Case Law Details

Case Name : M/s ABB Ltd. Vs CST (CESTAT Bangalore)
Appeal Number : Appeal No. ST/103/08
Date of Judgement/Order : 29/12/2010
Related Assessment Year :
Courts : All CESTAT (691) CESTAT Bangalore (91)

Issue before us involved in the current case is regarding the contract of supply, erection, installation and commissioning of fire, hydraulic systems and the issue before us in the case of the appellants’ own case in Final Order date 22/07/2010 was for supply, erection, installation and commissioning of power systems and distribution systems. Though the outcome of execution of the contracts may, be different but the contracts were for the similar purposes.

It can be noticed from the above reproduced portions of our Final Order, an identical issue in respect of Turbo tech Precision Engineering Pvt. Ltd. was before the Hon’ble High Court of Karnataka that being an issue in respect of ‘consulting engineer service’ providing design development, design review, installation and commissioning and other services. It is to be noted that Revenue had filed an appeal before Hon’ble High Court against the order of Tribunal in that case. Hon’ble High Court has categorically held that if the contract is a works contract, then the service tax liability will only arise from 01/06/2007. The facts of the current case before us and the case before the Hon’ble High Court were similar/identical, except for that the Revenue in the case of Turbo tech Precision Engineering Pvt. Ltd. sought to tax the service tax under ‘Consulting engineer service’ and the assessee was pleading that it would fall under the “works contract”, while in the case before us today, the assessee’s plea is that it will be “works contract” while Revenue’s contention is that it will not fall under the category of works contract but under “commissioning & installation services”. We find that the judgment of the Hon’ble High Court of Karnataka in the case of Turbo tech Precision Engineering Pvt. Ltd. (supra) would squarely cover the issue in favour of the appellants.

CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL, BANGALORE

Appeal No. ST/103/08

Arising out of Order-in-Original No.95/2007 Commr. Dated: 30.11.2007
Date of Decision: 29.12.2010

M/s ABB Ltd.

Vs

CST, BANGALORE

Judgement

Per: M V Ravindran:

This appeal is directed against the Order-in-Original No.95/2007 Commr. Dt. 30/11/2007.

2. The relevant facts that arise for consideration are that the appellants herein are the service provider and are having registration as LTU. The appellants herein entered into five contracts with M/s. Delhi Metro Rail Corporation (DMRC for short) viz. 3E 11, 3E 14, 3E 42, 3E 43 &3E 46. Contract 3E 11 is for design, manufacture, supply, installation, testing and commissioning of Electrical, Hydraulic & Fire systems for underground Barakhamba Road station on Barakhamba Road- Connaught Place- Dwarka Section of DMR Project. Contract 3E 14 is for design, manufacture, supply, installation, testing and commissioning of Electrical, Hydraulic & Fire systems for under ground Mandi House Station and associated Tunnel in section S-4 of East-West Corridor of DMR Project. Contract 3E 42 is for supply, fabrication, installation, testing and commissioning of Electrical, Fire Detection & Suppression Systems of Line 3 of DMR Project. Contract 3E 43 is for supply, fabrication, installation, testing and Commissioning of Electrical, Fire Detection and Suppression Systems for Ganeshnagar, janakpuri, Uttamnagar etc. of Line 3 of DMR Project while Contract 3E 46 is for supply fabrication, installation, testing and commissioning of Electrical, Fire Detection & Suppression Systems for elevated stations Pragathi Maidan and Indraprastha stations of DMR Project. Under the afore said contracts M/s. ABB Ltd., have supplied as well as carried out installation and commissioning of various electrical equipments, fire detection and suppression systems. The scope of the work undertaken include supply and laying of GI conduits with accessories for PA system, communication and signaling system, supply and laying of medium voltage, aluminum conduits/under ground insulated and armored cables, external cabling for lighting, high mass lighting etc. Similarly installation of fire alarm and suppression systems involve providing main fire alarm control panel, associated wiring, smoke detector etc. Fabrication and installation of fire hydrant sprinkler system involve providing electrical and diesel driven hydrant pumps, engine control panel, sprinkler piping, installation of control valves etc. Under all these contracts provision is made for supply of various equipment s (supply contracts) as well as for installation, testing and commissioning of such equipment s (service portion). The aforesaid contracts are indivisible contracts where the value of the equipment supplied cannot be segregated from the value of the services provided.

3. After an investigation carried out by the office of the DGCEI, it was notice that the appellants are required to discharge the service tax under the head ‘Commissioning or Installation service’ during the period 30/11/2004 to 09/03/2007 on the above referred contracts. After the investigation, a show-cause notice was issued for demand of service tax of Rs.1,48,84,854/- (including education cess of Rs.2,91,860/-) as detailed in the annexure to the show-cause notice on the ground that the appellants have not discharged the service tax liability on “Commissioning & Installation services” and for the appropriation of the amount already paid by them and for also imposition of penalty and demand of interest. Appellants contested the show-cause notice contending that all the contracts in question are turnkey contracts and therefore not liable for service tax prior to 01/06/2007; it was also contended that in terms of above contracts they had undertaken activity of supply, fabrication, installation, testing and commissioning of electrical, hydraulic and fire detection and suppression system in a composite manner. The Adjudicating Authority, after granting an opportunity of personal hearing and after considering oral and written submissions made before him, did not agree with the contentions raised by the appellants and came to the conclusion that the appellants are liable to pay service tax on the taxable services provided to DMRC under the category of “Commissioning and Installation services” and coming to such conclusion passed the following order:-

ORDER

i) I hold that M/s. ABB are liable to pay service tax on the taxable services provided to M/s. DMRC supply of equipment s designs, manufacture, supply installation, testing and commissioning of electrical hydraulic and fire systems for underground Barah Khamba Station and accordingly confirm the demand of service tax of Rs. 1,45,92,994/- (Rupees One Crore Forty Five Lakhs Ninety Two Thousand Nine hundred Ninety four only) and Education Cess of Rs.2,91,860/- (Rupees Two Lakh Ninety One Thousand Eight hundred and Sixty only) under the provisions of proviso to Section 73(1) of the Finance Act, 1994.

ii) I hold that M/s. ABB are also liable to pay interest at the applicable rate as per the provisions of Section 75 of the Finance Act, 1994, in addition to the service tax payable by them.

iii) I order appropriation of Rs. 56,13,702.00 (Rupees Fifty Six lakhs Thirteen thousand Seven hundred and Two only) deposited towards service tax inclusive of Education Cess against the service tax liability confirmed at (i) above. I order that the balance amount of service tax and interest thereon be paid forthwith by M/s. ABB.

iv) I impose penalty of Rs.1,48,84,854/- (Rupees One Crore Forty Eight lakhs Eighty Four thousand Eight hundred and Fifty Four only) under Section 78 of the Finance Act, 1994.

v) I also impose a penalty of Rs.200/- (Rupees two hundred only) for every day, during which such failure continues or @ 2% of such tax per month which ever is higher starting with the first day after the due date till the date of actual payment in terms of the substituted Section 76 of the Finance Act 2006, with effect from 18.4.2006.

The appellants being aggrieved by such an order are in appeal before us.

4.1. The ld. Counsel appearing on behalf of the appellants submitted that the factual position emerged from the show-cause notice and the documents given during the investigation and adjudication proceedings would indicate that the appellants had raised invoices /running account bills showing combined charges for supply and services and it was not possible for them to segregate the charges received for the value of material and equipments supplied and the amount of charges received against installation and commissioning of the same, and that they had not issued any separate bills or invoices showing the separate value of the materials / equipments supplied to DMRC in respect of the 5 contracts. It is also his submission that in the reply dt. 3/5/2007, they had categorically taken a stand that the appellants paid sales tax wherever applicable on the supply portion of the items and also paid works contract tax on civil items used therein. It is his submission that the statement was placed on record by the appellants during the time of hearing which indicated that deduction of works contract tax and income tax from the running account bills raised by the appellants. As an example, he would take us through the Running Account Bill No.RA6 and RA7 dated February, 2006 and March, 2006 and submitted that on the said gross value of the bills, DMRC have deducted an amount calculated @ 2% as works contract tax and income tax @ 2.244%. It is his submission that this calculation was brought to the notice of the Adjudicating Authority and tallied with the calculation sheet which was given in the show-cause notice indicated that the said contract was registered as a works contract. It is also his submission that the appellants had enclosed Delhi VAT TDS certificates issued by DMRC to the appellants validating the payment of TDS payments towards works contract tax as per the provisions of Delhi Value Added Tax Act, 2004, which is annexed at page 2156 to 2166 of the paper book. It is his submission that all the contracts are identical but for different areas; they are indivisible contracts; no separate value is available for material or labour in any of the contracts; the parties involved in the transactions i.e. the appellants and DMRC have treated the contracts as works contract only; TDS has been deducted as per the provisions applicable to works contract and the entire information was provided to the authorities during the course of investigation and adjudication. It is his submission that the Adjudicating Authority has not accepted these as composite contracts and turnkey projects without any reason. He would submit that all the documents and submissions made before the authorities would indicate that these entire contracts are turnkey contracts and composite turnkey contracts. It is also his submission that the show-cause notice also considers these contracts as turnkey contracts and it is not open to the Revenue to argue to the contrary. It is also submitted that the facts that equipments supplied by the appellants have been purchased by them and therefore the cost of materials is within the knowledge of the appellants is totally arbitrariness to the issue. It is his submission that the nature of the contracts, as the appellants have entered with the DMRC has to be arrived, as to whether such a contract is composite contract or such contract as separate value is attributable to the supply and services. It is his submission that if such separate value has not been discernible, then the fact that lot of items procured is of no consequence. It is the submission that the argument that the appellants had contracted to provide supply and services only for a portion of metro system is again irrelevant as what has to be seen is whether the contract entered into by the appellants even for a small job is turnkey project or not. It is the submission that smallness or bigness of the contract is relative term. It is his submission that since these contracts in question are turnkey contracts, as alleged in the show-cause notice, the appellants submit that the said contracts would fall under the category of works contract service which came into the statute book w.e.f. 01/06/2007. Ld. Counsel would draw our attention to the definition of the said works contract as interpreted under Section 65(105)(zzzza). After reading the said definition, he would submit that the activity undertaken by the appellants would fall under the category of ‘works contract’ in sub-clause (a) or (d) and will be leviable for service tax from 01/06/2007. He would rely upon the Circular No. B1/16/2007- TRU dt. 22/5/2007 and Circular No.98/1/2008-ST dt. 4/1/2008 for the clarification that classification of the services would depend upon the nature and substance of the transaction and the single composite service cannot be vivisected for the purpose of charging service tax. It is his submission that the Tribunal has been consistently holding that works contract is a new service taxable only w.e.f. 01/06/2007 for which he relies upon the following case laws:-

a. Diebold Systems Pvt. Ltd. Vs Commissioner of Service Tax, Chennai 2008-IST-139-CESTAT-MAD

b. Air Liquide Engg India Pvt. Ltd. Vs CCE, Hyderabad 2008 (9) STR 486

c. Daelim Industrial Co. Ltd. v. CCE, Vadodara 2006 (3) STR 124 (Tri-Del)

d. Jyoti Limited Vs CCE, Vadodara 2008 (9) STR 373

e. CCE, Bangalore v. Murali Sesh Enviro Engineers, Bangalore 2008-IST-203-CESTAT-BANG

f. Blue Star Ltd. v. CCE, Hyderabad-II 2008-IST-203-CESTAT-BANG

4.2. It is also his submission that whether an activity involving of execution of works contract is classifiable under works contract cannot be taxed prior to 01/06/2007 has been decided by the Hon’ble High Court of Karnataka in the case of Turbotech Precision Engineering Pvt. Ltd. [2010(18) STR 545 (Kar.)] He would draw our attention to the specific paragraphs. It is his further submission that in an identical issue, the Tribunal in the appellants’ own case, whether a contract which is considered by both the parties as works contract and which is recognized by the State Government as works contract; can be taxed prior to 01/06/2007, has been decided in their favour vide Final Order No. 1016/2010 dt. 19/7/2010  . He would draw our attention to the relevant portions of our final order and submit that the factual position in the current case is identical to the case which was decided by this Bench. It is the submission that show cause notice invoked extended period of limitation which is incorrect as it turns out from the records that the appellants were under a bonafide belief that their contracts being works contract, no service tax is payable on the activities carried out in terms of such contract. He would also submit that the statements recorded of the employees clearly show that the decision in the case of Daelim Industrial Co. Ltd. (supra) lead to a bonafide belief, subsequently the said decision being upturned by the Larger Bench of the Tribunal would not mean that the appellant did not entertain a bonafide belief. It is his submission that the appellants had rightly availed exemption under Notification No.12/2003-ST dt. 20/6/2003 as an alternative submission. It is his submission that this submission is made in order to avail the benefit of deduction of the value of the materials supplied for rendering of the services.

5. Ld. Special Counsel appearing on behalf of the Revenue would submit that the appellant’s claim that the contracts were in turnkey nature is without any basis. It is his submission that a turnkey project is one where design to complete installation is provided i.e. where the client is only required to turn the key on as it were to start off operations. It is his submission that the 5 contracts entered into by the appellants with DMRC for design, manufacture, supply, installation, testing and commissioning of electrical hydraulic and fire system for underground Barakhamba Road station and the detailed scope of work would indicate that the activities undertaken by the appellants are taxable under the category of ‘Erection, installation and commissioning services’. It is his submission that the particulars schedule, forming part of the contract provides for the general description of the work, total units to be supplied, unit rate for erection, installation and commissioning. It is his submission that the particulars schedule contained item wise, equipment wise charges for erection, installation and commissioning of all and all of them involved supply, fabrications, installation, testing and commissioning of electrical and hydraulic and fire detection and suppression system in a composite manner. It is his submission that the appellants had placed reliance in the decision of the Tribunal in the case of Daelim Industrial Co. Ltd. (supra) wherein it has been held that the works contract cannot be vivisected and the part of supplied material is not subjected to service tax and he submitted that the services are subject to service tax is incorrect law as the said decision was revisited by the Larger Bench in the case of CCE, Raipur Vs. BSBK Pvt. Ltd. [2010(253) ELT 522 (Tri. LB)], wherein the Larger Bench has answered the reference for the term that “turnkey contracts can be vivisected and discernible service elements involved therein can be segregated and classifiable as well as valued for levy of service tax under the Finance Act, 1994 provided such services are taxable services as defined by the Act and depending on the facts and circumstances of each case, services by way of advice, consultancy or technical assistance in a case of ‘turnkey contracts’. Leviability of the service tax on different elements of services certainly depends on the facts and circumstances of each case and classification of the respective services”. It is his submission that on reading the decision of the Larger Bench, it is clear that even prior to 01/06/2007, elements of services in a composite service contract can be vivisected and subjected to service tax. Hence, the contracts which are entered into by the appellants in this case could be vivisected and these services would fall under the category of ‘erection, commissioning and installation services’ and specifically cover under Section 65(39a) of the Finance Act, 1994. It is his submission that by virtue of vivisection, the same could be brought under the service tax net from 01/06/2007, as from the contracts in question the information is readily available. It is the submission that on the face of clear cut ruling of the Larger Bench in the BSBK case (supra) on merits and applying principles laid down therein, the services rendered by the appellants to DMRC prior to 10/9/2004 will fall under the ambit of ‘commissioning and installation services’ and post 10/9/2004 under the category of ‘commissioning, erection and installation services’ despite the fact that the said services were rendered under a indivisible contract which might have been in the nature of works contract. It is the submission that without prejudice to the above stand, the decision of the Tribunal in the appellants’ own case in Final Order No.1016/2010 date 22/7/2010, may not be applicable in this case, as the Tribunal relied on mainly Board’s circular dt. 22/5/2007 which clarified that the contract which treated as ‘works contract’ for the purpose of levy of VAT Sales Tax shall be treated as works contract for the purpose of levy of service tax. He submits that the present case, the equipments supplied are supplied to the site; were installed and thereafter various pre- commissioning tests were conducted by the appellants before commissioning the plant as a whole. He would submit that the Board’s circular No.59/8/2003-ST dt. 20/6/2003 would cover the issue wherein the Board has said that in the case of commissioning and installation it has been pointed out that in case of turnkey project, the contract may be indivisible and no separate value could be assigned to commissioning or installation of goods, on doubts raised as to what would be the value of taxable service. It is submitted that it has been provided in law that service tax is leviable on erection and commissioning charges only and not on the material and goods supplied; however, it is upto the service provider to show the break-up of commissioning or installation charges; in case service provider shows consolidated charges, service tax would be leviable on such consolidated amount. He would also rely upon the circular No.62/11/2003 dt. 21/8/2003 for this proposition and also on the circular No.80/10/2004-ST dt. 17/9/2004 to emphasize that even if there is a composite contract for erection, commissioning and installation, erection charges should be taxed as part of the category service rendered under ‘erection, commissioning and installation services’. It is his submission that the decision of the Tribunal having relied upon the circular dt. 22/5/2007, this Bench should give equal weights to other 3 circulars dt. 20/6/2003, 21/8/2003 and 17/9/2004 to come to a conclusion and the decision of the ABB Ltd.’s own case should not be applied without giving due consideration to the submissions made now and the decision of the Larger Bench decision in the case of BSBK (supra). It is the submission that the reliance placed upon by the ld. Counsel in the case of Turbo tech Precision Engg. Pvt. Ltd. (supra) as upheld by the Hon’ble High Court of Karnataka is in respect of the service rendered like design development, design review, manufacture, assembly of bought-out and manufactured items, installation and commissioning and technology transfer. It is the submission that the period of assessment in that case was from 7/7/1997 to 31/3/2001 and the entire activity was to be covered under the services rendered by a consulting engineer. It is the submission that hence this case law cannot be relied upon by the assessee. He would submit that Identical is the situation in the case of Die bold Systems and Glaxo Smithkline. He would submit that the contention of the appellants that they are eligible for the benefit of exemption Notification No.12/2003-ST dt. 20/6/2003 is incorrect as the appellants should have raised separate bills for the value of goods and materials sold by them. In the absence of any such evidence, the entire gross amount charged by the appellant would be considered as an amount charged by the service provider. It is the submission that, since the conditions of the specific notification were not fulfilled, they were not eligible for the benefit contained in the Notification No.12/2003-ST. It is his submission that the appellant could not also avail the benefit of Notification No.19/2003-ST dt. 21/8/2003, as the appellants had availed the benefit of Cenvat Credit on the input services of the service tax paid on the various services. It is the submission that extended period was correctly invoked and there was no suppression of facts is totally incorrect and that the appellants were aware that they are liable to pay service tax on the installation and commissioning prior to 10/9/2004 and subsequently ‘erection, commissioning and installation’ after that date was unearthed by the Revenue after DGCEI caused certain enquiries and conducted detailed investigation, which was not disclosed to the Department earlier. In view of this, it is the submission that the Order-in-Original be upheld without any interference.

6. We have considered the submissions made at length by both sides and perused the records.

7. The issue involved in this case is whether 5 contracts entered by the appellants with DMRC for supply of equipments, designs, manufacture, supply, installation, testing and commissioning of electrical, hydraulic and fire systems for underground Barakhamba Road Station at New Delhi would fall under the category of taxable services as per Section 65(105) of the Finance Act, 1994 under the heading ‘erection, installation and commissioning agency’. It is undisputed that the appellants had Service Tax registration for erection, commissioning and installation services and have been paying service tax on the activities of tower engineering consultancy or erection, installation and commissioning jobs. The Adjudicating Authority has proceeded on the premise that the appellants are providing the services of erection, installation and commissioning of the contracts along with supply of material and the agreement can be vivisected. He proceeded on the ground that the consideration and value for taxing of the services and the supply of materials being two separate incidences, Revenue is well within its rights to vivisect the contract entered by the appellants, as it is undisputed that there is purchase of the equipment s, materials and an element of erection and commissioning. He proceeded on the ground that the vivisection of contract was correct and that part which is liable for service tax is the services rendered and the bills raised by them being a consolidated bill and not being separately indicative of the materials supplied and the services rendered, the gross value charged needs to be taxed under the heading ‘erection, commissioning and installation agency’ services. It is also seen from the findings of the Adjudicating Authority (in para 49 on wards) that the contention of the appellants that the contracts which were rendered by them are taxable under the category of ‘works contract’ has been negatived only on the ground based upon the reading of the definition of ‘commissioning and installation, commissioning, erection and installation services. To come to such conclusion, the Adjudicating Authority has held that the equipment were supplied to the site are installed and thereafter further tests are undertaken before commissioning the entire plant or system as a whole. He relied upon the Board’s circular dt. 17/9/2004 and other two circulars as has been argued by the ld. Special Counsel for the Revenue.

8. In our considered view, the entire issue can be disposed off by coming to conclusion whether the appellants’ contracts entered into with DMRC can be works contract or contracts which can be vivisected, to arrive the value of the materials and the services. It is seen from the records, and recorded in the Order-in-Original at para No.28 that the appellants had categorically contended that the contracts in question are turnkey contracts and are not liable to service tax prior to 01/06/2007. On perusal of the findings accorded by the Adjudicating Authority, we find that he has not considered this aspect of the arguments of the assessee in a proper perspective. The Adjudicating Authority has directed himself to disagree with the contentions raised by the appellants on the ground that the contracts entered by them could not be works contract on the findings that the contracts included supply element and also services element of erection, commissioning and installation. In our considered view, this could be an incorrect appreciation of the evidences which were produced before us. It is seen from the records and undisputed that the contracts entered by the appellants with DMRC were registered with the Sales Tax authorities for billing under DVAT Act and VAT liability has been deducted from the payments made to the appellants and discharged to the authorities. It is also on record that the tax is deducted on at source from the bills raised by the appellants as per the provisions of the law, on execution of said projects. It is seen from the records that the appellants are not raising a lumpsum bill for the completion of the project, but are raising Running Account Bills, for the work completed and it included the element of supply of the materials which was either manufactured by the appellants or procured from outside. The discharge of VAT and deduction of TDS by the DMRC by taking the amount from the Running Account Bills of the appellants would definitely indicate that the said contracts have been considered by both the parties as works contracts. It is also seen from the records produced before us that the deduction of VAT is termed as WCT 2% i.e. Works Contract Tax 2% which would indicate that the appellants as well as DMRC has acted on the contract as that being a “Works contract”. If that be so, the contention of the assessee that the leviability of service tax under the works contract would be effective only from 01/06/2007 is correct. We find that in our own Final Order No. 1016/2010 date 22/07/2010, in the assessee’s own case as regards contracts for supply, erection, installation and commissioning of power transmission and distribution systems entered with M/s. Power Grid Corporation of India Ltd., Revenue raised the very same objection and sought to tax the appellants. It is seen that while allowing the appeal filed by the appellant and setting aside the impugned order, we had considered the entire issue, and relying upon the judgment of the Hon’ble High Court of Karnataka in the case of Turbo tech Precision Engineering Pvt. Ltd. (supra) set aside the impugned order. We may reproduce the entire findings.

“16. We find that the service tax liability under the works contract was brought into the service tax net with effect from 1.6.2007, the definition reads as under.

“works contract” means a contract wherein, –

(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, machinery, equipment or structures, whether prefabricated 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 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 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

(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 and construction or commissioning (EPC) projects”

17. It can be noticed from the above reproduced definition that turnkey projects including engineering and procurement and construction or commissioning projects were considered as works contract. From the combined reading of the three contracts entered by M/s Power Grid Corporation for the purpose of execution of turnkey project, it can be noticed that these three agreements would satisfy the definition of works contract as envisaged under Section 65 (105) (zzzza) of the Finance Act 1994. If that be so, the service tax liability if any will be on the appellants from 1.6.2007. It is also be to noticed that the CBEC vide Circular No B1/16/2007-TRU dated 22.5.2007 has in paragraph 9.9 and 9.10 has clarified as under:-

“Presently, erection, commissioning or installation service [Section 65(105)(zzd)], commercial or industrial construction service [section 65(105)(zzq) and construction of complex service [Section 65(105)(zzzh) are separate taxable services.

9.9 Various trade and industry associations have raised apprehension in respect of classification of a contract either under the newly introduced works contract service or under erection, commissioning or installation and commercial or residential construction services.

9.10 Contracts which are treated as works contract for the purpose of levy of VAT/sales tax shall also be treated as works contract for the purpose of levy of service tax. This is clear from the definition under section 65(105)(zzzza).”

18. We find that on this basic issue whether the contract in question would be a “works contract” or “any other contract”, matter could be decided. If no service tax liability arises on a agreement, which is to be considered as works contract and as understood by contractual parties and State Government, and also on the face of clarification given by CBEC clarifying as to, that a contract which is treated as a works contract for the purpose of levy of VAT/Sales Tax shall be treated as works contract for the purpose of levy of service tax, in our considered view revenue has no case in the issue before us.

19. Before parting with the case we would like to record here that our above view is fortified by the recent judgment of the Hon’ble High court of Karnataka in the case of CST Bangalore Vs Turbo tech Precision Engineering Pvt Ltd., [2010(18)STR 545(Kar)]  . We may, with respect reproduce the entire judgment of their Lordships.

“The revenue has come up in this appeal being aggrieved by the order of the CESTAT in Order-in-Appeal No. 59/2004-S.T. in Final Order No. 1068/06, dated 15-6-2006 [2006 (3) S.T.R. 765 (Tri- Bang.)]   raising the following substantial questions of law:

(a) Whether, the CESTAT was legal and correct in setting aside the impugned OLA No. 59/2004, dated 14-6-2004 with consequential relief, when the activities undertaken by the respondent came squarely within the ambit of Consulting Engineer service, and service tax was levied on design development only.

(b) Whether, the CESTAT was legal and correct in holding that the contracts entered into by the respondents were “Works Contracts”, and hence not leviable to service tax.

(c) Whether, ratio of decisions relied on by CESTAT applies to the facts of the present case.

2. The facts leading to this case are as here under: The respondent- assessee is registered under the provisions of Finance Act 1994. The Department holding that the respondent- assessee is rendering services like, design development, design review, installation and commissioning and technology transfer for study and design of oil free compressor systems, brought the respondent- Company within the scope of “Consulting Engineer” service as per section 65(13) of the Finance Act. Accordingly, a show cause notice was issued on 10-10-2002 calling upon the respondent- assessee why a service tax of Rs. 23,58,008/- shall not be demanded from it apart from levying interest and penalty under different provisions of the Act. The respondent contended that they are not liable to pay the service tax as Section 65(13) of the Act is not applicable to the respondent- assessee. However, the contention of the assessee was rejected by the Deputy Commissioner of Central Excise (Service Tax Division), Bangalore . Being aggrieved by the same, the assessee filed an appeal before the Commissioner of Central Excise (Appeals) Bangalore , which appeal also came to be rejected. Aggrieved by the concurrent findings, a second appeal was preferred before the CESTAT. CESTAT considering the different provisions of law of the Finance Act came to be conclusion that the assessee is not liable to pay either service tax or the interest or the penalty levied by the revenue. Accordingly, the appeal of the assessee came to be allowed by the Tribunal.

3. Being aggrieved by the same, the present appeal is filed raising the aforesaid substantial questions of law.

4. We have heard the learned counsel for the parties.

5. The main crux of the matter in this case is whether on the date of relevant assessment period the service rendered by the assessee has to be classified under the definition Section 65(13), as ‘Consulting Engineer’ and whether the assessee can be brought into tax considering the work executed by the assessee as a ‘Works Contract’.

6. If these two questions are answered in favour of the revenue and against the assessee, the substantial questions of law framed in this appeal are to be answered in favour of the revenue and against the assessee. If the case of the assessee does not fall under Section 65(13) of the Act and if the works contract executed by the assessee during relevant assessment period, cannot be taxed under the Finance Act then the substantial questions of law framed are to be answered against the revenue and in favour of the assessee.

7. During relevant period, the definition of Consulting Engineer defined under section 65(13) reads as hereunder:

“consulting engineer” means any professionally qualified engineer or an engineering firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering.”

Subsequently the definition of Consulting Engineer has been amended under the Finance Act 2006 which has come into effect from 1 st May 2006, the definition 01 which reads as here under:

65(31) “consulting engineer” means any professionally qualified engineer of any body corporate or any other firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to any person in one or more disciplines of engineering.

8. From the combined reading of the definition of Consulting engineer prior to 2006 and after 2006, it is clear to the Court that the service rendered by the Company had not been included under the definition of consulting engineer prior to 2006 as It stood under Section 65(13). As a matter of fact, this Court has decided the said point In CEA 12/2007 on 1st April 2010 stating that prior to the Amendment Act, 2006, the Companies were not included under the definition of consulting engineer. When we have taken such a view, considering the relevant assessment year in the present case we have to hold that the service rendered by the assessee-Company during relevant period cannot be brought under the category of consulting engineer. If the service rendered by the assessee cannot be considered as a consulting engineer, the question of calling upon the assessee to pay the service tax under the Finance Act brought the assessee under the word consulting engineer does not arise at all. Therefore, the said point has to be answered against the revenue and In favour of the assessee.

9. So far as the execution of the works contract is concerned, the works contract is defined under section 65(105)(zzzza) which reads as under:

(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 terminals, bridges, tunnels and dams.

Explanation. – For the purposes of this sub-clause, ‘works contract’ means a contract wherein, –

(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, machinery, equipment or structures, whether prefabricated 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 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 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

(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 and construction or commissioning (EPC) projects.

10. This section has come into force with effect from 1-6-2007. After considering the contract entered into between the assessee and its employer, the case of the assessee falls under Section 65(105)(zzzza) Explanation (a) and (e). Even though the assessee’s case falls under the definition of works contract but the revenue has no power to call upon the assessee to pay service tax, interest and penalty therein, since the provisions of law has come into force with effect from 1.6.2007.

11. In the present case, contract is for the period between 1997 to 2001. Therefore, the said question is also required to be answered in favour of the assessee against the revenue.

12. In view of our findings on these points, we have to answer the substantial questions of law framed against the revenue and in favour of the assessee.

13. Accordingly, the appeal is dismissed.”

Since we have disposed off the appeal on the question of the same being covered under the category of works contract, we are not recording any finding on various lengthy submissions made by both sides as they would be academic.

20. In view of the above reasoning, we set aside the impugned order and allow the appeal with consequential relief if any.”

9. Ld. Special Counsel for the Revenue would submit that this final order of ours in the appellants’ own case needs to be re-visited in view of the order of the Larger Bench in the case of BSBK (supra) and also Circulars issued by the Board. This contention of the Special Counsel does not carry the case of the Revenue any further for more than one reason. Firstly, we find that the issue before us involved in the current case is regarding the contract of supply, erection, installation and commissioning of fire, hydraulic systems and the issue before us in the case of the appellants’ own case in Final Order dt. 22/7/2010 was for supply, erection, installation and commissioning of power systems and distribution systems. Though the outcome of execution of the contracts may, be different but the contracts were for the similar purposes. It can be noticed from the above reproduced portions of our Final Order, an identical issue in respect of Turbotech Precision Engineering Pvt. Ltd. was before the Hon’ble High Court of Karnataka that being an issue in respect of ‘consulting engineer service’ providing design development, design review, installation and commissioning and other services. It is to be noted that Revenue had filed an appeal before Hon’ble High Court against the order of Tribunal in that case. Hon’ble High Court has categorically held that if the contract is a works contract, then the service tax liability will only arise from 01/06/2007. The facts of the current case before us and the case before the Hon’ble High Court were similar/identical, except for that the Revenue in the case of Turbo tech Precision Engineering Pvt. Ltd. sought to tax the service tax under ‘Consulting engineer service’ and the assessee was pleading that it would fall under the “works contract”, while in the case before us today, the assessee’s plea is that it will be “works contract” while Revenue’s contention is that it will not fall under the category of works contract but under “commissioning & installation services”. We find that the judgment of the Hon’ble High Court of Karnataka in the case of Turbo tech Precision Engineering Pvt. Ltd. (supra) would squarely cover the issue in favor of the appellants. Secondly, the reliance placed by the ld. Special Counsel for the Revenue on the decision of the Larger Bench in the case of BSBK(supra) would be of no avail as it is seen that the Larger Bench of the Tribunal in para 10 of the said order has held as under:-

“10 . Submissions of Intervener and Respondent that turnkey contracts cannot be vivisected does not find legal support and entire submission that severability of turnkey contract by 46th Constitutional amendment has only permitted levy of sales tax on goods is misconceived. An entry incorporated to the Statute book w.e.f. 1-6-2007 has nothing to do with the severance of the contract to segregate goods and services involved in turnkey contracts. Leviability of service tax on different elements of services certainly depends on the facts and circumstances of each case and classification of the respective services. The Division Bench while dealing with the appeals shall have advantage to look into each case on its own factual matrix and legal back ground as well as respective pleadings. The circulars relied by the Interveners and Respondent were misplaced since the circulars deal with classification of services covered by cluster of services without dealing with the divisibility aspect of the contract. Reliance placed by interveners and Respondents on different citations made is not profitable for the various reasons described herein before and observations made in this order. The plea that because decision of Daelim’s case has been followed in the past by different Benches of the Tribunal, that holds the field does not get sanction of law when different aspects of a commercial transaction are liable to tax under different legislation s according to the fields of taxation assigned to States and Government of India.”

It can be seen from the above reproduced portion of the order, the Larger Bench decision was on the turnkey contracts and an argument that it can be vivisected and it can be brought into service tax liabilities prior to 01/06/2007 would be running against the decision of the Hon’ble High Court of Karnataka in the case of Turbotech Precision Engineering Pvt. Ltd. (supra), of which have been reproduced by us herein above in the appellants’ own case in the earlier order.

10. In view of the above findings, we find that the impugned order confirming the demand and imposition consequent penalties and interest is incorrect and needs to be set aside and we do so.

11. Since, we have disposed off the appeal on the question of whether the contracts covered under the category of works contract (which we held it is so), we have not labored to record any findings on various lengthy submissions made by both sides as they would be of academic nature.

12. Accordingly, we set aside the impugned order and allow the appeal.

(Pronounced in court on 29.12.10)

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0 responses to “If the contract is a works contract, then the service tax liability will only arise from 01/06/2007”

  1. V G Subramanian says:

    On the part of Customs Classification, is the department bound by any statements certified by technical bodies surpassing the requirement of Section Notes / Chapter Notes of the Customs
    Tariff Act, 1975 .

    V.G.Subramanian

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