Whether services separately classifiable under other category prior to introduction of works contract service not leviable to service tax if they equally fall under works contract service?

Case:-ENERCON (INDIA) LTD. Versus COMMISSIONER OF CENTRAL EXCISE, DAMAN

Citation:-2013 (32) S.T.R. 97 (Tri. - Ahmd.)

Issue:- Whether services separately classifiable under other category prior to introduction of works contract service not leviable to service tax if they equally fall under works contract service?

Brief facts:-M/s. Enercon (India) Ltd. (hereinafter referred to as M/s. EIL) is engaged in manufacture and sale of wind operated electricity generators called “Wind Energy Converter” (WEC). The company also provides various taxable services to its WEC customers such as Erection, Commissioning or Installation Service, Commercial or Industrial Construction service; Works Contract service, Goods Transport Agency service. The services of Erection, Commissioning or Installation, Commercial or Industrial Construction, Works Contract, Goods Transport Agency were made taxable w.e.f. 1-7-2003, 10-9-2004, 1-6-2007 and 1-1-2005 respectively.
Demand for differential Service Tax amounting to Rs. 31,44,92,629/- was confirmed on the ground that the appellants did not include the value of site material used in providing erection, installation & commissioning services/commercial or industrial construction services and works contract services. Further, Service Tax of Rs. 13,58,74,780/- was demanded on the ground that the appellant is not entitled to avail the benefit of Notification No. 1/2006-S.T., as the appellant had violated the condition of the notification by availing credit of Service Tax paid on input service and an amount of Rs. 56,95,397/- was demanded as Service Tax under the category of Good Transport Agency (GTA) services on the ground that the appellant utilized the CENVAT Credit balance for payment of Service Tax on GTA services wrongly. Penalty equal to the Service Tax was also imposed. Further, interest was also demanded.

Appellant’s contention:- Ld. Sr. Advocate on behalf of the appellant submitted that the appellants were actually providing the works contract service and therefore the demand for Service Tax on the ground of undervaluation of different services cannot be sustained in view of the several decisions, wherein a view has been taken that the works contract service cannot be charged to Service Tax prior to 1-6-2007. He submits that on this ground alone, substantial portion of the demand cannot be sustained since the period involved is from 1-7-2003 to 31-3-2008 and works contract service became liable to Service Tax w.e.f. 1-6-2007 only. Further, he also relies upon the Board’s Circular, dated 6-7-2009 to support his submission that free issue material cannot be added to the gross value charged for the works contract service prior to 7-7-2009. As regards CENVAT Credit, he submitted that CENVAT Credit would be utilized for payment of Service Tax for the period upto 31-3-2008 and further CENVAT Credit reversed is as good as CENVAT Credit not availed.

Respondent’s contention:-Ld. AR submitted that the decisions relied upon by the ld. Sr. Advocate to submit that works contracts were not liable to Service Tax prior to 1-6-2007, is not correct in view of the latest decision of the Tribunal in the case of Instrumentation Limited - 2011 (23)S.T.R.221 (Tri.-Del.). Further, he also relies upon the decision of the Tribunal in the case of Sri Bhagavathy Traders - 2011 (24)S.T.R.290 (Tri.-LB), to submit that C.B.E. & C. Circular cannot be held to support the claim of meeting part of amount as reimbursable expenses and rest as service charges. He also relies upon the decision of the Tribunal to submit that just because a service is called as works contract service and Service Tax becomes payable under works contract category on 1-6-2007, it does not mean that prior to that, it would not be taxable at all even if there is a specific service enumerated in law covering the said service. He submitted that the appellants have deliberately under-valued the services provided by them by not including the cost of the material and the benefit of Notification No. 1/2006-S.T. cannot be claimed in view of the fact that investigation has brought out clearly that the purchasers of wind mills did not know anything about the material supplied for providing the service and therefore it cannot be said that such materials were sold to their customers. The customers wanted the wind mills to be manufactured, erected, installed and start generating electricity for them in the site and this is the sum and substance of the contract. The appellant had segregated the cost of wind mill and other costs since the wind mills were exempted from payment of Excise duty, whereas the other services provided by the appellant were liable to Service Tax.

Reasoning of judgment:-The first submission made by the ld. Sr. Advocate was that even though the appellant had paid Service Tax under the different heads of service prior to 1-6-2007, the fact remains that the service provided by the appellant was works contract service and if the appellant paid Service Tax because of ignorance or by wrong understanding of law, they cannot be held liable for undervaluation and consequential differential Service Tax liability.
The decisions relied upon by ld. Sr. Advocate were discussed. In the case of Turbotech Precision Engineering - 2010 (18)S.T.R.545 (Kar.), the issue before Hon’ble High Court was whether the service provided was classifiable under the head Consulting Engineers service or Works Contract. In Paras 8, 9 and 10 it was observed as follows :
“8. From the combined reading of the definition of Consulting engineer prior to 2006 and after 2006, it is clear to the Court that the service rendered by the Company had not been included under the definition of consulting engineer prior to 2006 as it stood under Section 65(13). As a matter of fact, this Court has decided the said point in CEA 12/2007 on 1st April 2010 stating that prior to the Amendment Act, 2006, the Companies were not included under the definition of consulting engineer. When we have taken such a view, considering the relevant assessment year in the present case we have to hold that the service rendered by the assessee-Company during relevant period cannot be brought under the category of consulting engineer. If the service rendered by the assessee cannot be considered as a consulting engineer, the question of calling upon the assessee to pay the service tax under the Finance Act, brought the assessee under the word consulting engineer does not arise at all. Therefore, the said point has to be answered against the revenue and in favour of the assessee.
9. So far as the execution of the works contract is concerned, the works contract is defined under section 65(105)(zzzza) which reads as under :
(zzzza) 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) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and
(ii) such contract is for the purposes, of carrying out,-
(a)    erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
(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)    construction of a new residential complex or a part thereof; or
(d)   completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or
(e)    turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.
This section has come into force with effect from 1-6-2007. After considering the contract entered into between the assessee and its employer, the case of the assessee falls under Section 65(105)(zzzza) Explanation (a) and (e). Even though the assessee’s case falls under the definition of works contract, but the revenue has no power to call upon the assessee to pay service tax, interest and penalty therein, since the provisions of law has come into force with effect from 1-6-2007.”
From the above, it can be seen that the Hon’ble High Court clearly held that the appellant was not liable for Service Tax under the head Consulting Engineers during the relevant time because the definition did not include the services rendered by a company. Thereafter, the question of liability under the works contract service was examined and it was held that it will be effective only from 1-6-2007 and it was also held that the assessee’s case fall under the definition of works contract. From the above, it is clear that in the case of Turbotech Precision Engineering (supra), prior to 1-6-2007, the service was not classifiable and leviable to Service Tax under any of the service category enumerated in the law.
The decisions in the case of ABB Limited - 2010 (20)S.T.R.610 (Tri.-Bang.), ABB Limited - 2011 (24)S.T.R.199 (Tri.-Bang.), ABB Ltd - Final Order No. A/1000/WZB/AHD/2011, dated 18-2-2011, and Khurana Engineering - 2011 (21)S.T.R.115 (Tri.-Ahmd.)do not support the case of the appellant in this case. Even though these decisions relate to cases which were detected and proceedings initiated prior to 1-6-2007, none of the appellants had paid duty prior to 1-6-2007 and all of them had claimed that their service was works contract and therefore liable to Service Tax liability only under the works contract category. Further, the ld. AR’s reliance upon the decision of the Tribunal in the case of in the Instrumentation Ltd. (supra), in our opinion, is relevant. In the case of Instrumentation Ltd, the decision of the Tribunal in the case of Turbotech Precision Engineering, was taken note of. The issue in this case dealt with by the Tribunal was whether the services which were specifically covered under a specific service heading prior to 1-6-2007, can be levied to tax or not, if they are to be treated as works contract for the period subsequent to 1-6-2007. The relevant observations of the Tribunal are contained in Para 5.5 of the judgment, which are reproduced below:
“5.5 It has been pleaded that the service of designing, erection, installation & commissioning along with goods supply, provided as a turnkey work contract could be subjected to tax only w.e.f. 1-6-2007 under Section 65(105)(zzzza) of the Finance Act, 1994, read with Rule 2A of the Service Tax (Determination of Value) Rules, 2006 as “Work Contract Service” and this being a new entry, during the period prior to 1-6-2007 no service tax could be charged in respect of such contracts and in this regard, reliance has been placed on judgment of Hon’ble Bombay High Court in case of Indian National Shipowner’s Association (supra) and of Karnataka High Court in the case of v. Turbotech Precision Engineering Pvt. Ltd. After carefully considering the submissions from both the sides on this plea, they were in the view that the same is not correct in view of the following :
(1) Sec. 65(105)(zzzza) introduced w.e.f. 1-6-2007 defines taxable service in relation to execution of a work contract — as “any service provided or to be provided, to any person, by any other person in relation to the execution of a works contract, excluding work contract in respect of roads, airports, railways, transport terminal, bridges, tunnels and dams”. As per the explanation to Section 65(105)(zzzza) for the purpose of this sub-clause, ‘work contract’ means a contract wherein -
(i)     transfer of property in goods involved in execution of such contract is leviable to tax as sale of goods; and
(ii)    such contract is for the purposes of carrying out -
(a)    erection, commissioning or installation of plant, machinery, equipment or structures, whether pre fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluid, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation fireproofing and water proofing, Lift and escalator, fire escape staircases or elevator; or
(b)   Construction of a new building or a civil structure or a part thereof, or of a pipeline, a conduit, primarily for the purpose of commerce or industry; or
(c)    Construction of a new residential complex or a part thereof; or
(d)   Completion and finishing services, repair, alteration, renovation or restoration of or similar services, in relation to (b) and (c); or
(e)    Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.
Under Rule 2A of Service Tax (Determination of Value) Rules, 2006, framed under Section 94(1) of the Finance Act, 1994, the assessable value of the ‘work contract service’ referred to in Section 65(105)(zzzza) of the Finance Act, 1994 shall be equivalent to the gross amount charged (excluding VAT/Sales tax paid on transfer of property in goods involved) minus the value of transfer of property in the goods involved in the execution of the said work contract. Alternatively, the assessee at his option could pay duty at the rate prescribed in Rule 3(1) of the Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, on the gross amount charges for the work contract. Thus Section 65(105)(zzzza) of Finance Act, 1994, read with Rule 2A of Service Tax (Determination of Value) Rules, 2006 and Work Contract (Composite Scheme for Payment of Service Tax) Rules, 2007, provides a machinery for assessment of Service Tax on certain types of contracts mentioned in Explanation to Section 65(105)(zzzza). On comparing the definition of “works contract” as given in Explanation to Section 65(105)(zzzza), with the definitions of (a) ‘erection, commissioning or installation service’ as given in Section 65(105)(zzd), read with Section 65(29) and Section 65(39a); (b) “Commercial or industrial construction service”, as given in Section 65(105)(zzq) read with Section 65(25b), and (c) “Residential Construction Service” as given in Section 65(105)(zzzh) read with Section 65(30a) & 65(91a), it will be seen that the “works contract”, defined in Explanation to Section 65(105)(zzzza) is nothing but contract for erection, commissioning or installation service as defined in Section 65(105)(zzd) read with Section 65(29) and Section 65(39a), or “Commercial or industrial construction Service”, as defined in Section 65(105)(zzq) read with Section 65(25b)) or “Residential Construction Service” as defined in Section 65(105)(zzzh) read with Section 65(30a) and 65(91a) or contracts for “Turnkey projects including engineering procurement and construction or commissioning (EPC Project)”, which involve transfer of property in goods in execution of such contracts and such transfer of property in goods is liable to Sales tax/VAT as sale of goods. Since the definition of “work contract” is only for the purpose of clause 65(105)(zzzza) which came into force w.e.f. 1-6-2007, it is valid only for the period w.e.f. 1-6-2007 and for the types of contracts mentioned in it. Therefore, for the period prior to 1-6-2007, the meaning of ‘Works Contract’ as commonly understood i.e. a contract for work and labour and in other words, a service contract has to be adopted, and it would not be correct to treat a work contract as something different from a service contract. As discussed in para 5.4.1 above, if such a work contract is an indivisible service contract, whether or not involving use of goods which get consumed or get passed on to service receiver either as such or in changed form, and that service is taxable, the works contract will attract service tax and if the work contract is a composite contract involving sale of goods and one or more services and those service are taxable, the service tax will be chargeable on the value of these services. Thus a contract for erection, installation and commissioning, even if involving transfer of property in goods on which state VAT/Sale Tax is paid, would attract service tax even for the period prior to 1-6-2007. Similarly a divisible contract involving consulting Engineer’s service (preparation of drawings/designs, preparation of operation manuals, or other technical assistance), procurement of goods, erection, installation and commissioning would attract Service Tax on Engineering Consultancy component and erection installation and commissioning component even prior to 1-6-07. This is so, as on discussed above, there is nothing in Sec. 65(105) and Section 66 of the Finance Act, 1994 from which it can be inferred that the taxable services defined in various clauses of Section 65(105) have to be standalone services and will not attract tax, if they are provided along with other services - or providing of the service involves supply/use of goods on which VAT or Sales Tax is payable. Hon’ble Supreme Court in case of Tamil Nadu Kalyan Mandapam Association v. Union of India, reported in 2004 (167)E.L.T.3 (S.C.) = 2006 (3)S.T.R.260 (S.C.) while upholding the levy of service tax on catering service has held that catering of food and beverages by an outdoor caterer is a service and service tax on the same will be chargeable on the gross amount charged for the service, even if on the supply of food and beverages, sales tax has been charged by the State Government by treating the same as sale under Article 366(29A)(f) of the Constitution.
(2) The entry “Service in relation to execution of work contract” as defined in Section 65(105)(zzzza) is different from services defined in other sub-clauses of Section 65(105). In fact, as discussed above, Section 65(105)(zzzza) read with Rule 2A of Service Tax (Determination of Value) Rules, 2006 and Work Contract (Composite Schemes for Payment of Service Tax) Rules, 2007 only provide a new machinery provision for assessment of service tax on “Erection, Installation or Commissioning Contracts”, “Commercial or industrial construction contracts”, “Residential Construction Service Contracts” and “EPC Contracts” involving transfer of property in goods on which sales tax/VAT is chargeable. But it does not mean that these contracts were not liable to Service Tax prior to 1-6-2007 as discussed above, “erection, installation or commissioning services”, “commercial or industrial construction service”, residential constructions services were taxable even prior to 1-6-2007, even if the same involved use/supply of goods on which Sales tax/VAT was payable. Similarly in respect of EPC contracts which are divisible contracts for design & engineering, procurement of goods, erection, installations & commissioning, service tax was chargeable even prior to 1-6-2007 on these taxable service component. The taxable services covered by Section 65(105)(zzza) and the services covered by Section 65(105)(zzd) [erection, installation or commission services], Section 65(105)(zzq) (Commercial or industrial construction service) and Section 65(105)(zzzh) [residential construction service] are overlapping. While w.e.f. 1-6-2007, following the principle of harmonious construction, it can be said that while Section 65(105)(zzzza) would cover the services defined by Section 65(105)(zzd), Section 65(105)(zzq), Section 65(105)(zzzh) and EPC contracts which involve transfer of property is goods on which tax as sale of goods is leviable, and Section 65(105)(zzd), 65(105)(zzq) and Section 65(105)(zzzh) will cover erection, installation or commissioning service, ‘commercial or industrial construction services’ and ‘residential construction services’ respectively not involving transfer of property in goods, but it does not mean that prior to 1-6-2007, the services covered by Section 65(105)(zzd), 65(105)(zzq) and 65(105)(zzzh) involving transfer of property or goods were not taxable. Giving such an interpretation to Section 65(105)(zzzza) will be against the intention of the legislation to tax- “erection, installation or commissioning services”, “commercial or industrial construction services”, or “residential construction service” during the period prior to 1-6-2007. Thus Section 65(105)(zzzza) is more like heading 98.01 of Indian Customs Tariff pertaining to Project Imports which provides a separate mode of assessment of Customs duty on a number of machines and other goods imported for initial setting up of a plant or a substantial expansion of an existing plant. The judgment of Hon’ble Bombay High Court in case of India National Shipowners Association (supra) is, therefore not applicable to the services covered under Section 65(105)(zzzza) as services covered by this Section and Section 65(105)(zzd), 65(105)(zzq) and (zzzh) are overlapping. As regards the judgment of Hon’ble Karnataka High Court in case of Turbotech Precisions Engineering P. Ltd. (supra) since this judgment does not discuss as to how prior to 1-6-2007, the type of contracts mentioned in Explanation to Section 65(105)(zzzza) were not taxable under Section 65(105)(zzd), 65(105)(zzq) or 65(105)(zzzh), the same is not a binding precedent.
(3) Tribunal in case of Sunil Hi-Tech Engineers Ltd. v. CCE, Nagpur (para 5 of the judgment), reported in 2010 (17)S.T.R.121 has held that construction service was taxable even during period prior to 1-6-2007, the date from which Section 65(105)(zzzza) regarding ‘work’s contract service’ was introduced.”
This decision has considered several decisions rendered on the subject and has considered statutory provisions in detail, the definitions of services and has come to the conclusion. All the decisions cited by the ld. Counsel are related to the period prior to this decision and decisions, even if subsequent had not considered these decisions in their order. Prima facie, the bench was also convinced that the decision in the case of Instrumentation Limited would be applicable. This is more so in case of the appellant since it was never the case of the appellant that their contract was works contract and they were not liable to pay Service Tax under other heads and they were paying Service Tax from the date of levy of Service Tax. It is not only the appellant understands about the liability to Service Tax, but also the decision in the case of Instrumentation Limited, which would show that the claim of the appellant that service has to be treated as works contract, is not acceptable. Moreover, the works contract service was introduced for the purpose of convenience of the assessees and also it was clearly understood that many of the services which were being levied to Service Tax under other headings may come under Service Tax levy under works contract service later. It has to be noted that unlike other services, specific rules for arriving at value was provided for works contract and the composition scheme has also been introduced.
In the case of Atwood Oceanics Pacific Ltd- Final Order Nos. A/1296-1298/WZD/AMD/2012, dated 30-8-2012, this Tribunal had occasion to consider the issue of classification and introduction of different services. According to Section 65A of Finance Act, 1994, the sub-clause which provides more specific description shall be preferred to sub-clause providing more general description and composite services consisting of combination of different services shall be classified as if they consisted of service which renders them an essential character. Therefore, prior to introduction of works contract service, if there was a sub-clause which provided a specific description, it has to be considered and in case of composite services which give the essential character has to be taken for the purpose of classification. Prior to 1-6-2007, as submitted by ld. AR, specific service mainly works contract was not available in the statute and therefore applying the principles of classification as enumerated in Section 65A of Finance Act, 1994, the classification of the services rendered by the appellant had to be made and when we apply these principles, the services rendered by the appellant have been correctly classified by them. Under these circumstances, we are not convinced that the claim that prior to 1-6-2007, the service itself was not liable to tax can be upheld.
As regards the supply of free material, the clarification issued by the Board in 2009 relates to Works Contract only and cannot be applied for the earlier period.
As regards under-valuation, we find that the appellant had separately collected the amount in the cost of wind energy converter as site material which was in reality required for various services rendered for installation of wind mills. Because of this, there was under valuation of services such as electrical work, civil work, D.P. structure, metering etc. Moreover, we also find that what was used to supply 4 items to sub-contractors for use in construction of foundation and the same were mentioned in the purchase order as free issue material by M/s. Enercon. The items are foundation studs along with nuts and washers, anchor ring, grouting frames, cement etc. These were shown as site material and charged as cost of wind energy converter. Prima facie, we are convinced that these items cannot be considered as part of the wind energy converter and therefore inclusion of cost of these materials in the wind energy converter was wrong and showing them as free supply was also wrong.
Having availed CENVAT Credit on input/input service, the appellant could not have taken the benefit of abatement. Therefore, prima facie, that charge has also to be upheld.
As regards CENVAT Credit, we find considerable force in the arguments that upto 31-3-2008, the appellant could have utilized the credit. In any case, the amount involved is very small as compared to the total demand.
The discussion above, would show that the appellant has not been able to make out a prima facie case for complete waiver.
As regards financial difficulty, no balance sheet or annual report was produced before us. However, an affidavit filed by the Assistant General Manager (Indirect Taxes) was submitted by ld. Counsel. According to this affidavit, the AGM was working with the company for 1¹/₂year; the appellant’s factory was closed because of strike; because of non-supply and installation of wind mills because of strike, the cash flow of the company is affected; salaries to the employees are getting delayed since May 2012 and the Company’s financial result as on 31-8-2012 also show the accumulated loss of Rs. 317 Crores.
In the facts and circumstances discussed above, we consider that that the appellants should be required to deposit an amount of Rs. 4.5 crores (Rupees Four Crores, Fifty Lakhs only) which is less than 10% of the total demand of Service Tax and less than 5% of the total amount demanded as Service Tax, interest and penalty imposed. The appellants are required to deposit this amount within eight weeks from the date of this order and report compliance on 2-1-2013. Subject to such compliance being reported, the requirement of pre-deposit of balance amounts involved shall be waived and stay against recovery of the same is granted during the pendency of the appeal.

Decision:- Stay application partly allowed.

Comment:-The essence of this case is that if any service is classifiable under works contract service and is also covered by any specific service prior to introduction of works contract service, it is not correct to contend that no service tax is leviable on such service for the period prior to introduction of works contract service on the premise that a service cannot be classified under other head prior to its introduction to the service tax net. As the services of errection, commissioning and installation are overlapping services and are also classifiable under works contract service, it would not mean that such services would not be taxable to service tax prior to introduction of works contract service.

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