Supply of equipment, design and providing services of installation, testing etc - whether falling under 'Erection, Installation & Commissioning' Agency service

Case: M/s ABB Ltd Vs CST, BANGALORE

Citation: 2011-TIOL-748-CESTAT-BANG

Issue:- Whether supply of equipments, designs, manufacture, supply, installation, testing & commissioning of electrical, hydraulic and fire systems for underground Barakhamba Road Station at New Delhi would fall under 'Erection, Installation & Commissioning Agency' service?

Brief Facts:- Appellants are service provider and are registered as LTU. They entered into five contracts with M/s. Delhi Metro Rail Corporation (DMRC) 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, appellant 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, aluminium conduits/under ground insulated and armoured 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 wirings, 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 equipments (supply contracts) as well as for installation, testing and commissioning of such equipments (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.

An investigation was done by the DGCEI and it was noticed that appellants are required to discharge service tax under the head 'Commissioning or Installation service' during the period 30/11/2004 to 09/03/2007 on the above referred contracts. A show-cause notice was issued for demand of service tax 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 contended 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 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 passed the order confirming the demand of service tax with interest and imposed penalties under Section 78 and Section 76 of the Finance Act, 1994.

Appellants being aggrieved by such an order are in appeal before the Tribunal.

Appellant’s Contentions:- Appellants submitted that the factual position indicates that they 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. In their reply dated 3/5/2007, appellant had categorically taken a stand that they had paid sales tax wherever applicable on the supply portion of the items and also paid works contract tax on civil items used therein. 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. The appellant has explained this with an example. That the appellants had enclosed Delhi VAT TDS certificates issued by DMRC to them validating the payment of TDS payments towards works contract tax as per provisions of Delhi Value Added Tax Act, 2004.

Appellant has further submitted 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. That the Adjudicating Authority has not accepted these as composite contracts and turnkey projects without any reason. Appellant submitted that all the documents and submissions made before the Authorities indicate that these entire contracts are turnkey contracts and composite turnkey contracts. 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 appellants is totally arbitrariness to the issue. It is submitted that the nature of the contracts, as the appellants have entered with DMRC has to be arrived, as to whether such a contract is composite contract or such contract as separate value is attributable to supply and services.

It is submitted that if such separate value has not been discernible, then the fact that lot of items procured is of no consequence. That the argument that 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 submitted that smallness or bigness of the contract is relative term. That since these contracts 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.

Referring to definition of works contract as interpreted under Section 65(105)(zzzza), it was submitted 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. Reliance was also placed on Circular No. B1/16/2007- TRU dt. 22/5/2007 and Circular No. 98/1/2008-ST dt. 4/1/2008 for clarification that classification of services would depend upon the nature and substance of transaction and the single composite service cannot be vivisected for the purpose of charging service tax. It is submitted that the Tribunal has been consistently holding that works contract is a new service taxable only w.e.f. 01/06/2007 for which reliance is upon following cases: -

- Diebold Systems Pvt. Ltd. Vs Commissioner of Service Tax, Chennai [2008-TIOL-489-CESTAT-MAD]

- Air Liquide Engg India Pvt. Ltd. Vs CCE, Hyderabad [2007-TIOL-2144-CESTAT-BANG]

- Daelim Industrial Co. Ltd. v. CCE, Vadodara [2003-TIOL-110-CESTAT-DEL]

- Jyoti Limited Vs CCE, Vadodara [2007- TIOL-2337-CESTAT-AHM]

- CCE, Bangalore v. Murali Sesh Enviro Engineers, Bangalore [2008-TIOL-714-CESTAT-BANG]

- Blue Star Ltd. v. CCE, Hyderabad-II [2008-TIOL-342-CESTAT-BANG]

It is also submitted 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 High Court of Karnataka in the case of Turbotech Precision Engineering Pvt. Ltd. [2010-TIOL-498-HC-KAR-ST]. It is further submited that in an identical issue, the Tribunal in 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 [2010-TIOL-1462-CESTAT-BANG]. It was submitted that the factual position in 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. That the statements recorded of the employees clearly show that the decision in case of Daelim Industrial Co. Ltd 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. That the appellants had rightly availed exemption under Notification No.12/2003-ST dated 20/6/2003 as an alternative submission. That this submission is made in order to avail the benefit of deduction of value of materials supplied for rendering of services.

Respondent’s Contention:- Revenue submitted that appellant's claim that the contracts were in turnkey nature is without any basis. 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. 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 appellants are taxable under the category of 'Erection, Installation and Commissioning services'. That the particulars schedule, forming part of the contract provides for general description of work, total units to be supplied, unit rate for erection, installation and commissioning. 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 submitted that the appellants had placed reliance on decision of the Tribunal in case of Daelim Industrial Co. Ltd wherein it was held that 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-TIOL-646-CESTAT-DEL-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 service tax on different elements of services certainly depends on facts and circumstances of each case and classification of the respective services".

Revenue submitted 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. 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. That on the face of clear cut ruling of the Larger Bench in BSBK case on merits and applying principles laid down therein, the services rendered by 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 submitted that without prejudice to the above stand, the decision of the Tribunal in appellants' own case in Final Order No.1016/2010 dt. 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 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. That in 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. 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 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. 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. Reliance was placed on 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'.

Revenue submitted that the decision of the Tribunal having relied upon 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 appellant's own case should not be applied without giving due consideration to the submissions made now and decision of the Larger Bench decision in the case of BSBK. That in the case of Turbotech Precision Engg. Pvt. Ltd. as upheld by the 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. 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. Hence this case law cannot be relied upon by the appellant. Similarly, the cases of Diebold Systems and Glaxo Smithkline would also not be applicable. That contention of appellants that they are eligible for the benefit of exemption Notification No. 12/2003-ST dt. 20/6/2003 is incorrect as 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. Since the conditions of specific notification were not fulfilled, they were not eligible for the benefit contained in Notification No. 12/2003-ST. That the appellant could not also avail benefit of Notification No. 19/2003-ST dt. 21/8/2003, as appellants had availed the benefit of Cenvat Credit on input services of the service tax paid on the various services. That the 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 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.

Reasoning of Judgment:- The Tribunal observed that the issue involved is whether 5 contracts entered by 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'.

The Tribunal noted that the undisputed facts 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. That the Adjudicating Authority has proceeded on the premise that appellants are providing the services of erection, installation and commissioning of contracts along with supply of material and the agreement can be vivisected. He proceeded on the ground that consideration and value for taxing of services and supply of materials being two separate incidences, Revenue is well within its rights to vivisect the contract entered by appellants, as it is undisputed that there is purchase of equipments, materials and an element of erection and commissioning. He proceeded on the ground that 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 services rendered, the gross value charged needs to be taxed under the heading 'erection, commissioning and installation agency' services. It is also seen from findings of the Adjudicating Authority that appellant’s contention that contracts which were rendered by them are taxable under the category of 'works contract' has been negatived only on the ground based upon reading of definition of 'commissioning and installation, commissioning, erection and installation services. To come to such conclusion, the Adjudicating Authority has held that the equipments were supplied to the site are installed and thereafter further tests are undertaken before commissioning the entire plant or system as a whole. It was noted that he has relied upon Board's Circular dt. 17/9/2004 and other two circulars as has been argued by Revenue.

The Tribunal was of the view that 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 at the value of materials and services. From the records and the Order-in-Original that appellants had categorically contended that contracts in question are turnkey contracts and are not liable to service tax prior to 01/06/2007.

On perusal of findings of the Adjudicating Authority, the Tribunal found that the Adjudicating Authority has not considered this aspect of appellant’s arguments in a proper perspective. The Adjudicating Authority has directed himself to disagree with appellant’s contentions on the ground that contracts entered by them could not be works contract on the findings that contracts included supply element and also services element of erection, commissioning and installation. The Tribunal was of the view that this could be an incorrect appreciation of evidences which were produced before them. It is seen from records and undisputed that contracts entered by 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 law, on execution of said projects. It is seen from the records that appellants are not raising a lumpsum bill for completion of project, but are raising Running Account Bills, for the work completed and it included the element of supply of materials which was either manufactured by appellants or procured from outside. The discharge of VAT and deduction of TDS by DMRC by taking the amount from the Running Account Bills of 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 the Tribunal 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 appellant’s contention that leviability of service tax under the works contract would be effective only from 01/06/2007 is correct.

The Tribunal found that in their own Final Order No.1016/2010 dt. 22/7/2010 [2010-TIOL-1462-CESTAT-BANG] in 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, the Tribunal had considered the entire issue, and relying upon the judgment of the High Court of Karnataka in case of Turbotech Precision Engineering Pvt. Ltd. set aside the impugned order.

The Tribunal found that on the 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 an 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 the considered view of the Tribunal Revenue has no case in the issue before them.

The Tribunal held that their view is fortified by the recent judgment of the High court of Karnataka in the case of CST Bangalore Vs Turbotech Precision Engineering Pvt Ltd., [2010-TIOL-498-HC-KAR-ST].

The Tribunal set aside the impugned order.

Decision:- Appeal allowed.

Comment:- A very detailed and good decision. If a contract is regarded as “works contract” under sales tax then it should be the same for the purpose of levying service tax.

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PJ/Case Laws/2012-13/1070

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