Service tax payable on labour component only if value of material separately determinable.

PJ/Case Law/2014-15/2163

Case:- M/s KHEM SALES AGENCIES Vs COMMISSIONER OF CENTRAL EXCISE, BHOPAL

Citation:- 2014-TIOL-708-CESTAT-DEL

Brief facts:- The appellant were engaged in supply, Erection, Commissioning and Installation of turbine pumps, centrifugal pumps and other pump for lift irrigation projects which were undertaken by the Governments of M.P. and Chhattisgarh. According to the appellant, the Irrigation Departments of the Governments of Madhya Pradesh and Chhattisgarh invited tenders for supply, Erection, Commissioning and Installation of turbine pumps, centrifugal pump and other pumps for lift irrigation projects and on the Appellants bid being accepted, they were awarded the contracts for the above jobs. The dispute in this case was in respect of the contracts executed during the period from 01.04.04 to 31.03.09. According to the Department, the appellant, during this period, have provided the taxable service of Erection, Commissioning and Installation, as defined under section 65(105)(zzd) read with 65 (39a)of the Finance Act, 1994 to their customers but have not paid service tax on the amount received for the same. According to the Department during the period of dispute, the gross receipt of the appellant was Rs.18,70,99,689/- and the value of the supply items was Rs.24,25,856/- and thus, according to the Department, the gross amount received by the appellant for the taxable services rendered by them was Rs.18,46,73,833/-. On this amount after giving 67% abatement, the service tax had been charged @ 12% adv. On this basis, a Show Cause Notice dt.15.10.09 was issued to the appellant for demand of service tax amounting to Rs.71,12,792/- along with interest and also for imposition of penalty on the Appellant under section 76, 77 & 78 of the Finance Act, 1994. This Show Cause Notice was adjudicated by the Commissioner of Central Excise, Bhopal vide Order-In-Original dt. 19.11.12. In course of proceedings before the Commissioner, the appellant pleaded that w.e.f. 01.06.2007 their service would be classifiable as works contract service and since it was in relation to dams, the same would not be taxable, that the total amount received in connection with Erection, Commissioning and Installation was only about Rs. 25 Lakh on which the service tax involved was only Rs.1.5 Lakh and as such the service tax demand of about Rs.71 Lakh was not sustainable, but this plea was not accepted by the Commissioner. The Commissioner by the impugned order confirmed the service tax demand of Rs.71,12,792/- along with interest and also imposed penalty of equal amount on them under section 78 and another penalty of Rs.5,000/- under section 77. Against this order of the Commissioner, this appeal had been filed.

Appellant’s contentions:- The learned counsel for the appellant, pleaded that from the sample work orders placed on record, it was clear that the Appellant had executed contracts awarded to them by the Governments of Madhya Pradesh and Chhattisgarh only relating to following work:-
(a) Construction of Lift Irrigation Scheme (LIS) in dams/canals built by the Government which involves supply of pumps, pipes and other electrical equipments and its erection and commissioning;
(b) Construction of Jack wells for pumping of water in canal and dam where pumps were installed; and
(c) Supply, Erection and Commissioning of Sluice gates and redial gate in dam and canal system of dams;
that the lift irrigation systems were constructed where canal water of dam/river could not flow naturally by gravity in high command area. The lift irrigation scheme contracts were with respect to or part of dams and canals of the Government. The work relating to the dams and canals was not taxable either as work contract service or as civil and industrial construction service. Service tax was chargeable only on service of Erection, Commissioning and Installation of turbine pumps and other electrical equipments of the lift irrigation scheme. Value of this service during the period of dispute was only Rs.25 Lakh on which the service tax involved was only about Rs.1.5 Lakh. The value of Erection/installation and Commissioning work could be easily determined from the work orders wherein the rates of various items of supply of goods and performance of services were separately mentioned. The civil work in connection with lift irrigation scheme would not attract service tax under Erection/installation and Commissioning service or under civil or industrial construction service. Commissioner had wrongly considered entire gross receipt except the value of supply items worth about Rs. 25 Lakh as the value of the Erection, installation and Commissioning service which was not correct and that in view of this the impugned order was not correct.

Respondent’s contentions:- Sh. Amresh Jain, learned DR, defended the impugned order by reiterating the findings of the Commissioner.

Reasons of judgment:- The Tribunal on going through the sample contract placed on records and also the invoices submitted by the appellant to the Project Authority, it was seen that the contract was not an indivisible works contract, as the same mentions the details of the price of the supply items and various services. The invoices had been issued by the appellant based on rate schedule in the contracts/works order and the invoices also mention separate price of the supply items and various services and as such from the invoices it was possible to determine the value of the Erection/installation and Commissioning service. The appellant’s contention was that all the contracts were of this type only. The appellant have placed on record a works order wise consolidated statement for the entire period of dispute which gives work order wise details of the value of the goods supplied and the value of various services. From this statement it was seen that substantial amount received was in respect of construction of lift irrigation system and Jack wells for water supply schemes which have nothing to do with Erection/installation and Commissioning of the pumps. Since the appellants contracts with their customers were not indivisible works contract but were split contract giving items wise details of the value of supply items and value of various services and from the contracts/work order and the respective invoices, it was possible to determine the value of taxable services, assessment of service tax should have been done on this basis, instead of treating the gross amount received minus value of the goods supply items (taken as Rs. 24.25 lakhs) as gross amount received for the services of Erection/installation and Commissioning services and calculating service taxes on this basis after giving 67% abatement. This approach of the Department would not be correct if the appellants claim that they have also received considerable amount for civil work relating to the lift irrigation schemes, construction of Jack wells etc., was correct. In view of this, the impugned order was not sustainable. The same was set aside and the matter was remanded for the Original Adjudicating Authority for de-novo adjudication, keeping in view our observations in this order.

Decision:- Appeal allowed by way of remand.

Comment:- The analogy drawn from the case is that if assessee’s contracts with their customers are not indivisible works contract but are split contract giving items wise details of the value of supply items and value of various services and from the contracts/work order and the respective invoices, it is possible to determine the value of taxable services, assessment of service tax cannot be done by treating the gross amount received including the value of materials.

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PJ/Case Law/2014-15/2163

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