CASE STUDY

Prepared By:
CA Pradeep Jain
CA Nishit Shah and
Sukhvinder Kaur LLB [FYIC]

Introduction:-
 
In the case under study, the assessee had entered into EPC contracts with the State Government for construction of canals for supply of water for irrigation purpose. Whether the activities of assessee can be said to be of commercial and nature and classifiable under Works Contract Service and therefore, exigible to service tax? 

M/s RAMKY INFRASTRUCTURE LTD - V SATYA MURTHY JOINT VENTURE & Anr v/s COMMISSIONER OF SERVICE TAX, HYDERABAD
[2012-TIOL-613-CESTAT-BANG]

Brief Facts:-
 
- Appellant executed Six EPC contracts awarded to them by the Irrigation & Command Area Development (CAD) Department, Government of Andhra Pradesh during the period from 01.06.2007 to 31.05. 2008.     
 
- Anti-evasion Wing of Department conducted investigation and alleged that appellant had provided Works Contract Service to the State Government in terms of Section 65 (105) (zzzza) of the Finance Act, 1994.
 
- The investigation revealed that appellant had raised Running Account Bills (R. A. Bills) on the contractee-Department but in respect of the same service tax was not paid. That the payments received by the appellant from the contractee did not reflect the actual value of the taxable services, certain deductions having been made, from the gross amount billed by the appellant, by the contractee towards advance recovery, TDS etc.
 
- It was alleged that Service tax was payable on the gross amount charged under R. A. Bills by the appellant in terms of Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. It was found that appellant had not filed ST-3 return for the relevant period.
 
- Accordingly, Department issued Show cause notice dated 24.08.2008 invoking extended period of limitation for recovery of service tax with interest and also proposed imposing penalties under Section 76, 77 & 78 of the Act.
 
- The Commissioner passed the order confirming the demand of service tax with interest and imposed penalties under Section 76 & 77 of the Act. It was held that the appellant’s service fell within the ambit of “turnkey projects including engineering, procurement and construction or commissioning (EPC) projects specified under clause (e) of the definition of works contract.
 
- Aggrieved by the impugned order, appellants are before the Tribunal.
 
Appellant’s Contentions:-
 
- Appellant submitted that their activities were more specifically covered by "construction of a new building or a civil structure or a part thereof or of a pipeline or a conduit" mentioned in clause (b) of the definition of "works contract" and that, as the construction was not for any commercial or industrial purpose, it remained outside the scope of the full text of clause (b) and consequently outside the scope of "works contract". It was submitted that the subject projects consisted essentially of "construction of civil structures, pipelines and conduits" falling within the taxable category of "commercial or industrial construction service" only and would not fall within the scope of "WCS".
 
- It was submitted that the contracts were essentially for construction of canals for supply of water for irrigation purpose. The activity of construction of canal system may be classifiable as "commercial or industrial construction" under Section 65(25b) of the Finance Act, 1994, but since the construction undertaken by the appellant was not intended for commerce or industry, it is not exigible to service tax. Normally, Government constructions for noncommercial purposes would not be taxable. Even constructions for the use of organizations or institutions established solely for educational, religious, charitable, health, sanitation or philanthropic purposes and not for the purpose of making profit are not taxable, being non-commercial in nature (Circular No. 80/10/2004-ST dated 17.09.2004). As the canal system was built under Government projects for non-commercial/non-industrial purposes, the activity is not chargeable to service tax. Only when a canal system is developed as a revenue generating measure, service tax can be charged on the construction activity (Board Circular No. 116/10/2009-ST dated 15/09/2009).
 
- Appellants relied on Section 65A(2)(a) & (b) of the Finance Act, 1994.
 
- Alternatively, it was submitted that their activities were alternatively classifiable under "site formation and clearance, excavation and earth moving, and demolition" defined under Section 65(97a) of the Finance Act, 1994 which took effect from 16/6/2005. The activities specified in the inclusive definition of "site formation and clearance, excavation and earth moving, and demolition" are only illustrative and not exhaustive. Operations like blasting and removal of rock, excavation etc. carried out by the appellant during the course of execution of the contracts are also covered by the inclusive definition. Indeed, more than 70% of the total contract value was spent for excavation work alone, which factor would determine the essential character of the service provided by the appellant. Thus, the entire work undertaken by the appellant would fall within the range of activities comprised and envisaged in the inclusive definition under Section 65(97a). But then, as the work was done in relation to irrigation, it is not taxable by virtue of the exclusion clause of the said definition. (Board Circular No. 17/2005-ST dated 07.06.2005).
 
- A "works contract" as defined under Section 65(105)(zzzza) of the Finance Act, 1994, must be a contract for construction or a new building or civil structure or a part thereof or for construction of a pipeline or conduit, primarily for the purposes of commerce or industry. Impliedly, such construction, activities undertaken for non-commercial/non-industrial purposes would not be taxable as "works contract ". Just as non- commercial activities cannot enter into the ambit of "commercial or industrial construction service", they would remain out side the scope of "works contract service" as well. (Board Circular No. 123/5/2010 dated 24.05.2010).
 
- Appellant relied upon the following cases:
 
+ Indian Hume Pipes Co. Ltd. vs. CCE, Trichy [2008-TIOL-1665-CESTAT-MAD]
 
+ Nagarjuna Construction Co. Ltd. vs. CCE [2010-TIOL-789-CESTAT-BANG]
 
+ Larsen & Toubro Ltd. v CST [2011-TIOL-218-CESTAT-AHM]
 
- It was submitted that in any case, within the definition of "works contract", clause (b) is more specific than clause (e) and, therefore, in terms of Section 65A(2) of the Finance Act, 1994, clause (b) should be the preferable classification for the activity in question even though, on account of its non-commercial/non- industrial nature, the activity may go out of the purview of clause (b). [Budget Circular No. 334/1/2008- TRU dt. 29/02/2008].
 
- It was submitted that Notification No. 41/2009-ST dated 23.10.2009 was issued to exempt works contracts (falling under Section 65(105)(zzzza) of the Act) in respect of canals constructed for non-commercial/nonindustrial purposes, from payment of service tax. The circular issued by the Board on 15/09/2009, prior to the Notification, also clarified the non-taxability of canals constructed for non-commercial purposes. Hence the intention of the Government was always to exclude construction of such canals from levy of service tax. It is not in dispute that the activity was not taxable as WCS prior to 01/06/2007. It is not taxable from 23/10/2009 by virtue of the above exemption Notification. In view of the clarification issued by the Board prior to the issue of the Notification by the Government, the Notification should be given retrospective effect. Whether the activity should be chargeable to service tax for the intervening period i.e., from 01/06/2007 to 22/10/2009, may also be considered in the light of the following decisions:
 
+ WPIL Ltd v/s CCE [2005-TIOL-51-SC-CX-LB]
 
+ Sujana Metal Industries Ltd v/s CCE [2011 (273) ELT 112 (Tri. Bang. )]
 
- It was submitted that where the activity in question stands excluded from levy of tax under two categories of service viz. "commercial or industrial construction", and "site formation and clearance, excavation and earthmoving, and demolition", it cannot be taxed under a third category, in view of the following decisions:
 
+ Dr. LaL Path Labs Pvt. Ltd. vs. CCE, Ludhiana[2006-TI OL-1175-CESTAT-DEL)] affirmed by the High Court in CCE, Ludhiana vs. Dr. LaL Path Lab Pvt. Ltd. [2007- TIOL-533-HC-P&H-ST]
 
+ CCE, Ludhiana vs. Patient Service Contra [2007-TIOL-602- HC-P& H-ST)
 
+ Federal Bank Ltd. vs. CCE, Cal/cut [2008(10) STR 320 (Tri. Bang. )]
 
+ Federal Bank Ltd. vs. CCE (Appeals), Cochin [2009(15) STR 279 (Tri. Bang. )]
 
- On the same principle, where the activity in question stands outside the scope of clause (b) of the definition of "works contract" by reason of its non- commercial/non- industrial nature, it cannot
be brought within the ambit of another clause [clause (e)] of the said definition for the purpose of levy of service tax.
 
- Without prejudice to the denial of tax liability, it was submitted that the taxable value ought to have been determined by deducting the retention money from the gross amount billed to the State Government.
 
- Without prejudice to the denial of tax liability, it was submitted that the amount received from the State Government ought to have been taken as cum-tax value and the tax element excluded from it for arriving at the taxable value in view of Section 67(2) of the Finance Act, 1994 and the following decisions:
 
+ Sri Chakra Tyros Ltd. vs. CCE, Madras[2002-TIOL-51-SC-CX]
 
+ CC v/s Maruti Udyog Ltd [2002-TIOL-34-SC-CX]
 
- It was submitted that No penalty can be imposed under Section 76, 77 or 78 of the Finance Act, 1994 on the appellant who has no liability to pay the service tax demanded. In any case, the appellant can legitimately claim the benefit of Section 80 of the Act in view of the following decisions:
 
+ Hindustan Steel Ltd. vs. The State of Orissa [2002-TIOL-148-SC-CT-LB]
 
+ ETA Engineering Ltd. vs. CCE, Chennai [2004-TIOL-959-CESTAT-DEL-LB]
 
+ Sajjan Kumar Kariwa/a vs. CCE [2002-TIOL-211-CESTAT-DEL]
 
+ Ashok Rastogi vs. CCE [2002-TIOL-265-CESTAT-DEL]
 
+ Catalyst Capital Services Pvt. Ltd. vs. CCE, Mumbai [2005-TIOL-1141-CESTAT-MUM]
 
+ CCE, Rajkot v/s Air Express Courier Services [2004-TIOL-1096-CESTAT-MUM]
 
- It was submitted that penalties cannot be imposed under both the Sections 76 and 78 at the same time in view of the following decisions:-
 
+ CCE, Ludhiana vs. Pannu Property Dealers & Ors [2008-TIOL-1750-CESTAT-DEL]
 
+ CCE, Ludhiana vs. Silver Oak Gardens Resort [2007-TIOL-2189-CESTAT-DEL]
 
+The Financers vs. CCE, Jaipur [2007-TIOL-1778-CESTAT-DEL]
 
In addition to the above submissions, another appellant made following submissions:
 
- It was submitted that no transfer of property from the appellant to that the transaction between the appellant and the contractee (Government of Andhra Pradesh) did not satisfy the first condition pertaining to transfer of property in goods used in the execution of the contract. For this very reason, the appellant cannot be held to have provided ‘WCS' to the contractee. In this connection, reference was made to a sub-contract agreement executed between the appellant and one M/s. RatnaInfrastructure Project s Ltd.
 
- Reliance was placed on the decision in M Ramakrishna Reddy vs. CCE [2009-TIOL-1118-CESTAT-BANG] and also on a few stay orders passed by the Tribunal in cases involving WCS.
 
- It was also contended that there was no valid ground for invoking the extended period of limitation in this case. The appellant had declared, in the revised returns for the half years ended 31/03/2008 and 31/03/2009, that the project turnover was exempt under clause (b) of Explanation to Section 65(105)(zzzza) of the Finance Act, 1994 and therefore they cannot be said to have suppressed any information to warrant invocation of the extended period of limitation. The appellant was under the bona fide belief that the services provided by them, being non- commercial and nonindustrial, were outside the scope of the definition of ‘works contract'. The appellant was regularly filing ST-3 returns under Section 70 of the Finance Act, 1994. Moreover, the question whether the services rendered by the appellant would fall under clause (b) or clause (e) of the definition of ‘works contract' is a question for interpretation. For all these reasons, the invocation of the proviso to Section 73(1) of the Finance Act, 1994 in this case cannot be sustained. The following case law was cited in this connection: 
 
+ Padmini Products Ltd. vs. CCE [2002-TIOL-289-SC-CX]
 
+ CCE vs. Chemphar Drugs & Liniments [2002-TIOL-266-SC-CX]
 
+ Continental Foundation JV vs. CCE [2007-TIOL-152-SC-CX]
 
Respondent’s Contentions:-
 
- Revenue contented that all the contracts in question are EPC/Turnkey contracts and the parties thereto have understood the contracts to be so. The scope of work under the contracts encompassed a wide range of activities including investigation, soil survey, preparation of designs/drawings and hydraulic particulars, excavation, procurement/supply of the required components/materials, provision  of labour, construction, testing and commissioning etc. Each contract was for a lump sum indicating its indivisible and composite nature. The JVs were registered with the VAT department of the Government of Andhra Pradesh and were paying VAT applicable to 'works contract' at appropriate rate in respect of the goods used in execution of the contracts and deemed to be sold to the contractee. The exigibility, to sales tax, of the goods used in execution of a contract is also an essential requirement for treating the activity as taxable service of "works contract". For all these reasons, the activities undertaken by the appellants under the EPC contracts are to be classified only as ‘WCS' covered by clause (e) of the definition of "works contract" under Section 65(105)(zzzza)of the Finance Act, 1994.
 
- Neither "commercial or industrial construction service" nor "site formation and clearance services" prescribed the requirement of transfer of property in goods. On the contrary, turnkey/EPC contracts involved transfer of property. The activities in question were much beyond the scope of "commercial or industrial construction service" defined under clause (25b) or "site formation and clearance services" defined under clause (97a) of Section 65 of the Act and the same squarely fell within the purview of "WCS" defined under Section 65(105)(zzzza) of the Act. The activities are taxable under clause (e) of Section 65(105)(zzzza) of the Act, irrespective of whether they were for the purposes of commerce or industry.
 
- It was submitted that Board's Circular No. 80/10/2004- ST dt. 17/09/2004 was issued in the context of introduction of "commercial or industrial construction service" as a taxable service and the same is not relevant to the context of interpretation of "WCS". In the statutory definition of "WCS" relating to EPC contracts, there is no stipulation or restriction regarding the status of the service recipient, such as commercial or non- commercial, industrial or non- industrial, or Government department or agency.
 
- It was submitted that Board’s Circular dt. 04/01/2008 is applicable only where the service is classifiable as "commercial or industrial construction" for the period prior to 01/06/2007 and hence not applicable to the present case. All the EPC contracts in the present case were executed subsequent to 01/06/2007, by which time "WCS" was specifically brought within the scope of levy of service tax. The new taxable service was not created by bifurcation of any pre-existing entry under Section 65 of the Finance Act, 1994, nor by amalgamation of any services which were already subject to service tax. It was introduced as a new and distinct service. There are clear points of distinction between WCS and pre-existing services. Firstly, the existence of a contract is a requirement under WCS. Secondly, there must be transfer of property in goods involved in the execution of the contract and the same should be exigible to tax as sale of goods. These two crucial requirements of WCS clearly indicate that the service covers execution of composite and indivisible contracts involving supply of goods and provision of service. These features are conspicuously absent in "commercial or industrial construction service" and "site formation and clearance services". More significantly, turnkey/EPC contracts were introduced for the first time w.e.f. 01/06/2007 for levy of service tax and the same did not find a place in any of the pre-existing entries or definitions under Section 65 of the Finance Act, 1994. In other words, turnkey/EPC contracts per se were not chargeable to service tax prior to 01/06/2007. The contracts in question were recognized by the parties thereto as turnkey/EPC contracts and hence the appellants are estopped from claiming that the execution of such contracts will not be covered by "WCS". In the context of explaining the distinct features of works contract [Section 65(105) (zzzza)] and certain pre-existing taxable services, Revenue referred to para (6.1.) of Alstom Projects India Ltd. vs. CST [2011-TIOL-459-CESTAT-DEL
 
- In respect of turnkey/EPC contracts, no generalized exclusion is provided for non-commercial or non- industrial nature of the end product/facility. Such exclusion, however, continues to be provided for construction services. Thus there is clear legislative intent (i) to exclude only construction of non-commercial and nonindustrial buildings/structures from WCS and (ii) to include all turnkey/EPC contracts within the purview of levy of service tax under WCS excepting the specifically excluded items such as roads, airports etc. If, indeed, it was the intention to exclude alt works relating to irrigation projects from the purview of WCS, the legislature would have mentioned "irrigation projects" among the excluded items under the definition of WCS. The exclusion is only for the specified items which do not include "irrigation projects". The intent of taxing alt other EPC/turnkey contracts (irrespective of whether or not for commercial or industrial purpose) is clearly and unambiguously reflected in the statutory provisions and definitions.
 
- There is no merit in the argument that clause (b) of the definition of "works contract" under Section 65(105)(zzzza) of the Finance Act, 1994 is more specific than clause (e). Indeed, it is the other way round. Construction of civil structure or conduit is only a part of a composite project, whereas "turnkey/EPC project" mentioned in clause (e) of Section 65(105)(zzzza) of the Act is a
very specific description of the work awarded to a contractor by a contractee.
 
- The words used in clause (e) of the definition of "works contract" are plain and clear, and the legislative intention is clearly conveyed without any ambiguity. The exclusions from taxable works contract have also been clearly stated viz. roads, airports, railways, tunnels, bridges and dams. Therefore, there is no room for applying any principle of interpretation. Reliance is placed on Grasim Industries Ltd. vs. CC[2002-TIOL-318-CESTAT-DEL-LB. In the light of the ratio of this decision, it can be safety held that the services in question are squarely covered by clause (e) of the definition of "works contract" under Section 65 (105)(zzzza) of the Finance Act, 1994.
 
- As the execution of a turnkey/EPC contract is squarely covered by clause (e) ibid and there is no scope for classifying it under other headings, the argument of the appellants that, if the execution of the contract could be classified under two headings, the classification which is beneficial to the assessee is to be adopted has no relevance and the decisions contextually cited by them are not applicable.
 
- In the Circular dated 15.09.2009, there is a reference to ‘canal system’ but this is in the context of examining the definition of ‘commercial or industrial construction; and not that of ‘works contract’. In the same Circular, there is also a reference to construction of dams etc. through EPC mode. In this context, the circular says that such construction activity, even if done through turnkey/EPC mode, is exempt from payment of service tax on account of the specific exclusion of dams, roads, airports etc. incorporated in the definition of “works contract”. The circular, in no way, deals with "irrigation projects" and therefore nothing contained therein is beneficial to the appellants. For this reason, the reliance placed by them on the Supreme Court's decision in Suchitra Components case is not apposite.  
 
- Notification No.41/2009 is not clarificatory. It is an exemption notification simpliciter, which was issued in respect of a specified service for the first time. It does not contain anything to indicate that it purported to operate retrospectively. Reliance placed on CC vs. Spice Telecom.
 
- As the demand of service tax in this case is under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, the appellants are not eligible for CENVAT credit on inputs/materials.
 
- Under the above Rules, the only permissible deduction from the gross amount charged is the VAT paid on the materials used in the execution of the contracts, and no other deduction is envisaged. Therefore, the appellants' claim for abatement of retention money from the gross amount is not admissible.
 
- As Rule 3(1) of the above Rules stipulates that the gross amount charged for the works contract shall be the value for payment of service tax notwithstanding the provisions of Section 67, the benefit of cum tax treatment of gross value under Section 67 cannot be claimed by the appellants. This is so particularly as the contract value in these cases does not include any service tax element.
 
- The relevant show-cause notices clearly brought out the facts and circumstances which indicate that the appellants wilfully suppressed/ misdeclared material facts and contravened the provisions of the Finance Act, 1994 with intent to evade payment of service tax. They did not pay the appropriate service tax even though they had discharged VAT liability on the works contracts. In the case of appellant Ramky-Murthy JV, the leading partner (Ramky) had classified similar contracts as "works contracts" and accordingly paid service tax thereon. They had done so after obtaining the requisite registration under WCS and by filing ST-3 returns. The projects executed by the JV are very similar in scope and content to those executed by its leading partner, Ramky. These facts clearly indicate that the JV was fully aware of their service tax liability in respect of the contracts in question. Hence the plea of bona fide belief raised by them is liable to be rejected. The allegation of wilful suppression/misdeclaration of facts and contravention of legal provisions with intent to evade payment of service tax is well-founded and the extended period of limitation has been rightly invoked.
 
Reasoning of the Tribunal:-
 
- The First issue is that whether the service provided by Appellant is Works Contract Service, it was noted that the issue has to be determined from the nature of the relevant contracts as understood by the parties thereto as also from the scope of the works executed under the contracts. Of course, this exercise has to be undertaken with reference to the definition of 'works contract' embodied in Explanation to Section 65(105)(zzzza) of the Finance Act, 1994.
 
- The Tribunal perused the particulars of the contracts awarded to the appellants by the State Government and found that the contracts were described and understood by the parties as 'Turnkey/EPC contracts".
 
- The Tribunal also examined the scope of work stipulated to be done by the appellants and noted that from the same it appears that the contract executed by the JV encompassed a wide range of activities including (a) survey, investigation and sub-soil exploration, (b) designing and engineering of barrage and appurtenant works, main canals, branch canals, distributories, minors, sub-minors, field channels, drains etc., (c) preparation of Ayacut registers, command area plans etc. as per the criteria of Irrigation Department, relevant IS Codes, CWC Manuals, Departmental Codes, Circulars issued by Department from time to time etc., (d) cost analysis itemwise for the entire work on the basis of approved alignment and design et c., (e) preparation of temporary land acquisition cases and pursuing the same with IAO and getting approval/award from the competent authority, (f) construction of barrage and appurtenant works and whole canal system as per the approved design-drawings, specifications of the Department , relevant IS Codes, CWC Manuals, Circulars etc., (g) formation of inspection path/service road and plantation of shade trees along the banks of earth dams/canals, (h) commissioning and trial of the constructed dam/barrage and appurtenant works and the canal system, (i) maintenance during the defect liability period of 24 months from the date of completion certificate and (j) beautification of earth dam site and canal structure sites . It is clear from the scope of work that what was, indeed, executed by appellant Ramky-Murthy JV was a turnkey project in general and an engineering/procurement/construction/commissioning(EPC) project in particular, which was squarely covered by clause (e) of the definition of "works contract" under Explanation to Section 65(105)(zzzza) of the Finance Act, 1994.
 
- On a perusal of the specimen contract document produced by appellant Maytas-NCC JV, the Tribunal found that this document pertains to "Flood Flow Canal Project from SRSP", a contract awarded to the JV by the Government of Andhra Pradesh/Irrigation & CAD Department. This contract was also  described and understood by the parties as "EPC/Turnkey Contract". The scope of services under this contract includes (a) Surveys and Investigation (Section-I), (b) Design and Engineering (Section-ll), (c) Civil Works (Section-III), (d) Gates and Embedded Metal parts (Section-IV) and (e) Maintenance during Defect Liability Period (Section-V). The Tribunal saw the wide range of activities under each Section. The "civil works" mentioned in Section- III were perused and it was concluded that from the description and scope of the contract that what was executed by Maytas-NCC JV for the benefit of the State Government was an EPC project squarely covered by clause (e) of the definition of "works contract" under Section 65(105)(zzzza) of the Finance Act, 1994.
 
- It is not in dispute that the execution of the contracts by the JVs involved transfer of property in goods and that VAT was paid by the contractors (at the rate applicable to works contract as per the relevant provisions of the A.P. State Act governing sales tax / VAT) on the sale of goods involved in the execution of the contracts.
 
- The only items of works contracts specifically excluded from levy of service tax under Section 65(105)(zzzza) of the Finance Act, 1994 are roads, airports, railways, transport terminals, bridges, tunnels and dams. Irrigation canals do not find a place here. The mention of "dams" in the excluded category is of no aid to the appellants' case either inasmuch as these "dams" - - not a word defined or explained anywhere under the Finance Act, 1994 / Rules thereunder - have to be understood according to the common parlance. These are gigantic RCC structures built across rivers and are not to be confused with the earth dams/barrages/constructed by the appellants as part of some of the EPC projects for irrigation. Even according to the appellants, a major share of the cost of execution of each project was on account of excavation works. If real dams were built by the appellants, this would not be the cost profile. In any case, the appellants have not been able to establish that any "dam" was built in execution of any of the EPC contracts awarded by the State Government. This apart, the scope of the expression "works contract in respect of dams" - - - used in the exclusion clause of Section 65(105)(zzzza) of the Finance Act , 1994 - - - - has to be correctly understood. The scope, in view of the Tribunal, is limited to the construction of dams and cannot include construction of canals, channels etc. in outlying sites. The Tribunal have not come across, in the present case, any EPC project for construction of dam alone. The EPC projects executed by the appellants have not been shown to fall in the excluded category of works contract.
 
- It follows from the above findings that the services provided by the appellants to the Government of Andhra Pradesh satisfy the statutory requirements of "works contract" defined under Section 65(105)(zzzza) of the Finance Act, 1994 inasmuch as (i) transfer of property in goods was involved in the transaction and VAT was paid on such goods, (ii) the contracts were for the purpose of carrying out irrigation projects of the Government through turnkey/EPC mode, and (iii) none of the contracts was in the excluded category of works contracts.
 
- The Tribunal noted that appellant, Maytas-NCC JV had argued that the contracts awarded by the Government to them were assigned to sub-contractors and that the transfer of property in goods used in the execution of such contracts was from the sub-contractors to the Government and not from the appellant to the Government and therefore the execution of such contracts would not be covered by the definition of "works contract ". This argument is unaccept able for more than one reason. Firstly, this plea was not raised by the appellant in their reply to the show-cause notice or in their subsequent written submissions filed before the adjudicating authority. Therefore this plea cannot be entertained at this stage. Secondly, the definition of "works contract" does not stipulate that, where the contracts were executed by the contractor through a subcontractor, there should be transfer of property from the contractor directly to the contractee (service recipient). To the Tribunal, it is enough if transfer of property in goods is involved in the execution of the contract and the same is exigible to sales tax as is the case under consideration.
 
- The Tribunal held that as rightly submitted by the Department, the activities undertaken by, the appellants are squarely covered by clause (e) of Explanation to; Section 65(105)(zzzza) of the Finance Act, 1994 and cannot be classified under clause (b) of the Explanation inasmuch as the activity described in clause (b) (construction of new building, civil structure, pipeline or conduit) cannot encompass the entire gamut of any of the contracts awarded by the Government and executed by the appellants and any such activity for non-commercial/non-industrial purposes is not envisaged under clause (b). Therefore, within the definition of works contract, the projects executed by the appellants can fit in clause (e) only.
 
- It has also been argued on behalf of the appellants that their activities under the subject contracts could, alternatively, be classified under other entries like "commercial or industrial construction"  [clause (25b) of Section 65] or "site formation and clearance, excavation, earth moving and demolition" [clause (97a) of Section 65]. These strenuous arguments have also been found to be untenable. It is not in dispute that the projects awarded to the appellants by the Government of Andhra Pradesh were executed by them for irrigation purposes of the Government. These purposes are, undisputedly and indisputably, non-commercial and non-industrial. If that be so, there is no question of classifying the works under the head ‘commercial or industrial construction service’ inasmuch as the statutory definition of this service appears to have underlined the commercial/industrial character of the end-use of the constructed structure/facility. As regards "site formation and clearance, excavation and earth moving and demolition", the Tribunal noted that Circular dt. 24/05/2010 provides a correct clarification on the point raised by the counsel. This Circular says thus: "Site formation and clearance, excavation, earth moving and demolition services are attracted only when the service providers provide the services independently and not as part of complete work such as laying of cables under the road". In the present case, any site formation, clearance, excavation, earth moving, demolition carried out by the appellants was only preparatory to the execution of the project and therefore these minor preparatory activities, per se, would not determine the classification of the entire service provided by the appellants to the Government. For this very reason, nothing turns in favour of the appellants on the legal position that such services as those specified in the main part of the definition of "site formation and clearance, excavation, earth moving and demolition" are, if provided in relation to irrigation, excluded from the taxable service. This exclusion only means that, if the appellants had undertaken only the activities specified in the main part of the said definition and nothing more than that, they could have claimed non-taxability of such activities on the ground that such activities were undertaken in relation to irrigation. The appellants, on the facts of this case, cannot set up such a claim because they were executing EPC projects in relation to irrigation and not mere drilling, boring, soil stripping, demolition of building and the like. What emerges from this discussion is that the scope of the services defined under Section 65(25b) and Section 65(97a) is limited one way or another, whereas the definition of "works contract" under Section 65(105)(zzzza) has much wider scope. It is also significant to note that any transfer of property in goods exigible to sales tax is not involved in the rendering of the services defined under clauses (25b) and (97a) of Section 65 whereas such transfer of property in goods is necessarily involved in the execution of "works contract". In this scenario, it has to be held that the service provided by the appellants to the State Government is classifiable as "works contract service" only. There is no other possible entry under Section 65 of the Act to cover the EPC projects executed by the appellants. Therefore, Section 65A(2) of the Act, which lays down certain principles to govern classification of a taxable service which is prima facie classifiable under two or more entries under Section 65(105), has no application in this case as rightly submitted by the Department
 
- It is not in dispute that the subject contracts required the contractee (State Government) to pay lump sum to the appellants against R.A. Bills raised by them from time to time. Neither the contracts nor the bills provided any break-up of the amount with reference to different items of work. These facts also clearly indicate the composite, indivisible nature of the contracts. Such composite contracts/projects encompassing a wide spectrum of activities ranging from survey & investigation to beautification of the finished facility are appropriately called ‘turnkey contracts/projects’. An EPC project is a species, of which turnkey project is the genus. In other words, alt turnkey projects cannot be EPC projects but all EPC projects are turnkey projects. Both the appellants were executing EPC projects for the State Government, thereby providing the taxable service of "works contract" to the Government.
 
- The definition of "commercial or industrial construction service" excludes services provided in respect of certain specified items including "dams". Similarly the definition of "site formation and clearance, excavation and earth moving and demolition" excludes services provided in relation to certain specified items including "irrigation". Therefore, according to the counsel for the appellants, any service provided in relation to "dams" and "irrigation" should be deemed to have been excluded from the purview of "works contract service" as well. There is no warrant for deeming so inasmuch as every taxable entry needs to be understood with reference to the language used in such entry and, accordingly, a given service has to be classified, which is the mandate of sub-section (1) of Section 65A of the Finance Act, 1994. The Tribunal had not found anything in the text of the definition of works contract" to indicate that turnkey/EPC projects for irrigation are excluded from the ambit of taxable service of works contract. With regard to "dams", the Tribunal have already expressed their views in para (10.6.) of this order. As rightly submitted by the Department, there is no room for any intendment or assumption or presumption and, where the words of the statute are plain and clear, there is no room for applying any of the principles of interpretation. In this context, the reliance placed by the Department on the decision of the Apex Court in Grasim Industries case is found to be apposite.
 
- It was noted that Clause (e) of the definition of works contract - turnkey projects including engineering, procurement and construction or commissioning (EPC) projects - clearly conveys the legislative intent underlying the definition of "works contract" in relation to turnkey projects. It does not exclude EPC projects for irrigation, nor does it discriminate between EPC projects for commercial/industrial purposes and those for non-commercial/non- industrial purposes, nor between EPC projects of Government departments/agencies and private entities. What does not figure in the plain language of the entry cannot be read into it by this Tribunal.
 
- The Tribunal also perused the various circulars referred by the partied issued on 17/9/2004, 27/07/2005, 04/01/2008, 15/09/2009, 24/05/2010 etc. The first two circulars were issued prior to 01/06/2007, the date w.e.f. which works contract service was introduced as a taxable service and, therefore, those circulars cannot have anything to do with works contract service. The circular dt. 04/01/2008 was issued to clarify that a service provider who paid service tax prior to 01/06/2007 for certain taxable services was not entitled to change the classification of those services as a composite service after 01/06/2007 for the purpose of payment of service tax under composition scheme. This clarification is not applicable to the facts of this case. The circular dt. 15/09/2009 was issued to clarify, inter alia, that works contracts in respect of roads,..... and "dams" were exempt from payment of service tax if such contracts were executed through EPC mode. But no works contract in respect of dams was awarded to the appellants and therefore the benefit of the said circular also cannot be claimed by them. The said circular also did not refer to irrigation projects. The Tribunal noted that they have already referred to the circular dt. 24/05/2010 in an earlier context, where it was noted that the Board's clarification in regard to the taxable service of "site formation and clearance, excavation and earth moving and demolition" was rather unfavourable to the appellants. In any case, in the context of discussing the scope of "works contract", it is not prudent to rely on circulars dealing with other taxable services.
 
- It was also argued by the appellants that the projects in respect of which the contracts were awarded to the appellants prior to 01/06/2007 could not, in any case, be classified under the head "works contract service". As the levy is on any taxable service 'provided or to be provided' by one person to another, the date of award of contract by the Government to the appellants is not the decisive factor. What matters is the fact that the contracts were executed by the appellants and payments received by them after 01/06/2007 and therefore they are liable to pay service tax on the taxable service.
 
- As rightly submitted by the Department, the Tribunal held that an exemption notification cannot be given retrospective effect unless it expressly provides for retrospective operation. Notification No. 41/2009-ST dt. 23/10/2009 exempted a works contract in respect of canals, other than canals primarily used for commercial or industrial purposes, from the whole of the service tax leviable thereon. This notification appears to be the first of its kind issued after introduction of works contract service as a taxable service, and did not provide for retrospective operation. Therefore the arguments advanced by the learned counsel, claiming support from a judgment of the Apex Court [2005 (181) ELT 359] and praying for exemption under the said notification cannot be accepted. The facts of the case considered by the Apex Court had disclosed the consistent policy of the Government to grant exemption from payment of duty on parts of power-driven (PD) pumps. When the Central Government issued a consolidated notification viz. Notification No. 46/94-CE dt. 01/03/1994 incorporating therein the provisions of a large number of old notifications, PD pumps were shown as an exempted item, but parts of such pumps were not so shown though such parts also had been exempted in the past. The Government corrected this omission when pointed out by the industry, by issuing another Notification No. 95/94-CE dt. 25/04/1994 wherein parts of PD pumps were also included as an exempted item. The question before the Apex Court was whether, on these facts, Notification No.95/94 could be held to be clarificatory in nature. This question was held in favour of the assessee by the court holding that Notification No.95/94 being clarificatory was retrospective in operation. Such or similar circumstances do not exist in the present case. Therefore the appellants cannot claim the benefit of exemption under Notification No. 41/2009-ST ibid.
 
- Certain other decisions were also cited by the teamed counsel, some in the context of discussing non-commercial/non-industrial purposes of certain Water supply schemes and some other decisions in the context of applying Section 65A provisions of the Finance Act, 1994 to classification of a given activity as taxable service under Section 65(105) of the Act. The Tribunal have already expressed their views in similar contexts, which are against the appellants. Therefore, the cited decisions are not applicable. The decision in M. Ramakrishna Raddy's case cited by the
appellant Maytas-NCCJV is also not of any aid to them as the dispute in that case pertained to a period, prior to 1/6/2007 when 'WCS' was not a taxable service.
 
- In the result, issue No. 1 is held in favour of the Department and, accordingly, the appellants are held liable to pay service tax under the head 'works contract service' on the turnkey/EPC contracts in question.
 
Second Issue- Whether deductions (claimed by the appellants) from gross amounts billed to the contractee can be allowed in the determination of the taxable value of the service for payment of service tax under the WCS?
 
- The Tribunal noted that impugned demands of service tax were quantified on the basis of Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The appellants have not objected to quantification of tax under these rules. These rules were made under Section 94 of the Finance Act, 1994, which authorized the Central Government to make rules, inter alia, for the determination of the amount and value of taxable service under Section 67 vide clause (aa) of sub-  section(2) of Section 94 of the Act. Referring to Rule 3(1) of the Works Contract (Composition scheme) Rules, 2007 it was held that the Explanation was added w.e.f. 7/7/2009 and the same is not applicable to a works contract, the execution of which commenced on or before 07/07/2009 or where any payment (except by way of credit or debit to any account) was made in relation to the contract on or before 07/07/2009. The periods of dispute in the present cases are all prior to 07/07/2009. The Explanation appears to be inapplicable to these cases. It would follow that the "gross amount charged" for the works contract has to be determined for purposes of Rule 3(1) in accordance with the parent provision viz. Section 67 of the Finance Act . The appellants are liable to pay service tax @ 20 percent upto 28/02/2008 and @ 4 percent thereafter on the "gross amount charged" so determined for each works contract. The question before the Tribunal is what should be the "gross amount charged".
 
- It was noted that the Adjudicating Authority has not accepted the plea for treating the "gross amount charged" as cum-tax value on the premise that Rule 3(1) does not permit abatement of service tax from the "gross amount charged" in the determination of taxable value. In the view the Tribunal have taken in the foregoing paragraph, the benefit of Section 67(2) is liable to be granted to the assessees and accordingly the gross amount charged can be treated as cum-tax value and the service tax element can be deducted from it to arrive at the taxable value of works contract service.
 
- But the Tribunal have not found any merit in the appellant’s plea for deduction of retention money from the gross amount charged. On a perusal of the terms and conditions of the contracts, the Tribunal have found that the contractee (State Government) was, while making payments to the contractor, retaining a small part of the gross amount billed. However, upon satisfactory execution of the contract the "retention money" was to be released to the contractor, which fact is not in dispute. In other words, the retention money was only a deferred payment and the appellants were entitled to receive the gross amount charged in the R.A. Bill. If that be so, there can be no valid claim for deduction of the retention money from the gross amount as rightly held by the adjudicating authority.
 
- The appellants are not entitled to claim CENVAT credit on inputs used in the execution of the subject contracts as this benefit is barred under Rule 3(2) of the Works Contract (Composition Scheme) Rules, 2007. But there appears to be no embargo on taking CENVAT credit on capital goods or input services.
 
- In the result, the valuation of the taxable service has to be reworked out by the Adjudicating Authority by granting the aforesaid benefits to the assesses.
 
Third Issue- Whether extended period of limitation prescribed under the proviso to Section 73(1) of the Finance Act, 1994 is invocable in appellant’s cases?
 
- The Tribunal noted that it is not in dispute that appellant Ramky, the leading partner of the Ramky-Murthy JV, was registered with the Depart ment under "WCS", filling ST- 3 ret urns and paying service tax in respect of similar turnkey/EPC contracts after 01/06/2007. Hence, appellant Ramky-Murthy JV cannot be heard to say that they were not aware of service tax liability under the head "WCS" in respect of the subject contracts. The plea of "bona fide belief" that they were not liable to pay service tax under WCS in respect of the subject projects is also not acceptable. The parties to each contract described it as "turnkey/EPC contracts" and also included within its ambit a wide range of activities which constituted a turnkey project. The provisions of each contract also clearly indicated that the project involved engineering, procurement, construction and commissioning, which was enough to bring the entire project within the ambit of clause (e) of the definition of "works contract" in the Explanation to Section 65(105)(zzzza) of the Finance Act, 1994. There was no room for doubt about the coverage of EPC contracts within the plain and clear language of clause (e). Therefore the appellants can hardly plead that they did not pay service tax on the works contracts by reason of bona fide belief that they were not liable to pay such tax. The material facts related to the EPC projects executed by them were not disclosed to the Department. Registration under "WCS" was taken and ST-3 returns filed only when compelled to do so. Even in some of the ST-3 returns, the material particulars were not disclosed to the department. It was submitted on behalf of appellant Maytas-NCC JV that they had filed certain revised returns disclosing the material facts. But even those revised returns did not disclose reason for the exemption claimed therein. No benefit of any exemption notification or of exclusion from specific taxable service was claimed. The original returns also had not disclosed the relevant facts. Therefore, the allegation of willful suppression/misdeclaration of relevant facts and contravention of the relevant provisions of the Finance Act with intent to evade payment of service tax is sustainable against both the appellants. The extended period of limitation under the proviso to Section 73(1) was correctly invoked in these cases. In the circumstances stated above, the decisions cited by counsel are not applicable.
 
- Fourth Issue: Imposition of penalties under Sections 76, 77 and 78 of the Finance Act, 1994
 
- In the aforesaid circumstances, the Tribunal have not found any reason to grant the benefit of Section 80 of the Act to the assessees in these cases. Where an assessee proves that there was reasonable cause for his failures (non-filing of returns, non-payment of tax etc.), Section 80 can be invoked to do away with penalties under Sections 76 to 78. But the Tribunal have already analysed the commissions and omissions of the assessees. The explanations given by them do not constitute any reasonable cause for non-taking of registration, non-filing of returns, non-disclosure of material facts in the returns filed, non-payment of service tax etc. hence Section 80 is not applicable to the present cases.
 
- It was observed that the legal requirements for invoking the proviso to Section 73(1) of the Finance Act for recovery of service tax dues beyond the normal period of limitation and the legal requirements for invoking Section 78 for imposition of penalty on the tax defaulter are identical and, therefore, there can be no valid ground against Section 78 penalty in these cases. However, as the taxable value and the amount of service tax have to be redetermined by the adjudicating authority, the penalties imposed on the appellants under Section 78 will be set aside for the purpose of requantification.
 
- It was noted that Section 78 underwent an amendment w.e.f. 10/05/2008 and accordingly, where a penalty was payable under the Section, no separate penalty was imposable under Section 76 vide the fifth proviso to Section 78. The appellants have claimed the benefit of this amendment. They have also relied on the Tribunal's orders in the case of Pannu Property Dealers, SilverOak Gardens Resort etc. Now that Section 78 penalties are being set aside for requantification, the Tribunal are of the view that the question whether Section 76 penalties are liable to be imposed on the appellants in ST/476/2009 and ST/432/2010 has also to be examined afresh by the Adjudicating Authority as the periods of dispute in these two appeals are partly beyond 10/05/2008.
 
- On the basis of the findings recorded by the Tribunal, it was ordered as follows:
 
1. The service provided by the appellants to the Government of Andhra Pradesh under the subject contracts is classifiable as "works contract service" under Section 65(105)(zzzza) of the Finance Act, 1994;
 
2. The appellants are liable to pay service tax on the correct taxable value to be determined by the Adjudicating Authority having regard to the findings recorded in para (11) above;
 
3. The extended period of limitation is invocable in these cases;
 
4. The penalties imposed on the appellants under Section 77 of the Finance Act, 1994 are sustained. The Section 76 penalty challenged in appeal No.ST/1589/2010 is also sustained. The penalties imposed under Section 78 of the Act are set aside for re-quantification. The Section 76 penalties challenged in appeals ST/476/2009 and ST/432/2010 are also set aside for fresh decision as to whether such penalty is liable to be imposed on the assessees and, if so, to what extent;
 
5. The appellants are liable to pay interest under Section 75 of the Act on the amount of service tax to be re-quantified by the Adjudicating Authority; The appellants shall be given a reasonable opportunity of being heard on the remanded issues.
 
Decision of the Tribunal:-
 
The appeals are disposed of in the above terms. Stay application also stands disposed of.
 
Conclusion:-
 
This is a very harsh judgment on assessee and it has long lasting impact on taxation of works contract. Since previously works contract for supply of water or irrigation purpose were considered to be non commercial and hence not taxable, but now with this judgment the same shall be considered taxable.

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