduction in case of works contract on account
of labour charges.-lf the dealer fails to produce any
account or the accounts produced are unreliable
deduction under sub-clause (1) of clause (a) of sub-section
F ( 1) of Section 21 on account of labour charges in case of
works contract from gross turnover shall be equal to the
following percentages ... "

The aforesaid provisions have been adopted by the State
G· of Jharkhand vide notification dated 15-12-2000 and
thus are applicable in the State of Jharkhand.

Interpretation of the amended Section 21(1) and the
newly substituted Rule 13-A fell for consideration of a
H Division Bench of the Patna High Court in Larsen &
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1093
KERALA v. M/S LARSEN & TOUBRO [R. F. NARIMAN, J.]

Toubro Ltd. v. State of Bihar [(2004) 134 STC 354]. The A
Patna High Court in the said decision observed as under:
"Rule 13-A unfortunately does not talk of 'any other
charges'. Rule 13-A unfortunately does not take into
consideration that under the Ruies the deduction in relation
B
to any other charges in the manner and to the extent were
also to be prescribed. Rule 13-A cannot be said to be an
absolute follow-up legislation to sub-clause (1) of clause
(a) of Section 21 (1 ). When the law provides that
something is to be prescribed in the Rules then that thing c
must be prescribed in the Rules to make the provisions
workable and constitutionally valid. In Gannon Dunkerley
& co. [(1993) 1 sec 364 : (1993) 88 STC 204] the
Supreme Court observed that as sub-section (3) of
Section 5 and sub-rule (2) of Rule 29 of the Rajasthan D
Sales Tax Act and the Rules were not providing for
particular deductions, the same were. invalid. In the··
present matter the constitutional provision of law says
that particular deductions would be provided but
unfortunately nothing is provided in relation to the other E
charges either in Section 21 itself or in the Rules framed
in exercise of the powers conferred by Section 58 of the
Bihar Finance Act.
•••
F
In our considered opinion sub-clause (1) of clause (a) of
S~ction 21(1) read with Rule 13-A of the Rules did not
make sub-clause ( 1) fully workable because the manner
and extent of deduction relating to any other charges has
not been provided/prescribed by the State." (at paras 9- G
12)

38. Similarly, the Madras High Court in Larsen and
Toubro Ltd. v. State of Tamil Nadu and Ors., [1993] 88
STC 289, struck down Rules 6A and 68 of the Tamil Nadu H
1094 SUPREME COURT REPORTS [2015] 8 S.C.R.

A General Sales Tax Rules as follows:-

''. .. The eight principles are the criteria and the norms
which every State legislation has to conform as per the
decision of the apex Court which has been already
B adverted to by us supra. In addition thereto, we have also
referred to at considerable length the particular reasons
assigned by the apex Court while striking down section of
the Rajasthan Sales Tax Act and rule 29(2) of the Rules
made thereunder. The impugned rules 6-A and 6-B of
c the Rules, in our view, do not pass the above vital and
essential test and the basic requirements laid down by
the ratio of the decision of the apex Court in Gannon
Dunkerley's case supra; . The impugned rules are
squarely opposed to the ratio of the said decision and
D particularly the ratio laid down in conclusion Nos. 1, 2, 3,
. · 6 and 7 of the decision in Gannon Dunkerley's case
[1993] 88 STC 204 supra; and also reiterated by the apex
Court in the second Builders Association of India case
[1993] 88 STC 248 (SC); [1992] 2 MTCR 542. In the
E light of the above, we see no merit in the stand taken for
the respondents relying upon the decisions reported in
[1957] 8 STC 561 (SC) (A. V. Fernandez v. State of
Kerala) and [1969] 23 STC 447 (Mad.) (Kumarasamy
Pathar v. State of Madras) that the omission to exclude
F
certain items relating to non-taxable turnovers is of no
consequence and does not affect or undermine the
validity of the impugned proceedings. Consequently,
applying the ratio of the above decisions, we hereby
G strike down rules 6-A and 6-B as illegal and
unconstitutional, besides being violative of sections 3 to
6, 14 and 15 of the Central Sales Tax Act and
consequently unenforceable.

The provisions of section 3-B merely levied the tax on
H
COMMISSIONER, CENTRAL EXCISE & CUSTOMS,' 1095
KERALA v. M/S LARSEN &TOUBRO [R. F. NARIMAN, J.]

the transfer of property in goods involved in the execution A
of the works contract. The assessment, determination of
liability and recovery had to be under the provisions of
the Act read with the relevant rules. In exercise of rule-·
making power conferred under section 53(1) and (2)(bb),
rules 6-A and 6-B came to be made and published. The B
ruies miserably failed to provide the procedure and
principles for effectively determining the taxable turnover,
after excluding the items of turnover relating to such works
contract which could not be subjected to levy of tax by
the State in exercise of its power of legislation under entry c
64 of the State List. Rule 6 by its own operation had no
application in the matter of determination of liability under
section 3-B since it has been made applicable only in
respect of determining the taxable turnover of a dealer
D
under section 3, 3-A, 4 or 5. Consequently, with our
decision above striking down rules 6-A and 6-B of the
Rules, there is no proper machinery provisions to
determine the taxable turnover for purposes of section 3-
B. The provisions of section 3-B, therefore, in the E
absence of the necessary rules for enforcing the same
. and determining the taxable turnover for the purposes of
section 3-B is rendered dormant, ineffective and
unenforceable. Such would be the positiQn till sufficient
provisions are made either in the Act itself or in the rules F
by virtue of the rule-making power to ignite, activate and
give life and force to section 3-B of the Act." (at paras
32, 33)

39. And the Orissa High Court in Larsen & Turbo v. G
State of Orissa, (2008) 012 VST 0031, held that machinery
provisions cannot be provided by circulars and held that
therefore the statute in question, being unworkable,
assessments thereunder would be of no effect.
H
1096 SUPREME COURT REPORTS (2015] 8 S.C.R.

A 40. Finally, in para 31, the Delhi High Court holds:-

''The contention of the petitioners that the impugned
notifications override the statutory provisions contained
in Section 65(105), which defines the term "taxable
B service", Section 66, which it is claimed is a charging
section, and Section 67, the valuation provisions of the
Finance Act, 1994, has to be rejected. We have, as
already state.d above, rejected the argument of the
petitioners on bifurcation/vivisect and held that as per
c the provisions of Section 65(105)(zzq) and (zzzh), service
tax is payable and chargeable on the service element of
the contract for construction of industrial and commercial·
complexes and contract for constructi.on of complexes
as specified and in case of a composite contract, the
D service element should be bifurcated and ascertained
and then taxed. The contention that the petitioners are
paying sales tax or VAT on material in relation to
execution of the contract under composite contracts for
construction of industrial/commercial complexes and
E construction contracts as specified under
Section 65(105)(zzq) and (zzzh) therefore fails. The
contention that there was/is no valid levy or the charging
section is not applicable to composite contracts under
clauses (zzq) and (zzzh) of Section 65(105) stands
F
rejected. But the petitioners have rightly submitted that
only the service component can be brought to tax as per
provisions of Section 67 which stipulates that value of
taxable service is the "gross amount charged" by the
G service provider for such services provided or to b.e
provided by him and not the value of the goods provided
by customers of service provider and the service tax
cannot be charged on the value of the goods used in the
contract."
H
COMMISSIONER, CENTRAL EXCISE & CUSTOMS, 1097
KERALA v. M/S LARSEN &TOUBRO [R. F. NARIMAN, J.]

41. We are afraid that there are several errors in this A
paragraph. The High Court first correctly holds that in the case
of composite works contracts, the service elements should be
bifurcated, ascertained and then taxed. The finding that this
has, in fact, been done by the Finance Act, 1994 Act is wholly
incorrect as it ignores the second Gannon Dunkerley B
decision of this Court. Further, the finding that Section 67 of
the Finance Act, which speaks of "gross amount charged", only
speaks of the "gross amount charged" for service provided
and not the gross amount of the works contract as a whole
from which various deductions have to be made.to arrive at C
the service element in the said contract. We find therefore that
this judgment is wholly incorrect in its conclusion that the
Finance Act, 1994 contains both the charge and machinery
for levy and assessment of service tax on indivisible works
0
contracts.

42. It remains to consider the argument of Shri
Radhakrishnan that post 1994 all indivisible works contracts
would be contrary to public policy, being hit by Section 23 of
the Indian Contract Act, and hit by Mcdowell's case. E

43. We need only state that in view of our finding that the
said Finance Act lays down no charge or machinery to levy
and assess service tax on indivisible col)lposite works
contracts, such argument must fail. This is also for the simple F
reasol) 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.

44. We have been informed by counsel for the revenue G
that several exemption notifications have been granted qua
service tax "levied" by the 1994 FinanceAct. We may only
state that whichever judgments which are in appeal before us
and have referred to and dealt with such notifications will have
to be disregarded. Since the levy itself of service tax has been H
1098 SUPREME COURT REPORTS [2015] 8 S.C.R.

A found to be non-existent, no question of any exemption would
arise. With these observations, these appeals are disposed
of.

45. We, therefore, allow all the appeals of the assessees
B before us and dismiss all the appeals of the revenue.

Kalpana K. Tripathy Appeals disposed of.