1. Preamble :
Recently on July 27, 2009, the Government issued Notification No. 24/2009-ST, whereby services provided in relation to management, maintenance or repairs of roads is notified as exempt from the whole of the levy of service tax. This prima facie appears to have been done to put an end to the controversy over the issue of taxability of these services. However, the question arises here is, can the Government exempt a service which was always outside the purview of the levy ? The issue of the Notification does not end the controversy over taxability of the services for the period prior to July 27, 2009, as it would mean that the services covered under the Notification were taxable till such date. Whether the services at least of repairs of roads were excluded from the purview of service tax or otherwise is discussed and analysed below.
2. Background :
2.1 Construction service was introduced w.e.f. September 10, 2004 in clause (30a) of S. 65 of the Finance Act, 1994 (The Act). The definition inter alia excluded construction of road, dams, tunnels, etc. CBEC vide its Circular F.No.B2/8/2004-TRU dated 10-9-2004 explained the scope of this service. Subsequently, with effect from 16-6-2005 this service was renamed as ‘commercial or industrial construction service’ under clause (25b) of S. 65 and the erstwhile clause (30a) defined taxable service called ‘construction of complex’. The new clause (25b) also excluded services provided in respect of roads, tunnels and dams along with construction services in respect of airports, railways, transport terminals and bridges. Further, when execution of works contract service was introduced vide clause (zzzza) in S. 65(105) of the Act from 1-6-2007, this category also excluded works contract in respect of the same items. The relevant definitions are reproduced here :
S. 65(25b) :
‘Commercial or industrial construction service’ means —
(a) construction of a new building or a civil structure or a part thereof; or
(b)
(c)
(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,
which is —
(i) used, or to be used, primarily for; or
(ii) occupied, or to be occupied, primarily with; or
(iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams”. (emphasis supplied)
S. 65(105)(zzzza) :
‘Taxable service’ means any service provided or to be provided 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)
(ii) such contract is for the purposes of carrying out, —
(a)
(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) ……………
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or
(e) (emphasis supplied)
The above definitions clearly indicate inclusion of repair, alteration, renovation or restoration or similar services in relation to commercial building or civil structure, pipeline or conduit in sub-clause (d) alongside construction services in sub-clause (a) and (ii)(b), respectively in the above definitions.
2.2 Under another category of service viz. ‘management, maintenance or repair’ in S. 65(64) of the Act, maintenance or repair of properties whether immovable or not has been made taxable w.e.f. May 01, 2006. The definition is reproduced here :
“65(64) ‘management, maintenance or repair’ means any service provided by :
(i)
(ii)
(a) ;
(b) maintenance or repair of properties, whether immovable or not; or
(c)
Explanation — For the removal of doubts, it is hereby declared that for the purposes of this clause, —
(a)
(b) ‘properties’ includes information technology software”. (emphasis supplied)
2.3 Thus, there has been an overlap of repair services in relation to immovable properties under both the above taxing entries. This gave rise to dispute with the authorities for the assessees particularly in relation to (b) different construction services in relation to road and other areas (a) repairs or restoration services in relation to roads.
3. Repair services in respect of roads :
3.1 Different kinds of services are provided by construction service providers in cases of both public and private roads. For instance, widening of existing roads, resurfacing, relaying, concretisation, etc. Since commercial or industrial construction service as well as execution of works contract service clearly include services in relation to repairs, alteration, renovation or restoration of any building or civil structure and exclude such services in relation to roads, the issue arose as to whether repair, renovation, etc. of road is classifiable under commercial or industrial construction service, or works contract service, as the case may be, on one side or under management, maintenance or repair service under the other. Service tax authorities at various places adopted divergent practices. On referring the matter to the Board by the Department, Circular No. 110/4/2009-ST, dated 23-2-2009 was issued providing the following clarification :
“2. Commercial or industrial construction service [S.65(105) (zzq) specifically excludes construction or repairs of roads. However, management, maintenance or repair provided under a contract or an agreement in relation to properties, whether immovable or not, is leviable to service tax u/s. 65(105) (zzg) of the Finance Act, 1994. There is no specific exemption under this service for maintenance or repair of roads, etc. Reading the definitions of these two taxable services in tandem leads to the conclusion that while construction of road is not a taxable service, management, maintenance or repair of roads are in the nature of taxable services, attracting service tax.
The next issue requiring resolution is the types of activities that can be called as ‘construction of road’ as against the activities which should fall under the category of maintenance or repair of roads. In this regard the technical literature on the subject indicate that the activities can be categorised as follows, :
A) Maintenance or repair activities:
I. Resurfacing
II. Renovation
III. Strengthening
IV. Relaying
V. Filling of potholes
B) Construction activities:
I. Laying of a new road
II. Widening of narrow road to broader road (such as conversion of a two-lane road to a four-lane road)
III. Changing road surface (gravelled road to metalled road/metalled road to black-topped/blacktopped to concrete, etc.)
4. The cases may be decided/revenue should be protected based on the above classification. Suitable trade and public notices may be issued for information of the trade and field formations.”
3.2 The above Circular appears to be not in harmony with the rules for classification of services required to be followed when a taxable service is prima facie classifiable under two or more taxing entries. S. 65A of the Act contains these rules. According to the first rule, specific description is always preferred over general description. Accordingly, if roads are specifically excluded from commercial or industrial construction service, as well as execution of works contract service and as both these categories specifically include repairs, renovation, restoration, etc. of buildings or civil structures as construction services, the sub-clause in management, maintenance or repair service of maintenance or repair of immovable ‘properties’ appears generic in nature for services in relation to roads. The Tribunal in the case of Dr. Lal Path Lab. Pvt. Ltd. v. CCE, Ludhiana 2006 (4) STR 527 (Tri.-Del.) held “What is specifically kept out of a levy by the Legislature cannot be subjected to tax by the Revenue administration under another entry”. “In the present case, Revenue is seeking to discard the specific entry and to bring the appellant’s services under a very general entry only because under the specific entry, no tax is payable. This approach is contrary to the scheme of legislation.” Also, under the excise law, similar view was held inter alia in the cases of Tata Tea Ltd. v. CCE, 2004 (164) ELT 0315 and TTK Healthcare Ltd. v. CCE, 2008 (231) ELT 0273. In the case of CCE v. Konkan Marine Agencies, 2009 (13) STR 7 (Kar.), it was held to the effect that once the definition of the taxing entry excluded a specific aspect, service tax could not be levied. It appears therefore a reasonable view that the above Circular restricts the scope of the taxing entries viz. commercial or industrial construction service and execution of works contract service. “Circulars contrary to the correct legal interpretation are not binding on judicial authorities” was held in the case of Videocon International Ltd. v. Commissioner, 2004 (167) ELT 33 (Tri.-Mum). Similarly, it was held in the case of Mahakaushal Builders Welfare Association v. Supdt., 2006 (3) STR 721 (MP) that Circular does not create liability for payment of service tax if assessee not liable to pay tax under law relating to service tax. In the case of Pahwa Chemicals Pvt. Ltd. v. Commissioner, 2005 (181) ELT 339 (SC), it was held that the Board can issue directions only for purpose and in furtherance of and not contrary and derogation to provisions of the Central Excise Act, 1944.
3.3 Construction services per se cover repairs, renovation or restoration services as these services also involve’ construction’ and / or reconstruction in part. Roads are per se civil structures. When an existing road is redone completely, it can be called restoration. Clause (d) in the relevant definition cannot be rendered redundant by issuing a Circular. Further, there is a thin line of distinction between the terms ‘relaying’ and ‘laying of a new road’. Can ‘relaying’ not be covered by the terms ‘renovation’ or ‘alteration’ ? A further question arises as to whether the word ‘renovation’ used in the Circular directing that it is a maintenance service liable for service tax and the same word used in clauses (25b) or (zzzza) mean different? It is a cardinal principle of interpretation of taxing status that interpretation leading to absurdity cannot be accepted. By the parameter adopted by the Circular, even repair services in respect of a dam, bridge or any airport also would be considered taxable under clause (64) of S. 65 as all such services are also provided under a contract. Admittedly, revenue consideration of the authorities is on a higher footing than any other parameter like natural or grammatical meaning, principle of harmonious construction in a statute or principle of legality.
3.4 In effect, the Board’s Circular interprets the definition of commercial or industrial construction service in a restrictive manner merely to suit the Revenue needs. If sub-clause (a) under commercial or industrial construction service and sub-clause (ii)(b) under execution of works contract service, which provide for construction of a new building or a civil structure or a part thereof apply to the respective exclusionary part of the definition, why would sub-clause (d) under both the definitions providing for repair, alteration, renovation or restoration or similar services in relation to building or civil structure, etc., cannot apply to the exclusionary clause? If the scope of the definition is comprehensive enough to extend coverage to various services in relation to construction including those of repair, restoration aspects, the same ‘expansive’ scope applies to the exclusionary clause of the definition containing such services provided in respect of roads, airports, tunnels, dams, etc.” Such clarification being binding on the lower authorities would certainly create litigation than relief for the period prior to July 27,2009 when Notification No. 24/2009-ST was issued.
4. Services of construction of dam, tunnel and road:
4.1 The above Circular in no ambiguous terms clarifies that construction of road is not a taxable
The project was completed in February 2007. The tax demanded for the period April 2005 to March 2008 was made in the following manner:
- Tax was computed on the entire amount received from WBSEB without granting abatement of 67%.
- Computation of liability was made on the gross value even though service tax was not collected.
- Invoked extended period of limitation on the charge of mis-representation and mala fide intention of evasion.
4.2 The Noticee’s case contained chiefly the following grounds :
- Scope of the service included civil works structures of dams, tunnels and roads and did not include designing of power generation system or providing electrical and mechanical works for the plant.
- The service was covered more appropriately under execution of works contract service introduced from 1-6-2007, whereas the project was completed in February 2007.
- Filing of return or taking registration under wrong category could not be the basis for the levy.
- Declaration of the entire value of the contractual service and claiming exemption on the proach or a voyage of discovery of the authorities ground of exclusion of dams, tunnels and roads in the definition of commercial or industrial construction service in various returns from time to time and providing copy of the agreement in October 2005 to the Department evidenced against the charge of suppression or evasion.
- Wide range of activities described in the scope of work in the contract under different nomen-clature related only to construction of dams, tunneling and roads.
- Each activity described in the agreement was clarified to prove construction/civil works related to dams, roads and tunnels.
4.3 Order in a nutshell contained the following observations:
- Based on examination of definition of ‘dam’ cited in Encyclopedia Britannica and the reading of the agreement clauses concluded that construction of dam involves several auxiliary works. Exclusion of dam in the purview of the definition would mean exclusion of all auxiliary works and that there was no scope to view the exclusion provision in narrow meaning.
- No distinction could be made between construction of ordinary dams, tunnels and roads and tunnels, dams and roads as an integral part of the hydroelectric power project as the statute does not provide for it and therefore the statute cannot permit such distinction. Moreover, the dams are generally used for generating hydroelectric power.
- There is no scope for segregating the agreement for considering any part of the work as taxable service.
- Allegation of suppression also being unmeritous, the case failed both on the question of merit and the question of limitation.
5. In conclusion, to issue a half-baked Circular which generates controversy rather than settling it and then to combat it, issue a Notification or another Circular which also would not end the existing controversy is peculiar to the administration of the levy of service tax. The analysis and discussion above amply demonstrate the state of administration of the levy which otherwise contains several ambiguities and limiting factors leading to litigation due to dichotomy in interpretation. In most cases, it appears frivolous and a result of innovative approach or a voyage of discovery of the authorities at the peril of assessees at large.
