CESTAT Larger Bench decision on levy of service tax in case of turnkey contracts

CESTAT, Larger Bench decision in the case of CCE, Raipur Vs M/s BSBK Pvt. Ltd. (2010-TIOL-646-CESTAT-DEL-LB)

The Hon^?ble CESTAT, Delhi held in case of Daelim Industrial Co. Ltd Vs CCE, Vadodara (‘Daelim’) (2003-TIOL­1 10-CESTAT-DEL) that a works contract cannot be vivisected and a part of it cannot be subjected to service tax. In the case of CCE, Raipur Vs M/s BSBK Pvt. Ltd (2009 (13) STR 26) it was observed by the Hon^?ble CESTAT, Delhi that the conclusion in the Daelim case, prima facie, is not in accordance with the law.

Accordingly the Hon^?ble CESTAT, Delhi referred the matter to the LB to examine that whether service by way of “advice, consultancy or technical assistance” in the case of turnkey contract will attract service tax.

The issue therefore, was whether a turnkey contract can be vivisected for the purpose of levy of service tax. The grounds put forth by the referring Bench in this matter were as under:

• The 46^th amendment to the Constitution of India inserted clause 29A to Article 366 to make inter alia works contract as a deemed sale. After this amendment, a works contract can be dissected for the levy of service tax and sales tax.
• The decision in case of Daelim is not in accordance with the decision of the Hon^?ble Supreme Court in case of Bharat Sanchar Nigam Ltd Vs UoI (2006-TIOL-15-SC-CT-LB).
• The subject contract is a single contract involving completion of various works like designing and engineering, erection, testing and commissioning of plant, etc.
• Summary rejection by the Hon^?ble Apex Court of the Special Leave Petition (^„SLP^?) filed by the Revenue in case of Daelim cannot be observed as affirmation of decision of Hon^?ble CESTAT on merits.

Contentions of the Appellant

Justifying the case that taxable service involved in the execution of a turnkey contract is liable to service tax, the Appellant put forth the following –

• In case of an activity in the nature of taxable service which is involved in a contract whether composite, indivisible or turnkey, the service element involved therein is discerned, such an activity would be liable to service tax.
• Services provided independently or in combination with other activities during the execution of a turnkey contract would not make any difference to its taxability so long as it is a taxable service.
• After the 46^th amendment to the Constitution of India, a works contract can be dissected for purpose of levy of sales tax and service tax.
• If it was the intention of the legislature to exempt the services involved in a turnkey contract, an express provision in this regard would have been inserted. Rather provisions have been made to determine the value of services involved in works contract by the Service tax (Determination of Value) Rules, 2006 and works contract composition scheme.
• Reliance is placed on the decision of the Hon^?ble Apex Court in the case of Imagic Creative Pvt. Ltd Vs CCT (2008-TIOL-04-SC-VAT) which held that a composite contract may involve different elements which may attract different nature of levy.
• The judgment in case of Daelim did not consider the consequences of 46^th amendment which intended indivisible, composite and turnkey contracts to be made divisible separating the goods component from service components for taxation allocating the same for taxation under the respective laws.

Contentions of the Respondent/ Interveners

The Respondents! Interveners in order to substantiate that a turnkey contract cannot be vivisected and made liable to service tax contended –

• A turnkey contract is not divisible and cannot be vivisected to determine the service tax liability.
• The dominant object of the contract is not to render any service and further it would be impractical to severe turnkey contract into supply and service portion.
• The decision of Hon^?ble CESTAT in case of Jyoti Limited vs. CCE, Vadodara (2007-TIOL-2337-CESTAT­AHM) held that services involved in a works contract can be made taxable only from June 2007 i.e. from introduction of clause (zzzza) of section 65 (105) of the Finance Act making works contract liable to service tax.
• Article 366 (29A) does not intend to divide a composite works contract to impose service tax on the service portion but is applicable only to sale of goods.
• The dismissal of SLP by the Hon^?ble Apex Court in respect of petition filed by the Revenue in case of Daelim along with series of other decisions substantiates the case of the respondents! interveners.
• The Hon^?ble Mumbai Tribunal in case of Larsen & Toubro Ltd (2006-TIOL-490-CESTAT-MUM) had upheld the ratio laid down by Daelim even after considering the BSNL judgment and other decisions on the subject.

Observations of CESTAT

The following observations were made by the Larger Bench of the Hon^?ble CESTAT –

• There is no difference between production or manufacture of saleable goods and production of marketable/ saleable services in the form of an activity undertaken by the service provider for a consideration, which correspondingly stands consumed by the service receiver.
• The nomenclature of a levy is not conclusive for deciding its true character and nature. The Court looks in to pith and substance of the legislation to decide the true character and nature of a particular levy.
• It is open to Legislature or more than one Legislature to impose a tax on a particular “aspect” of the transaction falling within its legislative competence.
• A plain or simple service contract or a composite contract comprising various activities of different nature of services do not make any difference to discern role of each service involved in a composite or turnkey contracts.
• It may be stated that once value of goods involved in composite or turnkey contracts is determinable applying the ratio of Gannon & Dunkerley (1992 (88) STC 204 (SC)), the remnant part of such contract is attributable to the service element subject to service tax.
• Service elements involved in execution of such contract provide measure of levy under the provisions of Finance Act, 1994 following principles of equivalence irrespective of nature of works contract whether turnkey, indivisible or composite.
• It cannot be said that the severability of a composite and turnkey contract permitted by Constitution under Article 366 (29A) (b) is merely for the purpose of levy of sales tax.

Conclusion:-The reference to the Larger Bench was answered to the effect that the turnkey contracts can be vivisected and discernible service elements involved therein can be separated and levied to service tax provided such services are taxable services. Thus, services by way of advice, consultancy or technical assistance in the case of turnkey contract shall attract service tax liability.

NF