Case Law Details
Urvashi Porwal
Brief of the Case
In the case of M/s SEPCO Electric Power Construction Corporation Vs. CCE, Raipur, it was held that merely because it had entered into four contracts for completing the scope of work would not take away from the fact that it was an operation of erection and commissioning on a turnkey basis and therefore the service rendered was works contract service which was not liable to service tax prior to 1.6.2007 in the light of the judgement of Supreme Court in the case of Larsen & Toubro (supra). Further, during the relevant period, the appellant being a body corporate was not covered under the definition of consulting engineer as per the judgement of Delhi High Court in the case of Simplex Infrastructure and Foundry Works and consequently, the service rendered by the appellant could not be classified under Consulting Engineer Service.
Facts of the Case
The Appellant had a contractual obligation with BALCO to procure, set up and bring into commercial operation captive power plants at their site. The period involved in this case is August, 2003 to November, 2005. The scope of activities included design, engineering, procurement, manufacture, supply, erection, testing, commissioning and reliability run, demonstration of performance guarantees as well total project management in an integrated manner on turnkey basis. Thus it involved composite works. For that purpose they entered into four contracts as under :
- Contract No. BALCO-SEPCO-01: off shore Supply Contract for the Balco Captive Power Plant Project.
- Contract No. BALCO-SEPCO-02: Contract for Off shore Engineering and Technical Services for the Captive Power Plant Project.
- Contract No. BALCO-SEPCO-03: On shore Supply contract for the Captive Power Plant Project
- Contract No. BALCO-SEPCO-04: On shore Services & Construction Contract for the Captive Power Plant Project
As per the bidding document issued by BALCO the scope of work was described as under :
“The scope of Works of SEPCO, in accordance with the Specification for EPC Contract attached to the Notice inviting Tender issued to SEPCO on 4th February, 2002, shall include planning, design, engineering, project management, manufacture & procurement supply, ocean transportation including marine insurance, custom clearance, inland transportation including transit insurance, storage & handling civil works, erection, testing, commissioning, insurance against Erection All Risks, training, trial operation and handling over of the complete equipment and works for 5 x 135 MW coal-fired power plant as described in the Volume II (Technical Proposal) and Volume III (Bid Proposal Sheets) on turnkey basis, SEPCO shall also be responsible for the successful execution of performance guarantees tests for the entire Plant.”
The price as per bidding document was quoted on a turnkey basis for the entire project at US D 228923000/- and the payments were depending upon various stages of completion of project as a whole. The performance parameters were also stated unit wise for each unit and the bank guarantee of 10% of the total contract price was for the entire project. The time schedule is indicated unit wise and not contract wise. The technical specifications are set for all contracts. The department alleged that even if the appellant was given work for four 135MG power plants, it had entered into four separate independent contracts and the contract in question was purely a sweat contract and did not involve supply of any goods at all and the service rendered there-under was Consulting Engineer Service and therefore service tax is payable. The adjudicating authority confirmed the demand under the category of consulting engineer and the assessee preferred the present appeal against the same.
Contentions of the assessee
The assessee contended that the service rendered was works contract service and it was only for the purpose of convenience that four separate contracts were entered into and the breach of anyone contract was to be treated as breach of all contracts. The appellant cited the judgement of Supreme Court in the case of BSES Ltd. Vs. Fenner India Ltd. – (2006) 2 SCC 728 wherein the Supreme Court held as under:
“Upon a careful reading of this agreement, we are satisfied that the contract though, for the sake of convenience, was split up into four sub- contracts (viz. the four work/ purchase orders), was a composite contract executable on a turnkey basis. The terms of this turnkey contract were reduced into writing by the “wrap-around agreement” of 10.5.2000. We are of the definite view that under the “wrap-around agreement”, the Appellant had the right to encash any or all of the guarantees for any breach in any of the terms of the four contracts. Hence, we are unable to accept the submission of Mr. Sorabjee that the first three bank guarantees were only for securing the advances paid and that it was only the fourth bank guarantee (No. 291/99 dated 23.3.2000) that was liable to be called for failure to perform the contract. In fact, an appraisal of the terms of the contract leads us to the conclusion that the bank guarantees were intended for both purposes: for securing the advances paid to the First Respondent and also for securing due performance of the contract.”
The assessee also referred to the judgement of Tribunal in the case of CCE & Customs, Vadodara Vs. Larsen & Toubro – 2006 (4) STR 63 (Tri.-Mumbai) wherein the ld. DR’s argument that when the value of the goods is separately mentioned in a composite contract it would cease to be an indivisible works contract was rejected. Thus the service rendered was works contract service which was not taxable prior to 1.6.2007 as per the judgement of Supreme Court in the case of CCE Vs. M/s Larsen & Toubro Ltd. – 2015-TIOL-187-SC-ST.
Contentions of the Department
The department contended that even if the appellant was given work for four 135MG power plants, it had entered into four separate independent contracts and the contract in question was purely a sweat contract and did not involve supply of any goods at all. Each contract laid down its own terms and conditions and its own scope of work, responsibility and obligation value etc. and therefore the judgements cited by the appellant are not applicable. The manner of payment or the enforceability provisions do not take away from the fact that the contract in question was an independent legally enforceable contract and the service rendered there-under was Consulting Engineer Service.
Held by Hon’ble CESTAT
The Hon’ble CESTAT stated that it is seen that the appellant was given the work which included design, engineering, procurement, manufacture, supply, civil works, erection, testing commissioning, reliability run, demonstration of performance guarantees as well as total project management in an integrated manner and on turnkey basis, and any other works reasonably required for the completion of the Facility and/or for safe, trouble free, normal operation of the facility. Therefore, there is force in the appellant’s contention that merely because it had entered into four contracts for completing the scope of work would not take away from the fact that it was an operation of erection and commissioning on a turnkey basis and therefore the service rendered was works contract service which was not liable to service tax prior to 1.6.2007 in the light of the judgement of Supreme Court in the case of Larsen & Toubro (supra). The particular contract under consideration is however not a works contract per se, because there was no transfer of property in goods involved in the execution of that contract. The contention of the appellant is that it entered into four contracts for the sake of operational convenience and the total work was essentially an EPC/turnkey project involving transfer of property in goods leviable to sales tax and what is taxable is not a contract but the taxable service which by virtue of that becomes works contract service.
The impugned demand has been confirmed under Consulting Engineer Service. Definition of consulting engineer during the relevant time as given under Section 65(31) of the Finance Act, 1994 was as under :
“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 any person in one or more disciplines of engineering.
The said definition was amended with effect from 1.5.2006 to read as under :
“Consulting engineer” means any professionally qualified engineer or anybody corporate or any other 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.
The Hon’ble CESTAT further referred to the judgment of Hon’ble Delhi High Court in the case of CCE & ST. Vs. Simplex Infrastructure and Foundry Works -2014 (34) STR 191 (Del.) wherein it was held as under :
“4. It may be relevant to point out that the words “an engineering firm” appearing in the above definition, were substituted by the Finance Act, 2006 with effect from 1-5-2006 with the words “any body corporate or any other firm”. It is, therefore, clear that the expression “any body corporate” was introduced with effect from 1-5-2006. But, in the present case, the relevant period is 1997-2001. At that point of time, the expression “any body corporate” was not included in the said definition of “consulting engineer”.
5.The learned counsel for the appellant submitted that Section 3(42) of the General Clauses Act, 1897 ought to be pressed into service. He submitted that the word “person” includes any company or association or body of individuals whether incorporated or not. However, we fail to understand as to how the learned counsel for the appellant can place reliance on Section 3(42) of the General Clauses Act. That provision would only apply where the word “person” is used in any Act or Regulation. The definition of ”consulting engineer” as provided in Section 65(31) of the Finance Act, 1994, as it existed during the relevant period, did not employ the word “person” at all. Consequently, the provisions of Section 3(42) of the General Clauses Act, 1897 would not apply.
6.From a reading of the impugned order, we find that the Karnataka High Court has also taken the view that the expression “consulting engineer” as it appeared in Section 65(31) of the Finance Act, 1994, at the relevant time (i.e. prior to 1-5-2006), did not include “a private limited company or any other body corporate”.
The Hon’ble CESTAT further stated that it is seen that the period of dispute in this case is August 2003 to November 2005. Thus during the relevant period, the appellant being a body corporate was not covered under the definition of consulting engineer as per the above quoted judgement of Delhi High Court and consequently, the service rendered by the appellant could not be classified under Consulting Engineer Service under which the impugned demand is confirmed.
In view of the aforesaid analysis, the impugned demand is not sustainable. Accordingly, the appeal is allowed.
