CCE. & S.T. Vs Kalpataru Power Transmission Ltd (CESTAT Ahmedabad)
Service Tax Dispute: Material Value in Works Contracts Under Scrutiny
Ahmedabad: The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Ahmedabad, recently addressed a dispute concerning the inclusion of material value in the taxable value of works contract services, particularly in cases involving separate contracts for material supply and services. The case, CCE. & S.T. Vs Kalpataru Power Transmission Ltd., hinged on the interpretation of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, before and after a key amendment in 2009.
The core issue before the tribunal was whether the value of materials supplied by Kalpataru Power Transmission Ltd. (hereinafter referred to as the respondent) under a separate contract with Electricity Distribution Authorities (EDAs) should be added to the gross value of the works contract service for service tax calculation. The department contended that despite having two separate contracts – one for goods supply and another for erection, installation, and commissioning of transmission lines – the overall undertaking was a composite work, and thus, the value of both contracts should be clubbed for service tax purposes under the works contract service category.
The respondent, on the other hand, maintained that the contracts were distinct and that service tax was being discharged under the Works Contract (Composition Scheme) Rules, 2007. The tribunal’s examination focused heavily on the said rules, specifically Rule 3 and its explanation, and the changes introduced through an amendment effective from July 7, 2009.
Prior to the 2009 amendment, the explanation to Rule 3 stated that the gross amount charged for the works contract would not include Value Added Tax (VAT) or Sales Tax paid on the transfer of property in goods involved. The amendment, however, altered this explanation significantly. Post-amendment, the gross amount charged was defined to include the value of goods used in or in relation to the execution of the works contract, “whether supplied under any other contract for a consideration or otherwise,” as well as the value of all required services. Crucially, a proviso was added stating that this amended explanation would not apply to works contracts where execution had commenced or any payment (except by credit or debit) had been made on or before July 7, 2009.
The tribunal noted that Central Board of Excise and Customs (CBEC) circulars dated July 6, 2009, and February 8, 2012, clarified that the inclusion of the value of free-of-cost supplies and goods supplied under other contracts in the gross amount was a legal requirement only from July 7, 2009. These circulars further reiterated that this requirement did not apply to contracts commenced or where payment was made prior to this date.
In the present case, it was an undisputed fact that the execution of 24 contracts in question had commenced before July 7, 2009. The tribunal, therefore, concluded that the amended provisions of Rule 3, which mandated the inclusion of material value from separate supply contracts, were not applicable to these contracts. The tribunal highlighted that prior to the 2009 amendment, there was no explicit provision requiring the clubbing of values from separate goods supply and service contracts.
The revenue’s argument that a single composite works contract existed despite separate agreements was also addressed. The tribunal found that the contractual terms between the respondent and the EDAs, being government organizations, clearly stipulated the entering into two separate contracts – one for manufacture and sale of goods (transmission towers manufactured and sold at the factory gate, with property transferring upon clearance) and another for works contract service (erection, installation, and commissioning using labour and other materials where property transferred during execution). The tribunal found it improbable that government entities would engage in practices to evade service tax through such bifurcation.
The tribunal emphasized that the property in the transmission towers transferred to the service recipient upon clearance from the factory gate, i.e., before the execution of the works contract service. Therefore, the value of these goods, whose property was already with the recipient, could not be included in the value of the works contract service. This was contrasted with the value of other accessories and parts used during execution, where property transferred during the works contract and whose value was admittedly included.
The tribunal also dismissed the revenue’s contention that the existence of a single bidder for both supply and service necessitated treating it as a single indivisible contract. Relying on several judicial precedents, the tribunal asserted that the nature of the contract is governed by the agreements entered into by the parties, not by the tender or bid document.
Judicial Precedents Cited:
The tribunal referred to several judgments to support its findings:
