TMI Blog2007 (5) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... rry, respectively . The impugned orders relate to liability to tax on services rendered by the appellants. 2. In the order impugned in Appeal No. S/116/06, service tax of Rs. 94,40,799/- for the period 6/2000 to 2/2003 under Section 73(2) of the Finance Act, 1994 (the Act) and interest on the service tax payable under Section 75 were demanded. There were also penalties imposed in the order of Rs. 200/- per day from 26/06/2000 to 25/07/2000, Rs.400/- from 26.07.2000 to 25.08.2000, Rs. 600/- from 26.08.2000 to 25.09.2000 and so on in terms of Section 76, Rs. 500/ in terms of Section 75A and Rs. 1000/- in terms of Section 77 of the Act. In the order impugned in the appeal No. S/143/2006, service tax of Rs. 1,98,54,506/- for the period 3/2003 to 9/2004 and Rs. 1,29,39,582/- for the period 9/2004 to 5/2005 were demanded under Section 73. Interest on the service tax amounts was demanded under Section 75 of the Act. Penalties of Rs. 1,98,54,506/- in terms of Section 78, Rs. 500/- in terms of Section 75A, Rs. 100/- per day for failure to pay service tax amounts in terms of Section 76 and Rs. 6000/- in terms of Section 77 of the Act were imposed. The original authorities have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and drawings produced by EPC contractors and the operating manual for the facility. They would recommend to the owner the rectification required of those items not in accordance with the EPC contract and oversee such rectification. They would review and comment on test data provided by EPC contractors and their performance. The O M contractor would implement the plant management and maintenance system in consultation with the owner and forward within 90 days of the commencement of the facility, the initial seven year forward maintenance plan. They would help the owner and TNEB to develop plans for recovery of the facility from electrical black out and voltage reduction. As per the Agreement, the contractor would test, supervise loading, unloading, schedule deliveries of lignite loads by trucks/wagons and stock lignite. They would ensure a certain level of inventory at the NLC mine head and the plant site. The contractor would raise invoices on behalf of the owner on TNEB. 4.1 The Agreement mandates CMS to operate, inspect, maintain and repair the facility and procure necessary equipment, spares and consumables. They would operate the facility in such a manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaken the service of C F Agent. Lignite being the main fuel for generation of electricity, its procurement, movement and inventory had to be undertaken by them for smooth generation of electricity. The activity of transporting lignite from the field to the facility had not been undertaken by them. The appellants cited the decision of the Tribunal in Daelim Industrial Company Ltd. Vs. CCE, Vadodara (Final Order No.7/36/D/NB/A dated 20.6.2003)/(1994-2006] STT 438 (New Delhi-CESTAT) and Gujarat State Co-operative Land Development Bank Ltd. Vs B.R. Mankad [1997 (3) SCC 123] in support of the plea that the proposal to split a contract and to tax the services was bad in law. 7. In the order passed, the Dy. Commissioner observed that as per Section 65 of the Act, a service provided to a client in connection with the management of any organization in any manner came under the category of Management Consultant's service. The facility was manned by the staff of the O M contractor including the General Manager. The staff of the O M contractor had manned the facility even during the pre-operating period. The O M contractor coordinated scheduling of lignite trucks, supe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - towards these three services. Accordingly, he determined the liability of the appellants towards services rendered to be Rs.94,40,799/-. The appellants had suppressed the value of taxable service received from the owner with intent to evade payment of tax. He therefore imposed a penalty of Rs. 1,88,81,598/- on the appellants under Section 78 of the Act. He demanded interest on the service tax due and imposed penalties under various sections of the Act. On appeal to the Commissioner of Central Excise (Appeals), he concurred with the findings of the Deputy Commissioner. The Ld. Commissioner cited various clauses in the contract to find that the contractor could not act independently of the owner in the operation and maintenance of the plant. He distinguished the instant case on the above basis from the Rolls Royce Indus Power (I) Ltd. Vs. CCE [2004 (171) ELT 189 (Tri.-Del.] /[2007] 6 STT 506(New Delhi-CESTAT) case. He justified the valuation adopted by the original authority on the ground that the operating cost related to day-to-day expenses in connection with the running of the power plant such as labour employed, their training, travel expenses, office expenses etc. which r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmedabad in Gujarat State Electricity Corporation Limited and ITO had observed that The agreement executed between the appellant company and GEB is not an agreement simplicitor for acquiring technical services or professional services from them but it is an agreement requiring GEB to execute the work contract of operating and maintaining the mega power project. The ITAT had upheld the claim of the appellants that they were not providing only technical personnel or consultancy but they were themselves carrying out all the activities required for operation and maintenance of power plants. That was a composite contract for carrying out the operation and maintenance of power projects, which could be properly described as a turnkey project for carrying out the operation and maintenance of the plant (the relevant citation was not furnished). It was argued that the O M Agreement could not be regarded as a contract for rendering services nor could it be vivisected and taxed. They cited the decision in the Rolls Royce Indus. Power (I) Ltd. case (supra) in support of their appeal. In that case it was held that the operator was fully autonomous and responsible for the performa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and Management Consultant's Service. As regards the Management Consultant's service, the Commissioner also found that the owner continued to have the obligation to supply electricity to TNEB. Therefore, CMS was not independent. CMS had provided service directly or indirectly in connection with the management of the facility. The organization chart of ST-CMS comprised its M.D with two parallel hierarchies under him-one as CMS India (O M) Co. Pvt. Ltd., O M Manager and another as Business Manager. Under the latter wing there was Financial Controller and Assistant Manager Engineering. The Financial Controller had a Secretary, Accountants, Computer Specialists and clerical staff. Similarly the CMS branch had various categories of staff. Therefore, he found that the claim that there was no organization to manage and to render service to, was incorrect (There was a hierarchy of CMS staff reporting to MD, ST-CMS). He extracted various clauses in the contract to buttress his finding and relied on the clarification in Board's Circular dated 27.6.2001 (supra) which had clarified: thus management of any organization involves carrying out a wide variety of clearly defined ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance, repairs and overhauls and directed and supervised the O M contractor's staff in such operations. The Commissioner inferred that the appellants did repair equipment though some machines under warranty might have been repaired by their manufacturers. He thus found that the appellants had also rendered maintenance or repair service. Accordingly he passed the impugned order. 12. In the appeal against the above order, the appellants have taken the grounds advanced in the appeal discussed earlier. Additionally the following grounds have been taken. i) Electricity is goods. Therefore generation of electricity is an activity of manufacture. In terms of sub section 16 of Section 65 of Finance Act 1994 any activity that amounted to manufacture was not liable to service tax even under the category of Business Auxiliary Service. Therefore, the operations of the facility did not attract service tax. ii) The appellants generated electricity on behalf of ST-CMS. Therefore the impugned demand for an activity excluded from the coverage of service tax was not sustainable. iii) The appellants ran, operated, maintained, repaired, and mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that the appellants were not engaged in giving advice but were engaged in actual operation of the plant. The conclusion of the appellants rendering consulting engineer service was arrived at on the basis of certain terms of the contract relating to pre-operating and operating periods. These were part and parcel of the contract of operation and maintenance and were not for rendering service to ST-CMS. 14. Lignite being the primary fuel for operation of the plant, it was the obligation of the appellants to ensure availability of sufficient stock of lignite in the facility. Taking delivery of lignite from the transporter, maintaining stock and inventory thereof by the appellants, were in relation to operation of the facility. It was incorrect to construe such obligation in terms of O M contract as providing C F Service to ST-CMS. Activities relating to procuring, transporting and maintaining stock of lignite fuel were activities incidental and ancillary to operation of the facility. Therefore, those activities could only be in relation to operation and day-to-day maintenance of the facility. The scope of C F Agent's service covered the activity of clearing the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-worked. This position had been clarified in Delhi II Commissionerate Trade Notice No.20/2002 dated 23.5.2002. 17. The demand was barred by limitation as the notice was dated 21.1.2005 and the period of taxable service rendered was 1.3.2003 to 30.9.2004. The contracting parties were under the bona fide belief that they were not rendering any service liable to tax. Therefore longer period could not be invoked. Further for the period upto February 2003, proceedings had been initiated earlier invoking longer period. Therefore longer period was not available for the subsequent period from March 2003. Therefore, the demand raised in the Show Cause Notice dated 21.1.2005 for the period 3/03 to 9/2003 was barred by limitation. It was also claimed that they were not liable to pay any penalty or interest. 18. During hearing, the Ld. Counsel for the appellants reiterated the written arguments made in support of the appeals. The Ld. Counsel explained the doctrine of Pith Substance which, he submitted, had to be resorted to in interpreting the O M contract. According to him, maintenance of plant was incidental to operation. The agreement was essentially for opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uxiliary Services prevented CMS being covered as provider of Business Auxiliary Services. CMS manufactured electricity for the owner and not on behalf of the owner. He further explained that the functions were performed by CMS as reporting persons. Section 65 A (2)(b) applied only if the service could be classified under more than one clause of Section 65. He also submitted various case laws to drive home the ratio that it was a well-settled principle of interpretation of contracts that the contract must be construed as a whole . 20. Ld. SDR defended the demand of tax and interest and imposition of penalties in both the orders. She justified the demand on all the services invoking Section 65 A (2)(b), with reference to the essential character of the services in the impugned order in original passed by the Commissioner. The appellants had collected Management Fee which expression threw light on the nature of the service rendered. Ld. SDR endeavored to distinguish the Daelim Industrial Co. Ltd., case from the case on hand. The facility (plant) was managed by ST-CMS through CMS. The services of CMS were outsourced by ST-CMS. She cited the Tribunal's decision in P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have assailed the orders both on merits and on the ground of limitation. 23. Lower authorities have arrived at their respective findings on the basis of the agreement between ST-CMS and CMS which had entrusted to the latter, the responsibility of operation and maintenance of the Power Plant of the former, to ensure supply of electricity to TNEB as per the PPA entered into by ST-CMS with TNEB. The various provisions of the agreement have been discussed in the early part of this order. 24. We first take up Appeal No. S/116/06 for detailed examination. Our findings also apply to the appeal No. S/143/06, as regards the services covered by appeal No. S/116/06. The order impugned in this appeal has affirmed the original order. As per the original order, the services rendered are separately found to be Management Consultancy, Consulting Engineer Service and C F Agents Service. 24.1 As per clause 65 of Section 65 of the Act, Management Consultant means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization in any manner and includes any person who renders any advice, consultancy or technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they also carry out certain incidental and ancillary functions such as maintaining the plant with its team of experts including engineers. 24.3 The original authorities found that the appellants rendered Consulting Engineer's Service, mainly by commenting on the designs and drawings prepared by the EPC contractors and by making suggestions on drafting the operating manual for the plant. These activities, we find, were undertaken prior to the material period. The comments and suggestions had been made in the interest of eventual efficient running of the plant by the appellants, then under erection by the EPC contractors. As the plant is run by the appellants, it cannot be held that they had rendered engineering consultancy to owner or anybody else by the impugned activities sought to be classified as engineering consultancy. As per Clause 31 of Section 65 of the Act, Consulting Engineer is any qualified engineer or an engineering firm who renders any consultancy or technical assistance to a client in engineering. We find that the appellants did not render any such services to any client as Consulting Engineer. 24.4 We also find that appellants in the Rolls Royce Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards the finding that the appellants acted as a C F Agent for the owner, we find that as per Clause 25 of Section 65 of the Act, the term Clearing and Forwarding Agent's services applies to services of clearing and forwarding operations rendered in any manner by any person to any other person. In the subject case the owner is responsible to provide the primary fuel lignite at the project site. For this purpose the owner had entered into a transportation agreement with Chettinad Lignite Transport Services Ltd. The appellants are responsible for maintaining certain level of inventory of fuel at the project site and also at the NLC mine head. The transport of lignite between two points is the responsibility of the owner. CMS coordinating delivery of lignite with transporting agent and ensuring that the fuel of required specification is supplied cannot be held as a separate service rendered by it. Ensuring quality of the fuel and its availability to run the plant without interruption are functions incidental to the operation of the plant for generating power. 27. The order impugned in appeal No.S/143/06 found the services rendered by CMS to be also Business Auxiliary Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice to themselves and not to another person. Therefore no liability is incurred by the appellants on this account. 29. A works contract for manufacture of an item as prescribed in Section 2f of the Central Excise Act, 1944 cannot be vivisected to charge tax on some part of the activities involved. In our considered view, this is what the lower authorities have done in the cases covered by both the appeals. Moreover, in the first appeal there is demand on different activities of the O M contractor categorized as Management Consultant, Consulting Engineer and Clearing and Forwarding Agent without giving the taxable value in each case. We find that tax cannot be levied when the liability of the assessee is not determined precisely with respect to each of the taxable services found to have been rendered. No tax can be levied without specifying taxable value. 30. In the impugned order the Commissioner had rendered a finding that the facility was run by entering into contracts with different organizations such as CMS who had contracted to undertake the operation and maintenance of the facility. He found that though CMS was operating the facility for generating electricit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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