SERVICE TAX IS NOT PAYABLE TO ERECTION, COMMISSIONING OR INSTALLATION SERVICE WHEN EXCISE DUTY IS PAID BY THE MANUFACTURER ON VALUE INCLUDING INSTALLATION CHARGES

[Mr. M. GOVINDARAJAN]

             'Erection, Commissioning or installation' service came into the service tax net with effect from 10.09.2004.   The definition for the said service has been amended twice, one with effect from 16.06.2005 and the other from 01.05.2006.   As per the amended provision the definition 'Erection, commissioning or installation service' is any service provided by a commissioning and installation agency in relation to-

     (i)    erection, commissioning or installation of plant, machinery, equipment or structures whether pre-fabricated or otherwise; or

     (ii)    installation of-

     (a)    electrical and electronic devices, including wirings or fittings therefore; or

     (b)   plumbing, drain laying or other installation for transport of fluids; or

     (c)    heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work; or

     (d)   thermal insulation sound insulation fire proofing or water proofing;

     (e)    lift and escalator fire escape staircases or traveators; or

     (f)     such other similar services.

             From the above definition we can infer the ingredients of the definition.  The services must be provided by commissioning and installation agency.

             In many cases the cost of the machinery includes the cost of erection, commissioning and installation charges.   Thus the value of the said services is included in the gross value of the machinery based on which excise duty is payable.   If the excise duty is paid likewise then service tax liability is not there for the erection, commissioning and installation charges.

             In 'Commissioner of Central Excise, Vapi V. Alidhara Textool Engineering Private Limited' - 2009 -TMI - 33376 - (CESTAT AHMEDABAD) erection, commissioning charges have been included in the cost of the machines sold.   The appellants have selected the agency to do this work and once the purchaser enters into an agreement for supply of the machine including the erection and commissioning charges, the responsibility for erection and commissioning is on the manufacturer.   Therefore what is happening in this case is that the supplier of the machine is not only selling the machine but is also providing the service of erection and commissioning.   Once erection and commissioning cost is included, in the transaction value the natural conclusion that would emerge is that the process undertaken in the buyer's premises are actually incidental to manufacturing activity undertaking in the manufacturer's premises.  What has been sold in this case is the complete machine duly erected and commissioner and operational.  The incidental process of erection and commissioning being incidental to manufacture, has to be treated as continuation of the earlier process which started in the manufacturer's premises.  In this case even though the position of the machine in CKD condition gets transferred to the buyer when it is removed from the factory as per the contract, the question to be examined is whether such a service is related directly or indirectly to the manufacture of their goods in question.  The process of erection and commissioning at the buyer's premises is incidental to the manufacture of the machine and therefore the erection and commissioning services provided also can be said to be in relation to the manufacture, since the process in this case is complete only after the erection and commissioning takes place.

              In 'Allengers Medical Systems Limited V. Commissioner of Central Excise, Chandigarh' - 2008 -TMI - 33252 - (CESTAT NEW DELHI) it was observed that where the assessee is paying central excise duty on the manufacture and sale of medical equipments on the total value recovered by them from their customers and where the activities of erection, commission and installation of equipment is a part of sale of excisable goods and where there is no separate charging for erection and commission of equipments, levy of service tax on such activities cannot be held to be proper and legal.   The Tribunal held that activity of installation, erection and commissioning was incidental to the delivery of goods to the customers and as such no service tax can be confirmed against the appellants.

              In 'Maa Sharda Wine Traders V. Union of India' - (2008 -TMI - 34140 - MADHYA PRADESH HIGH COURT) the question placed before the High Court was as to whether bottling of liquor amounts to manufacture of liquor or only packaging so as to attract service tax.   The High Court observed that whether activity amount to manufacture or not it is incumbent to take note of any process which is incidental or ancillary to the completion of the final product.   Whether the final product is excisable or not. The definition of 'manufacture' as contained in Sec. 2(14) of the Act, is an inclusive definition which covers every process whether incidental or artificial by which the intoxicant is produced or prepared. The manufacture does not necessary mean that it is to excisable goods but would include any process which is incidental or ancillary to the completion of manufactured product.  

              In 'Alidhara Texspin Engineers V. Commissioner of Central Excise & Customs, Vapi' - (2010 -TMI - 78915 - CESTAT, AHMEDABAD) the appellant is engaged in the manufacture of textile machineries.  They entered into a contract with their customers for supply of textile machinery and the sale price quoted by them was inclusive of installation and commissioning charges.   By taking the entire contract value as the assessable value of the machinery, central excise duty was paid by them.  The Department as a result of audit objection required the appellant to pay the service tax under the category of 'erection, commissioning or installation' charges.  The appellants were asked to provide the charges recovered by them from their customers for the services provided in respect of erection, installation and commissioning.   The appellants gave reply submitting that since their sale price is inclusive of erection and commissioning charges and they are not discharging the said charges separately and the amount of said charges could not be reported separately.

             The appellants were served with show cause notices proposing to recover the service tax  Rs.8,13,41,574/- on the entire gross value of charged by them from their customers for the manufacture, supply and erection of textile machinery during the period from 2.9.03 to 31.12.06.   Extended period was invoked by alleging suppression with intent to evade payment of service tax, inasmuch as the appellant did not disclose the information as regards collection of charges for the erection, installation and commissioning services and did not file any ST 3 returns with the department.  The Commissioner confirmed the demand as proposed in the notice along with interest and also penalty of identical amount.

 Before the Tribunal, on appeal, the appellant submitted the following:

The contract entered into by them with their buyers was a composite contract for selling and supplying textile machineries in fully installed, commissioned and in operational condition;

The process undertaken at the buyer's premises was actually an incidental with the manufacturing activity and as such the same have to be treated as continuation of manufacturing process;

The excise duty was paid on the entire contract value of the machine inclusive of installation and commission charges and as such the same has to be treated as a manufacture process and no separate service tax can be recovered from the appellants;

There was no separate contract for erection and commissioning of the goods manufactured by them;

The Commissioner has confirmed the service tax on the entire gross value charged by them from their customers, as if the same was for erection and installation of the goods;

If the appellants would have chosen to claim deduction of installation and erection charges from the assessable value of the machinery for the purposes of payment of central excise duty and would have chosen to pay service tax on the paid amount, the actual amount of duty paid by them would have been lower by an amount of Rs.3.60 lakhs approximately.   Having paid the excise duty on the entire value, the appellant does not stand benefited.

         The Revenue contended that the appellants are duly covered by the erection, commissioning or installation service and having undertaken the said services at the buyers premises they are liable to pay duty.  Further the appellants failed to give segregated amount collected for the purpose of erection and installation, the Commissioner was left with no alternative but to confirm the service tax on the entire gross amount charged by the appellants.  

         The Tribunal held that where an activity so integratedly related and connected with the manufacturing activity and the purchase orders are for the complete plant and machineries, duty commissioned without showing any segregated amount recovered for erection and commissioning and where the entire contract value is taken as an assessable value for the purpose of payment of excise duty, no service tax is liable to be paid by the assessee.  The appellants are not liable to pay any service tax.  Accordingly the Tribunal set aside the impugned order confirming the demand and imposing penalties.