2025 (6) TMI 442 - AT - Service Tax

Liability of appellant to pay service tax - execution of flood lighting work executed along the Indo-Bangladesh border - sub-contractors executing the work under NPCC are liable to pay Service Tax under the category of Erection Commissioning or Installation Services or Works Contract Services - HELD THAT - The main appellant namely NPCC was entrusted with the execution of flood lighting work along the Indo-Bangladesh Border within the state of Tripura Meghalaya for which NPCC had executed Memorandum of Understanding(s) with the Ministry of Home Affairs and the contract was executed on Deposit Basis as per CPWD norms and NPCC acted only as an executing agency and supervisory body. Therefore no demand of Service Tax is sustainable against NPCC in terms of Circular No. 125/7/2010-ST dated 30.07.2010 - Admittedly the appellant NPCC is only an implementing agency for Central Government therefore no Service Tax is payable by NPCC. With regard to co-appellants it is admitted fact that the work has been executed being a sub-contractor of NPCC which include supply of material and the said issue has been examined by this Tribunal whether in this circumstances the appellant are liable to pay Service Tax or not wherein this Tribunal has observed the demand if any could have been raised under the Works Contract Service. The demand in this case has been made under Erection Commissioning and Installation Service. ECIS does not include the contract where transfer of materials is involved. Since the demand has been raised under ECIS and the nature of contract does not fall under this category the demand on this head it has to fail. Admittedly in the matter in hand the appellants have executed works alongwith material therefore merit classification of their services Works Contract Service as held by the Hon ble Apex Court in the case of Larsen and Toubro Ltd. 2015 (8) TMI 749 - SUPREME COURT wherein it has been held that where the contract in question is a composite contract involving both supply of goods and provision of services in relation to construction or infrastructure projects such contracts must be assessed under the category of Works Contract Service . As in these cases Service Tax has been demanded under the category of Erection Commissioning or Installation Services (ECIS) whereas the correct classification involves in Works Contract Service in that circumstances the demand of Service Tax under the category of Erection Commissioning and Installation Services is not sustainable. Conclusion - Demands confirmed against the appellants under the category of Erection Commissioning or Installation Services are set aside. As no demand is sustainable consequently no penalty can be imposed against the appellants. The impugned order set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal in these appeals are:

1. Whether the appellant NPCC, acting as an implementing agency under a Centrally Sponsored Scheme (CSS) with funding from the Central Government, is liable to pay Service Tax on the flood lighting work executed along the Indo-Bangladesh border.

2. Whether the sub-contractors executing the work under NPCC are liable to pay Service Tax under the category of "Erection, Commissioning or Installation Services" (ECIS) or whether their activity falls under "Works Contract Service".

3. Whether the demand of Service Tax under ECIS is sustainable in view of the nature of the contracts and applicable legal precedents.

4. Whether penalties imposed in respect of the Service Tax demand are sustainable.

Issue 1: Liability of NPCC as Implementing Agency under Centrally Sponsored Scheme

The relevant legal framework includes Circular No. 125/7/2010-ST dated 30.07.2010 issued by the Central Board of Excise and Customs (CBEC), which clarifies the non-applicability of Service Tax on services provided by State Governments or their agencies under Centrally Sponsored Schemes funded by the Central Government.

The Circular explains that the relationship between the Central Government and State Government agencies implementing CSS is not that of principal and agent for taxable services, but rather an administrative arrangement where the State Government acts as an implementing agency bound to execute the scheme on receipt of a grant. Consequently, the grant is not consideration for a taxable service and Service Tax cannot be levied on such transactions.

The Court interpreted this Circular as binding and applicable to NPCC, which had executed the flood lighting project under a Memorandum of Understanding with the Ministry of Home Affairs on a deposit basis as per CPWD norms. NPCC acted purely as an executing and supervisory agency without direct involvement in installation or erection.

The key finding was that NPCC's role as implementing agency under a CSS exempts it from Service Tax liability. The Circular's explicit language stating that levy and collection of Service Tax on State government agencies implementing CSS under central grant is "not legally tenable" was decisive.

The competing argument by Revenue that NPCC's activity falls under ECIS was rejected on the ground that NPCC was not providing taxable services but merely implementing a government scheme.

The conclusion was that no Service Tax demand is sustainable against NPCC.

Issue 2: Classification of Sub-Contractors' Activities and Applicability of Service Tax

The sub-contractors appointed by NPCC executed the actual flood lighting work, including supply of materials and installation. The Revenue contended that these activities fall under "Erection, Commissioning or Installation Services" attracting Service Tax.

The appellants contended that the contracts are composite works contracts involving both supply of materials and provision of services, and therefore should be classified under "Works Contract Service" as per the Apex Court's ruling in Larsen & Toubro Ltd. v. CCE, which was followed by this Tribunal in Vishwanath Projects Limited v. Commissioner of Service Tax.

The Larsen & Toubro judgment established that contracts involving both supply of goods and provision of services in construction or infrastructure projects constitute a separate category known as "Works Contract Service". Such contracts are distinct from pure supply of goods or pure provision of services and must be taxed accordingly.

The Tribunal analyzed the contract documents and found no clear demarcation between the supply of materials and the service component. The absence of a break-up in the contract value between materials and services precluded vivisection of the contract for tax purposes.

The Tribunal observed that the demand of Service Tax was raised on the entire contract value under ECIS, which does not include contracts involving transfer of materials. Since the contract was composite, the demand under ECIS was unsustainable.

The Tribunal applied the legal principle that composite works contracts are taxable only under Works Contract Service post 01.06.2007, the relevant period here.

The Revenue's argument that the contract could be taxed under ECIS was rejected on the basis that ECIS excludes contracts involving transfer of materials, which is inherent in works contracts.

The conclusion was that the demand of Service Tax under ECIS against sub-contractors is not sustainable, and the correct classification is under Works Contract Service.

Issue 3: Sustainability of Service Tax Demand and Penalty

Given the findings on the nature of NPCC's role and the classification of sub-contractors' contracts, the Tribunal concluded that the Service Tax demands confirmed under ECIS were unsustainable.

Since no demand was sustainable, the imposition of penalties was also held to be unjustified.

The Tribunal set aside the impugned order confirming the Service Tax demand and penalty and allowed the appeals.

Significant Holdings and Core Principles

"Levy and collection of service tax on State government agencies/departments implementing CSS under a central grant, is not legally tenable and therefore in such cases service tax should not be demanded." (Circular No. 125/7/2010-ST)

"Works contract is a separate specie of contract known to the trade and commerce distinct from a contract for supply of goods or a contract for supply of services." (Larsen & Toubro Ltd. ruling)

"ECIS does not include the contract where transfer of materials is involved."

"Since the demand has been raised under ECIS and the nature of contract does not fall under this category, the demand on this head it has to fail."

"No Service Tax is payable by NPCC as it is only an implementing agency for Central Government under CSS."

"The demand of Service Tax under the category of Erection, Commissioning or Installation Services is not sustainable where the contract is composite and involves supply of materials."

"Consequently, demands confirmed under ECIS and penalties imposed are set aside."