Whether the appellant is eligible for the benefit of Notification No. 19/2003-ST, dated 21.8.2003 as amended?

Case: SUZLON INFRASTRUCTURE V/S COMMISSIONER OF CENTRAL EXCISE, PUNE-III

Citation: 2012 (27) S.T.R. 242 (Tri.-Mumbai)

Issue:- (1) Whether the appellant is eligible for the benefit of Notification No. 19/2003-ST, dated 21.8.2003 as amended?

(2) Whether the appellant’s contracts with its customers are composite contract for "erection, commissioning or installation of Wind Farm Project of which electrical installation is a part or the electrical work is a separate activity distinct from Wind Farm Project?

(3) Whether the extended period of limitation under section 73(1) of the Finance Act, 1994 is applicable here in this case?

Brief Facts: - The appellant, M/s. Suzlon Infrastructure Limited (SIL) formerly known as M/s. Suzlon Developers Limited is an associate company of M/s. Suzlon Energy Limited (SEL). It is engaged in erection, commissioning or installation of windmills or wind turbine generators for its customers on contract basis. The Wind Turbine Generators (WTG) are manufactured and supplied by M/s. SEL. It had taken Service Tax Registration for installation & commissioning services on 18-7-2003 which was subsequently amended to endorse other services also.

Based on intelligence that M/s. SIL was indulging in evasion of service tax under the category of "Erection, Commissioning or Installation service" as defined in Sec. 65(39a) of the Finance Act, 1994, the officers of Directorate General of Central Excise Intelligence (DGCEI), New Delhi conducted investigation into the matter. In the course of investigation, the officers examined the relevant records and recorded statements of some of the functionaries of the appellant company. In his statement dated 27-10-2005, Shri Bipin Shah, General Manager had, inter alia, stated that their company is engaged in project execution work comprising civil construction work, erection installation and commissioning of WTG on exclusive basis to the customers of M/s. SEL as per Agreement dated 11-6-2005 entered into between M/s. SEL and the appellant company.

On assessment of the Agreement dated 11-6-2005, between M/s. SEL and M/s. SIL, the officers found that M/s. SIL was required to provide services of erection, commissioning or installation of WTG and establishment of Wind Farm Project exclusively for customers of M/s. SEL. It was also found that M/s. SIL was entered into the contract with its customers for services of erection, commissioning or installation of WTG and for this purpose, it was issuing four types of invoices to its customers relating to:-

Ø Construction of civil foundation, control room, transformer plinth, crane platform, road for crane movement, electrical yarn fencing etc.
Ø Supply and installation of HT Electrical yard with VCB, outdoor type CT/PT and HT Transmission line from windmill to grid inter-connection and related facilities.
Ø Erection and installation of windmill consisting of unloading and safe-keeping of windmill equipment, assembly, erection and installation of windmill tower and Wind Turbine Generator.
Ø Charges towards final testing and commissioning of the wind mills.

It was appeared that civil foundation is an integral part of erection and installation of the wind mill and the control room and electrical yard etc. also form an integral part for commissioning of the wind mill without which the commissioning of wind mill or WTG is not complete. It was also found that M/s. SIL was discharging its service tax liability on the full value realized by it from its customers in respect of invoices of erection and installation of windmill and of charges towards final testing and commissioning of wind mills. However, in respect of invoices of construction of civil foundation etc. and of supply and installation of HT electrical yard with VCB etc., it was availing the benefit under Notification No. 19/2003-S.T., dated 21-8-2003 which provides that in case of a contract involving erection, commissioning or installation services along with the supply of plant, machinery or equipment, service tax will be payable only on 33% of the gross amount charged by the service provider from its customers for erection, commissioning or installation and supply of plant, machinery and equipment.

Since M/s. SIL was providing only the services of erection, commissioning or installation of WTGs, it appeared that it was not eligible to the benefit of Notification No. 19/2003-S.T., dated 21-8-2003. M/s. SIL, was, therefore, served with a show-cause notice dated 28-8-2006 demanding service tax of Rs. 22,04,53,114/- and Education Cess of Rs. 44,09,131/- for the period 10-9-2004 to 30-9-2005. The notice also proposed to impose penalty on it under Sec. 76 for contravention of provisions of Section 68 and penalty under Section 78 of Chapter V of the Finance Act, 1994 for evasion of service tax by willful suppression of facts. The notice also demanded interest on the service tax not paid during the period 10-9-2004 to 30-9-2005 under the provisions of Section 75 of the Finance Act, 1994.

The Commissioner, after hearing the contentions of the appellant, confirmed the service tax including Education Cess amounting to Rs. 224862245/- under the category of ‘erection, installation and commissioning service’. The commissioner also ordered adjustment of Rs. 8,55,15,594/- already paid against its service tax liability. The Commissioner also ordered adjustment of Rs. 2,90,480/- already paid by M/s. SIL towards interest. In addition, the Commissioner also imposed a penalty @ of Rs. 100/- per day from the date it is payable till the date it is paid under Section 76 of the Act. The Commissioner also imposed a penalty of Rs. 22,48,62,245/- under Section 78 of the Finance Act, 1994. Aggrieved by this order, the appellant has filed this appeal.

Appellant’s Contention: - The appellants contended that they are engaged in developing wind farm, related infrastructure, project execution covering civil work, electrical work, assembly/erection and commissioning of the windmill exclusively for M/s. SEL or its clients. As soon as a client is identified by M/s. SEL and order is confirmed for sale of WTG, the customer is introduced to their company and thereafter, they finalize the contract for erection, installation and commissioning of the WTG with the customer as per mutually agreed terms and conditions. He also stated that the complete plant, machinery and equipment of the WTG are supplied by M/s. SEL and M/s. SIL is not supplying plant, machinery and equipment except electricals required for the project.

They challenged the notice by its reply dated 24-11-2006 contending that the contract of electrical work is distinct and separate from the contract of erection of tower and civil work. Hence it is entitled to the benefit of Notification No. 19/2003 dated 21-8-2003.

He contends that the contracts of work order carried out 4 types of activities namely,

Ø civil work including foundation and allied activities of wind farm project,
Ø Supply and installation of Electrical equipments,
Ø Erection and installation of windmill and
Ø Final testing and commissioning of the wind mills.

He submits that the disputes are limited to first 2 activities. Each of the four types of activities carried out by them is distinct and separate. Civil work has been done by a sub-contractor who is registered under the category of "commercial or industrial construction service" and that the sub-contractor has paid service tax of 33% of the gross amount charged from them by availing the benefit of Notification No. 15/2004-S.T., dated 10-9-2004 as amended. Similarly, electrical work has been done by a sub-contractor who is registered under the category of 'Erection, Commissioning or Installation service' and has discharged service tax on the entire gross amount charged from them without claiming any abatement under Notification No. 19/2003-S.T., dated 21-8-2003 as amended. Hence they have claimed benefit of Notification No. 19/2003-S.T., dated 21-8-2003 as amended.

He contented that erection, commissioning or installation of electrical equipments is a separate activity having no relation to erection, commissioning or installation of windmill or WTGs. To support his contentions, he relied upon the decisions of the Hon'ble Supreme Court in the case of Nicco Corporation Ltd. v. CCE, Kolkata - 2006 (203) E.L.T. 362 (S.C.), Skytone Electricals (India) Ltd. - v. Commissioner - 2008 (225) E.L.T. A97 (S.C.) holding that wires and cables are not parts of windmill.

On limitation, he submitted that the present case involves a pure question of interpretation of law and that they were under bona fide belief that the activity of civil work and electrical work are distinct and separate from the activity of erection, commissioning or installation of windmill. Hence, in the facts of the case, the extended period of limitation could not be invoked.

Respondent’s Contention: - The respondent held that the it is a case of composite contract for erection, commissioning and installation of Wind Farm Project, in terms of the Agreement dated 11-6-2005 between M/s. SEL and the appellant and in terms of various work orders placed on the appellant by its customers, it is quite clear that the appellant has provided composite service of erection, commissioning or installation of windmills or WTGs.

He submitted that it is a common knowledge that without civil foundation, erection of tower is not possible. It is an integral part of erection and installation of the windmill. Similarly, without electrical installation, commissioning of windmill is not possible inasmuch as electricity generated by the WTGs cannot be evacuated from the windmill to the Electricity Board grid. Electrical installation is, therefore, an integral part of the Windmill. Therefore, the appellant's claim that civil foundation and electrical installation are separate activities is not acceptable. Consequently, the appellant's claim for the benefit of Notification No. 19/2003-ST., dated 21-8-2003 as amended is not available to it. He also submitted that the appellant's contracts with its sub-contractors are not relevant as the same are not under dispute.

With regard to the case laws cited by the appellant, they submitted that the case laws cited have no application to the facts of this case. He submitted that the appellant overlooked the fact that the appellant had undertaken the entire services of erection, commissioning or installation of wind farm project of which electrical installation is a part. In his view, wind farm project is not complete without electrical installation. In the context of service under the Finance Act, 1994, the case laws cited are totally misplaced. On limitation, they submitted that it is not at all a case of bona fide belief. The appellant is guilty of suppression of facts. It had not declared the correct value of taxable services in ST-3 returns filed with the department. It had suppressed the fact from the department that it had availed the benefit of Notification No. 19/2003-S.T., dated 21-8-2003 although it did not supply WTGs to its customers. Therefore, the extended period of limitation has been correctly invoked in this case. In his submission, the appellant has no case both on merit as well as on limitation. He therefore urged for dismissal of the appeal.

Reasoning of Judgment: - The Hon’ble CESTAT held that on perusal of the work order they find that it is for erection and installation of 2 Nos. of WTGS (1250 KW each) at Dhulia Site in Maharashtra. They also find that in the work order indicates Scope of work which includes the board heading of Civil, electrical, erection & Commissioning, loading & unloading and temporary road for movement of crane and preparation of crane platform. As seen from the Work Order, it is not being possible to appreciate that the appellant had received 4 separate contracts embodied in a single document. From the Work Order, it is clear that it is a composite contract for erection, commissioning or installation of WTGs. Therefore, they agree with the Revenue's contention that by showing 4 separate invoices, it cannot be contended that appellant had executed 4 separate and distinct contracts with its customers. It is clearly a composite contract and the intention of the appellant is quite obvious from the Work Order.

On careful consideration of "Agreement for Services" dated 11-6-2005, between M/s. SEL and the appellant, they find that the company (M/s. SEL) offers "total solutions" to its customers in establishment of wind farm project including civil work and installation and commissioning of WTGs and in this endeavour the appellant provides the required services (as defined in the Agreement) to the customers of the company. It is quite obvious from "Agreement of Services" that the appellant has to provide "integrated solutions" to the customers in wind power generation. From the definition of "Services" as reproduced, they note that the services required for the erection, installation and commissioning of the wind farm project, include all related electrical work including material. Reading the definition of "Services" together with the various clauses reproduced above, it is not in doubt that the main object of the Agreement, in so far as the appellant is concerned, is to provide all of the services required for the erection, installation and commissioning of the Wind farm project (WTGs) to the customers. In that process, while carrying out related electrical work, the appellant will also provide material in relation to the electrical work. Consequently the material provided by the appellant in relation to the electrical work is only incidental to the services for erection, installation and commissioning of the Wind farm Project. The contention of the appellant that the electrical work is separate activity distinct from Wind farm Project cannot be accepted as correct. They hold that the electrical installation is a part of Wind farrn Project (WTG) inasmuch as without electrical installation, evacuation of electricity from WTG to the State Electricity grid is not possible. It is needless to mention that the establishment of Wind farm Project becomes complete only after commissioning of the WTGs.

Further they have gone through the both of two judgments as relied on by the appellants. In both the judgments, the Hon'ble Apex Court has held that "wires and cables" cannot be considered as parts of Windmill and hence the benefit of Notification No. 205/88-C.E., dated 25-5-1988 as amended cannot be extended to the assessee. In their view, these judgments have no application to the facts of this case. They have not concerned with the classification of Windmill or its part under Central Excise Tariff Act, 1985. They concerned herewith the classification of services of "erection, commissioning or installation" of Wind farm Project (WTGs) under the Finance Act, 1994. Undisputedly, the appellant is providing integrated services of "erection, commissioning or installation of Wind farm Project (WTGs) of which electrical installation is a part. It is needles to say that without electrical installation, Wind farm Project will remain incomplete. Therefore, it was hold that the appellant's contracts with its customers are composite contracts for erection, commissioning or installation of Wind farm Project of which electrical installation is a part. Consequently, they hold that electrical installation is not a separate activity distinct from Wind farm Project.

In relation to issue relating to the eligibility of appellant for the benefit of Notification No. 93/2003-ST, dated 21.8.2003, on the careful reading of the Notification they contended that its benefit could be available only where the service provider i.e. a commissioning and installation agency also supplies under a contract a plant, machinery or equipment, parts and any other material during the course of providing erection, commissioning or installation of services.

M/s. SEL are manufacturers of WTG. They had supplied WTGs and parts thereof and also electrical items to the customers under separate invoices. One such invoice dated 7-2-2005 issued by M/s. SEL to M/s. Hercules Hoists Limited is found at page 17 of the Revenue's written submission. After pursuing the said invoice, they find that M/s. SEL have not only supplied WTG and its parts, but also electrical items of substantial value. The benefit of Notification is applicable only to those cases where under a contract the services provider not only supplies a plant, machinery or equipments but also provides the service of commissioning or installation of the said plant, machinery or equipment. Since the appellant had not supplied WTGs to its customers and provided only the service of erection, commissioning or installation of WTGs supplied by M/s. SEL, they were not eligible for the benefit of the Notification. Further the claim of the appellant that under separate contract with their customers, they had not only supplied electrical components but also carried out the work of electrical installation and hence they were eligible for the benefit of Notification. This claim merits were rejected for various reasons. Firstly, that as far as the appellant is concerned, supply of some material including some electrical items was only incidental to the services of "erection, commissioning or installation" of WTGs. Secondly, in terms of the Agreement for the Services dated 11-6-2005 between M/s. SEL and the appellant as also in terms of various Work Orders placed on the appellant by its customers, there cannot be any doubt that the contracts were composite contracts for providing services of erection, commissioning or installation of WTGs. Thirdly, civil works and electrical works are inseparable parts of Wind Farm Project. It is needless to say that without civil foundation, erection of tower is not possible. Similarly, without electrical installation, commissioning of Wind Mill is not possible inasmuch as electricity generated by WTGs cannot be evacuated from the Wind Mill to the Electricity Board.

They observed that the mere issue of 4 different invoices would not make the activities independent of each other. The Agreement for Services specifies the service as services required for erection, installation and commissioning of Wind farm Project. The entire gamut of the installation commences with construction of the civil foundation and progresses into installation of electrical yard and transmission line for grid connectivity to erection of the windmill to testing and commissioning of the windmills. Thus, each process is dependant on every subsequent process and thus are inherent and inseparable parts of the work of the entire agreement relating to complete erection, installation and commissioning of the WTGs. Hence, civil foundation and electrical installation are in separate part of wind farm project. Once it is held that electrical installation is a part of the composite contract for erection, commissioning or installation of WTGs, the appellant's claim for the benefit of Notification No. 19/2003-S.T. for electrical installation cannot be accepted only on the basis that it had supplied some electrical materials for electrical installation. Therefore the benefit of Notification No. 19/2003-S.T. is not available to the appellant.

With regard to issue relating to extended period of limitation under Section 73(1) of the Finance Act, 1994, they contended that they do not find any basis established of bona fide belief. They do not find anything on record to suggest that the appellant had ever approached the Service Tax authorities to ascertain the details of their liability to pay service tax. It is needless to say that the belief can be said to be bona fide only when it is formed after all the reasonable consideration are taken into account. In the present case, it has not been find any such consideration having been taken by the appellant. Therefore, the department has rightly invoked the extended period of limitation.

Decision: - The appeal was rejected.

Comment:- When it is inseparable contract when each activity is dependent on other activity then the dividing contract into separate individual agreement and invoices will not serve the purpose. It will be termed as composite contract.

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PJ/Case Laws/ 2012-13/ 1194

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