Work contracts — Liability before 1-6-2007 —
Even in indivisible contract — Lump sum turn key (LSTK) work contracts
or EPC projects — Services provided as part of such contracts liable to
service tax — No mention that service tax is leviable in respect of only
stand-alone activity u/s.65(105) or 66 of the Finance Act, 1994 (the
Act) — Service tax attracted if service is taxable — Consulting
Engineering Service — Engineering drawings separately charged in
contract — Activity covered under Consulting Engineer services — Failure
to obtain registration — Returns not filed — Non-payment of service tax
since 1997 — Assessee guilty of suppression — Extended period of
limitation invokable and liable to penalty.
Facts:
The
appellants engaged in the manufacture of telecommunication equipment,
UPS Systems, and primary and secondary instruments, etc., chargeable to
Central Excise duty. In addition, the appellants also designed,
installed and commissioned the electronic control systems, provided
operational training to the customer’s employees and also undertook
repair and maintenance of these equipments as per the contract with
their customers. Pursuant to the introduction of ‘Consulting Engineers’,
‘Installation & Commissioning’ and ‘Repairs and maintenance’ as
taxable services under section 65 of the Act), the appellants took
service tax registration for ‘Repair & Maintenance’ on 1-8-2003 and
for ‘Installation & commissioning’ and ‘Repairs & Maintenance’
on 20-1-2004. A show-cause notice was issued against the appellants in
respect of the ‘Consulting Engineer’ services provided prior to 1-8-2003
for service tax amounting to Rs.40,71,946 along with interest and
penalty.
Key contention of the appellants:
The
appellants did not provide any Consulting Engineer’s services but
executed lump sum turnkey contracts for design, engineering,
manufacture, supply, erection, testing and commissioning of control
systems. The lower Appellate Authority overlooked the law laid by the
Tribunal in the case of Daelim Industrial Co. Ltd. v. CCE, Vadodra 2003
(155) ELT 457 and a plethora of other cases holding that “lump sum
turn-key contracts for design, engineering, manufacture, supply,
erection, testing and commissioning cannot be vivisected to levy service
tax on the service components”. The view taken by the Tribunal in the
case of CCE, Raipur v. BSBK Pvt. Ltd., 2010 (253) ELT 522 (Tribunal-LB)
that after 46th Constitution amendment, the service part of a turnkey
contract can be separated from the goods part for levy of service tax
did not apply in the present case as the legal fiction under Article
366(29A) cannot be applied to the laws other than sales tax. The
appellants relied on a plethora of cases such as BSNL v. Union of India,
2006 (3) SCC 1, Southern Petrochemical Industries Co. Ltd. v.
Electricity Inspector, (2007) 5 SCC 447, Geo Miller & Co. (P) Ltd.
v. State of M.P., 2004 (5) SCC 209, etc. Relying on the decision in the
case of Patnaik & Co. v. State of Orissa, AIR 1965 SC 1655, it was
submitted that drawing and designs prepared were to be treated as
service provided by the appellant to themselves and not a consulting
engineer’s service provided to clients. Separate amount indicated in the
contract for ‘drawing/designing or engineering’ was only for a
milestone payment to be released on preparation and approval of drawings
and could be treated as value attributable to the drawings and
designing. The contracts in the case were indivisible turn-key contracts
with single-point responsibility which could be treated as severable
contracts. Such contracts became taxable as ‘Work contract services’
w.e.f. 1-6-2007 under 65(105)(zzza) of the Act and any activity under
work contract was not taxable prior to that date. The longer period of
limitation for demand of allegedly non-paid service tax was not
available to the Department as they were aware of the activities of the
appellants since 1991.
Key contention of the respondent:
The
services rendered as ‘consulting engineer’ were clearly distinguishable
as the clauses of the contract showed the intention to provide the
services and to charge separately for the same. The Tribunal in the case
of Transformers & Electricals Kerala Ltd. v. CCE, 2006 (1) STR 233
(CESTAT-DB) held that the engineering consultancy component of EPC
contracts was taxable. Further, the terms of the contract clearly
indicated that service tax was rightly demanded on the charges for
drawing, designs and other technical assistance. There was no provision
in the Act that taxable service mentioned in section 65(105) will not be
taxable if provided under a lump sum turn-key contract (LSTK) or as a
work contract. There was no documentary evidence produced to show that
charges for drawing, designs, engineering assistance, etc. in the
contracts and invoices were not the actual charges for these contracts. A
work contract is a service contract and if that service was taxable
w.e.f. 1-6-2007, the same would attract service tax prior to 1-6-2007,
even if it is provided as a lump sum work contract. In addition it was
contended that the decision of Daelim (supra) did not lay down any law
as SLP was summarily dismissed by the Supreme Court. The Karnataka High
Court decision of Turbotech Precision Engineering Pvt. Ltd. was not a
binding precedent as no reasons were provided in the said judgment for
holding works contract as not liable for service tax.
Held:
The
Tribunal held that the preparation of basic and detailed engineering
drawings, on the basis of which erection and installation work was done
and training of clients was technical assistance provided to the clients
and it had to be held as consulting engineer’s services. As regards the
issue of subjecting lump sum turn-key work contracts to service tax
payment and the levying of the same prior to 1-6-2007, the Tribunal
observed that a contract will attract service tax if the service is
taxable u/s.65(105) of the Act and the legal fiction of Article 366(29A)
was of no relevance in this case. Service tax shall be chargeable in
case of a work contract for a particular service which is taxable
u/s.65(105) of the Act, regardless of it being divisible or indivisible.
The meaning of work contract being a contract for work and labour i.e.,
a service contract prior to 1-6-2007 and hence service tax would be
levied on the same prior to 1-6-2007. The contract and the invoices
indicated that the clients were charged for drawings/designs,
engineering and technical training and hence the contracts contained
component of activity covered by ‘Consulting Engineer service’. Hence,
service tax was chargeable. The longer period of limitation of five
years for unpaid service tax was rightly invoked in the light of the
appel-lant’s failure to furnish any explanation for non-payment of
service tax and for not obtaining registration. Penalty imposed u/s.76,
77 and 78 were also rightly imposed as the facts were suppressed.
