2025 (6) TMI 1361 - AT - Service Tax

Dropping of proceedings initiated against the Respondent in terms of the SCN and subsequent Statement of Demand - Classification of services - services rendered by the Respondent prior to 01.06.2007 under composite turnkey contracts - Erection Commissioning or Installation Services and Commercial or Industrial Construction Services or only under Works Contract Service? - HELD THAT - It is found that the appellant s challenge to the impugned Order in Original is principally on the ground that the adjudicating authority has not followed the administrative instructions to keep the matter in call book since the Department has preferred appeals against the various decisions of the Tribunal involving the same issue. The circulars/clarifications issued by the Central Government on the interpretation or application of different provisions merely reflect their understanding of the statutory provisions and if they run contrary to the statutory provisions they have really no existence in law - while the question whether an adjudicating authority who has in his quasi-judicial capacity adhered to judicial discipline and passed an adjudication order can be proceeded against for a perceived violation of any administrative instructions namely as that contained in master circular dated 10th March 2017 itself is moot; conspicuously there is complete absence of any averment in the grounds of appeal much less any evidence that the officer has been proceeded against on the administrative side for the alleged recalcitrant non-adherence to the said administrative circular to substantiate the earnestness of the ground that the adjudicating authority has by not following the Board s instruction acted without jurisdiction and put the Department in jeopardy; which itself is indicative of the speciousness of the ground raised. The said contention/ground of the appellant that for non-adherence to the Departmental administrative instructions the legally tenable order issued by the adjudicating authority in his capacity as a quasi-judicial authority is required to be set aside is thus totally misconceived and devoid of merits. It is also found in the instant case that the demand in the show cause notice (SCN) has been raised on the allegation that the services rendered by the Respondent are classifiable under the categories of erection commissioning and installation service and commercial or industrial construction service for the entire period covered in the SCN as well as for the period covered by the subsequent Statement of Demand. Therefore the adjudicating authority could not possibly have framed the question in the manner in which the appellant has expressed in the grounds of appeal and then gone on to confirm the demand under the category of works contract service completely different from the categories under which the SCN and SOD proposed to classify the services of the Respondent. It is a settled principle in law that when the proposal is not made in the show cause notice the Department cannot travel beyond the show cause notice. The Judgements of the Honourable Apex Court in Commissioner of Customs Mumbai v Toyo Engineering India ltd 2006 (8) TMI 184 - SUPREME COURT and CCE Bhubaneswar-II vs. Champdany Industries Ltd 2009 (9) TMI 7 - SUPREME COURT lay down the ratio that unless the foundation of the case is made out in the show cause notice revenue cannot argue in Court a case not made out in the show cause notice. Thus the said ground raised by the appellant in this regard is wholly untenable. Conclusion - The services provided by the assessee in respect of the turnkey projects executed by it under composite contracts for the period prior to 01.06.2007 cannot be classified and levied to service tax under Commercial or Industrial Construction Services and Erection Commissioning and Installation services. Appeal dismissed.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal are:

• Whether the adjudicating authority's order dropping the proceedings against the Respondent under the Show Cause Notice and Statement of Demand was legally tenable.
• Whether the services rendered by the Respondent prior to 01.06.2007 under composite turnkey contracts are taxable under the categories of "Erection, Commissioning or Installation Services" and "Commercial or Industrial Construction Services" or only under "Works Contract Service".
• Whether the adjudicating authority erred in not keeping the proceedings in abeyance (call book) pending the outcome of appeals filed by the Department before the Supreme Court against Tribunal decisions on similar issues.
• Whether the adjudicating authority was justified in framing the issue narrowly as to classification under specific taxable services rather than broadly as to the levy of service tax on contracts entered prior to 01.06.2007.
• Whether the Department could demand service tax under categories not mentioned in the Show Cause Notice or Statement of Demand.

Issue-wise Detailed Analysis

1. Legality of the Adjudicating Authority's Order Dropping Proceedings

Legal Framework and Precedents: The adjudicating authority relied heavily on the Supreme Court's decision in Commissioner of Central Excise and Customs, Kerala vs. Larsen & Toubro Ltd., 2015 (39) STR 913 (SC), which held that indivisible or composite works contracts executed prior to 01.06.2007 were not liable to service tax under "Commercial or Industrial Construction Services" or "Erection, Commissioning and Installation Services." The Supreme Court clarified that such services could only be taxed as "Works Contract Service" from 01.06.2007 onwards.

Court's Interpretation and Reasoning: The adjudicating authority, supported by the Tribunal, interpreted Larsen & Toubro as establishing that composite turnkey contracts involving supply of materials and civil works are not taxable under the categories alleged by the Department prior to 01.06.2007. The authority further noted that the nature of services did not change post 01.06.2007 and hence classification under the disputed categories was impermissible.

Key Evidence and Findings: The Respondent's contracts were composite turnkey contracts covering design, procurement, supply, erection, testing, and commissioning of treatment plants. The Department's demand was based on classification under erection and construction services, but the adjudicating authority found these contracts to be works contracts not taxable under those categories for the relevant period.

Application of Law to Facts: Applying Larsen & Toubro and subsequent authoritative rulings, the Tribunal concluded that the demand for service tax under the impugned categories was unsustainable and the adjudicating authority correctly dropped the proceedings.

Treatment of Competing Arguments: The Department argued that the contracts had price breakups and taxable components, but the Tribunal held that the demand must be confined to the categories mentioned in the Show Cause Notice and that the nature of composite contracts precluded classification under the disputed categories.

Conclusion: The adjudicating authority's order dropping the proceedings was legally sound and consistent with binding Supreme Court precedent.

2. Obligation to Keep Proceedings in Abeyance Pending Supreme Court Appeals

Legal Framework and Precedents: The Department relied on administrative instructions, including a master circular dated 10th March 2017, and decisions such as UOI v. West Coast Paper Mills (2004) and Kriti Shrimankar v. Commissioner (2018), arguing that proceedings should be kept in call book pending Supreme Court appeals.

Court's Interpretation and Reasoning: The Tribunal referred to the Supreme Court's decision in Commissioner of Central Excise & Service Tax, Rohtak v. Merino Panel Product Ltd. (2022) which clarified that circulars and administrative instructions cannot override binding judicial decisions. The Tribunal emphasized that once the Supreme Court has pronounced binding law, adjudicating authorities must follow it and are not legally obliged to keep proceedings pending merely because the Department has filed appeals.

Key Evidence and Findings: The Tribunal noted absence of any stay of the impugned orders by the Supreme Court and no evidence that the adjudicating authority faced any administrative penalty for not following the circular.

Application of Law to Facts: The Tribunal held that administrative instructions do not bind quasi-judicial authorities when they are adjudicating based on binding judicial precedent. Thus, the adjudicating authority was correct in proceeding with adjudication and disposing of the matter on merits.

Treatment of Competing Arguments: The Department's reliance on administrative circulars and pending appeals was rejected as legally untenable and inconsistent with the principle of judicial discipline and Article 141 of the Constitution.

Conclusion: There was no legal obligation to keep the proceedings in abeyance, and the adjudicating authority acted within jurisdiction in deciding the matter on merits.

3. Framing of Issues by the Adjudicating Authority

Legal Framework and Precedents: The Department contended that the adjudicating authority framed the issue too narrowly by focusing solely on classification under "Commercial or Industrial Construction Services" and "Erection, Commissioning and Installation Services" rather than broadly on levy of service tax on contracts entered prior to 01.06.2007.

Court's Interpretation and Reasoning: The Tribunal observed that the demand was specifically raised under those two categories in the Show Cause Notice and Statement of Demand. It is a settled principle that the Department cannot travel beyond the scope of the Show Cause Notice. Reliance was placed on Supreme Court rulings in Commissioner of Customs, Mumbai v. Toyo Engineering India Ltd. and CCE, Bhubaneswar-II v. Champdany Industries Ltd. which hold that the foundation of the case must be laid in the Show Cause Notice.

Key Evidence and Findings: The adjudicating authority did not reclassify the demand under "Works Contract Service" as alleged by the Department but held that the demand under the categories mentioned was not sustainable.

Application of Law to Facts: Since the Department's demand was confined to specific taxable services, the adjudicating authority rightly framed the issues accordingly and did not err in refusing to entertain arguments beyond the pleadings.

Treatment of Competing Arguments: The Department's argument was rejected as it sought to expand the case beyond the Show Cause Notice, which is impermissible.

Conclusion: The framing of issues by the adjudicating authority was proper and legally correct.

4. Classification of Respondent's Services for Service Tax Liability

Legal Framework and Precedents: The Supreme Court's Larsen & Toubro decision and subsequent affirmations, including Total Environment Building Systems Pvt. Ltd v. Dy. Commissioner of Commercial Taxes (2022), establish that indivisible composite turnkey contracts executed before 01.06.2007 are not liable to service tax under "Commercial or Industrial Construction Services" or "Erection, Commissioning and Installation Services." Such contracts are taxable only under "Works Contract Service" from 01.06.2007 onwards.

Court's Interpretation and Reasoning: The Tribunal found that the Respondent's activities clearly fell under the category of "execution of works contract" and not under the categories alleged by the Department. The adjudicating authority's reliance on Larsen & Toubro was appropriate and binding.

Key Evidence and Findings: The composite nature of the contracts, including supply of materials and civil works, was determinative. The Department's attempt to classify parts of the contract under different taxable categories was rejected.

Application of Law to Facts: The Tribunal applied the binding Supreme Court precedent to conclude that the demand for service tax under the disputed categories was unsustainable.

Treatment of Competing Arguments: The Department's reliance on price breakups and partial classification was dismissed as inconsistent with the legal principle that composite contracts must be classified as a whole.

Conclusion: The Respondent's services were correctly classified as works contract services, not taxable under the categories alleged by the Department for the relevant period.

Significant Holdings

"It is thus clear that only those contracts which are services simpliciter, not involving supply of materials, will be subject to levy of service tax under Commercial or Industrial Construction Services and Erection, Commissioning and installation services prior to 01.06.2007 and thereafter."

"The services provided by the assessee in respect of the turnkey projects executed by it under composite contracts for the period prior to 01.06.2007 cannot be classified and levied to service tax under Commercial or Industrial Construction Services and Erection, Commissioning and Installation services in the light of the Hon'ble Supreme Court judgement in the case of Larsen & Toubro."

"In respect of any composite contract which is in the nature of works contract, service tax cannot be demanded under any taxable service other than works contract service after 01.06.2007."

"Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court."

"There is no legal compulsion for the adjudicating authority to keep the proceeding in abeyance and not decide the case merely because the Department's Special Leave Petition is admitted in Supreme Court."

"Unless the foundation of the case is made out in the show cause notice, revenue cannot argue in Court a case not made out in the show cause notice."

"The judgment of this Court in the case of Larsen and Toubro Limited has stood the test of time and has never been doubted earlier... The said decision has been followed consistently by this Court as well as by various High Courts and the Tribunals."

"The appeal, being devoid of merits, is dismissed."