TMI Blog2011 (3) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... urely for design and engineering, in all other contracts, the contracts contain clauses for design and engineering for which separate charges are mentioned Since during the period for July 1997 to January 2004 neither service tax registration for consulting engineer’s service was obtained, nor ST-3 returns were filed, penalty under section 77 has been rightly imposed on the Appellant for contravention of the provisions of sections 69 and 70 of the Finance Act, 1994 read with rules 4 and 7 of the Service Tax Rules, 1994 - Appellant’s conduct during the period of dispute amounts to suppression of facts, as while they were providing the consulting Engineering service, taxable since 7-7-1997, they till mid January 2004, neither informed the Department about this activity, nor applied for service tax registration, nor paid the service tax - Appeal is dismissed - ST/79/2007 - ST/98/2011 - Dated:- 14-3-2011 - D.N. PANDA, RAKESH KUMAR, JJ. ORDER Rakesh Kumar, Technical Member - The facts giving rise to this appeal are, in brief, as under : 1.1 The Appellants are engaged in the manufacture of Telecommunication equipment, UPS Systems, and primary and secondary i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (b) imposition of penalty on them under sections 76, 77 and 78 of the Finance Act, 1994 for contravention of the provisions of sections 68, 67 70 of the Act read with rules 4, 6 7 of the Service Tax Rules, 1994. 1.3 The above show-cause notice was adjudicated by Additional Commissioner, Central Excise, Jaipur vide Order-in-Original dated 31-1-2006 by which (a) Service tax demand of Rs. 40,71,946 was confirmed against the Appellant under section 73 of the Finance Act, 1994 along with interest on it under section 75 ibid; (b) penalty of Rs. 40,71,946 was imposed on the Appellant under section 78 ibid; and (c) while penalty of Rs. 1,000 was imposed under section 77, penalty of Rs. 100 per day from the date when the Service tax became payable till the date of payment of tax was imposed under section 76 of the Act. 1.4 On appeal to Commissioner, Central Excise (Appeals), their appeal was dismissed vide order-in-appeal No. 92/(GRM)ST/JPR- 1/06, dated 31-10-2006. It is against this order of CCE (Appeals), that the present appeal has been filed. 2. Heard both the sides. 2.1 Shri P.K. Sahu, Advocate, the learned Counsel for the Appellant, made the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point responsibility. Such a service is different and distinct from its component activities-designing/Engineering, supply of goods, erection, installation or commissioning and the same being an indivisible contract, cannot be vivisected for charging service tax on its component which may be covered by the definition of Consulting Engineer s Service . (4) The Larger Bench of the Tribunal in case of CCE v. BSBK (P.) Ltd. 2010 (253) ELT 522 (New Delhi - CESTAT) has taken a view contrary to that in the Tribunal s judgment in case of Daelim Industrial Co. Ltd. (supra) holding that after 46th Constitution amendment, the service part of a turnkey contract can be separated from the goods part for levy of service tax. But in following cases, the Courts have refused to apply the legal fiction of Article 366(29A) to the laws other than Sales Tax. (a) Hon ble Supreme Court s judgment in case of Bharat Sanchar Nigam Ltd. v.Union of India 2006 (3) SCC 1 wherein it was held that the ratio of State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. AIR 1958 SC 560 on indivisibility, of composite work contract survived the 46th Constitutional amendment as the legal fiction created by Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s judgment in case of Sentinel Rolling Shutters Engg. Co. (P.) Ltd. v. Commissioner of Sales Tax [1978] 4 SCC 260 wherein it was held that true nature of the contract does not depend upon the mode of payment of the amount provided in the contract and the parties may provide by mutual agreement that the amount stipulated in the contract may be paid at different stages of execution of the contract, but that would not make the contract one for sale of goods if it is otherwise a contract for work and labour. (7) The contracts in this case are indivisible lump sum turnkey contracts with single point responsibility. Such contracts cannot be treated as severable contracts for supply of goods and activities like drawings and designing, erection, installation and commissioning etc., as a severable contract is that which includes two or more provisions, each of which can be enforced separately so that failure to perform one provision does not necessarily becomes the breach of the entire contract. Such contracts became taxable as Work Contract Service with effect from 1-6-2007 under section 65(105)(zzzza) of the Finance Act, 1994 read with rule 2A of the Service Tax (Determination of Va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of the equipment at their client premises, which is clear from show-cause notice dated 15-1-1991 issued to the Appellant for inclusion of the charges for erection, installation and commissioning of the equipment in the assessable value for charging central excise duty on the equipment manufactured and cleared by the Appellant. In view of this, in any case, longer limitation period for demand of allegedly non-paid service tax is not available to the Department. 2.2 Shri Sumit Kumar, the learned Departmental Representative made the following submissions. (1) It is not disputed that technical advice, consultancy and technical assistance was provided. It is claimed that these services were provided as part of indivisible Lumpsum Turnkey Contracts whose objective was supply of installed and functioning control system/equipment. The adjudicating authority and first appellate authority have found that the services rendered as consulting engineer are clearly distinguishable as the clauses of the contracts show the intention to provide these services and to charge separately for the same. None of the contracts, in question, is an indivisible work contract for erection, instal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision in the Finance Act, 1994 that taxable service mentioned in section 65(105) will not be taxable if provided as a lump sum Turnkey contract (LSTK) or as a work contract or as a part of a LSTK or as part of a work contract. If a service is taxable under section 65(105), it will attract service tax even if it is provided as a LSTK or as a part of LSTK. In a plethora of cases, it has been stated by the Apex Court that where the language is clear, the intention is to be gathered from the language used and the courts cannot add words to a statute or read into it something which is not there. (5) The Appellant s plea that the charges for drawings, designs, engineering/technical assistance shown in the contracts and invoices are not the actual charges for these service is un-acceptable, as the contracts have clauses regarding preparation of drawings, designs and providing other technical assistance and invoices show separate charges for these services. Documentary evidence cannot be countered by oral evidence. No documentary evidence has been produced by the Appellant to show that the charges for drawings, designs, engineering or technical assistance shown in the contracts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant had been providing this service, they neither intimated the Department about this activity nor did they obtain any service tax registration. The Department came to know about their Engineering Consultancy activity only from their website. The Appellant are, thus, guilty of suppressing the relevant information from the Department and therefore longer limitation period under section 73(1) of the Finance Act, 1994 is available to the Department. For the same reason, penalty under section 78 has been rightly imposed. 2.3 Shri P.K. Sahu, Advocate, in rejoinder emphasised on the following points. (1) A LSTK contract has an identity separate from its component activities and the same has to be treated as one indivisible contract. It cannot be split up for subjecting its components to service tax. (2) In Larger Bench judgment in case of BSBK (P.) Ltd. (supra) cited by the learned DR, the question as to whether the legal fiction created by introducing article 366(29A) of the Constitution by 46th Constitutional amendment for the purpose of charging sales tax on transfer of property in goods involved in work contracts and certain other contracts which are not sale under Sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contracts of the Appellant are indivisible lump sum turnkey contracts for design, engineering, supply, erection, installation, testing commissioning of central instrumentation systems, and the objective of these contracts is delivery of installed and functioning C I system, such indivisible contracts cannot be vivisected for changing tax on design engineering component. It has also been pleaded that service tax could be charged on service portion of such contracts only with effect from 1-6-2007 under section 65(105)(zzzza) of the Finance Act, 1994, read with rule 2A of the Service Tax (Determination of Value) Rules, 2006, as Work Contract Service and prior to 1-6-2007, no tax could be charged on such contracts. It is also pleaded that in any case, the bulk of the demand is time barred, as longer limitation period is not available to the Department as the Department was all along aware that when the Appellant erect, install commission the control instrument system supplied by them, they charge amount towards design engineering from the clients along with charges for the goods supplied. Thus, the points to be decided in this case are as under: (1) Are the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anning training, and (g) Trouble shooting and technical services including establishing system and procedures for an existing plant. 4.2 There is no dispute that the Appellant is covered by the definition of Consulting Engineer . The original adjudicating authority as well as the Commissioner (Appeals) have given clear findings that the Appellants contracts with their clients required them to prepare basic engineering drawings as well as detailed engineering drawings of the control instrumentation System to be installed and in the invoices the charges for these jobs and in some cases, for training of the clients personnel, have been separately shown. The preparation of basic engineering drawings detailed engineering drawings, on the basis of which erection and installation work is done and training of the clients personnel in operation maintenance of the equipments installed is clearly technical assistance provided to the clients and hence the same is covered by the definition of Consulting Engineer s services. 5. Are the Appellant s contracts with their customers indivisible lump sum Turnkey Contracts for Designing of erection, installation commissioning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the intention of the contract, is taxable. If such a service contract involves transfer of property in goods in course of providing the service, by invoking the legal fiction of Article 366(29A) of the Constitution of India, for the purpose of charging sales tax, this contract can be treated as a contract for sale of goods which have got passed on to the service receiver either as such or in changed form and a contract for service and the deemed sale portion can be subjected to sales tax. But for charging service tax on such a contract, the legal fiction of Article 366(29A) is of no relevance and the contract will attract service tax if the service is taxable under section 65(105) of the Finance Act, 1994. 5.2.1 As against indivisible contracts, whether for sale or for service, there are composite contracts consisting of sale as well as a service or sale as well as more than one service. In such contracts, there is intention for sale as well as service, whether one service or more than one service. As observed by Hon ble Supreme Court in para 13 of its judgment in case of Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204 in respect of such contracts, sales tax co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (AIR 1957 MP 76) the question was whether photographic materials imported and used in the process of manufacturing photographic work, copies of which were supplied by the assessee to a customer, was a transaction involving sale of those materials. The High Court held that such a transaction did not cease to be a sale merely because the materials were not sold directly in their original form but in another form, forming the components of the finished product, namely, the copies of the photograph, and that the transaction was not merely the performance of skilled services but the supply of finished goods. This was, however, a border line case. The transaction might well be considered as one of service, during the performance of which, a transfer of certain materials, in respect of which there was no contract for sale, either express or implied, may be said to have taken place. An illustration of such a kind is furnished by the case of United Bleachers Ltd. v. State of Madras [1960] 11 STC 278 (Mad.). In that case the assessee bleached and dyed, calendared, pressed and folded, unbleached yarn and cloth manufactured by his customer textile mills. The bills issued by the assessee conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . But the decision in that case did not rest on there, being a transfer of packing materials in favour of the customer. There was evidence that such a transfer was for consideration, inasmuch as the amounts charged as remuneration for service also contained charges for the packing materials, though such charges were not separately shown in the assessee s accounts. In such a state of evidence it would be possible for the Court to infer a separate implied contract of sale of packing materials and not as part of the service of drying raw tobacco and delivering it in packed condition. Though the judgment of Hon ble Andhra Pradesh High Court in case of A.S. Krishna Co. Ltd. v. State of Andhra [1956] 7 STC 26 was overruled by Hon ble Apex Court, in the case of Government of Andhra Pradesh v. Guntur Tobacco Ltd. AIR 1965 SC 1396 observing that in absence of any evidence from which contract to sell packing material could be inferred, the respondent s contract of drying tobacco leaves with their customer must be treated as contract of service, the Apex Court in this case held that whether a contract for service or for execution of work involves a taxable sale of goods must be decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be ascertained from the terms of the contract. Similarly if in a contract there is intention to provide more than one services - A, B C and charge for the same, it will be treated as a composite contract for the services A, B C. A contract would be an indivisible contract for a particular service if the intention of the contract is providing that particular service for some consideration and use of other service/services or goods or both is incidental. Charging of a fixed lump sum price or single point responsibility for performance of the contract involving use of goods and services, do not make such a contract an indivisible contract as, as discussed, above, the identity of a contract - whether an indivisible contract for a service or an indivisible contract for sale of goods or a composite contract for sale as well as service or services depends upon the intention of the contracting parties, as expressed in the wordings of the contract. 5.3 There is nothing in the language of section 65(105) or section 66 of the Finance Act, 1994 from which it can be inferred that for attracting service tax, the services specified in section 65(105) must be standalone activity or that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in composite contract and segregated elements fall under respective fields of taxation, has not considered the judgments of Hon ble Supreme Court in cases of Geo Miller Co. (P.) Ltd. (supra), Southern Petrochemical Industries Co. Ltd. (supra), Federation of Hotels Restaurant Association of India (supra) wherein it was held that the legal fiction created by Article 366(29A) for the purpose of enabling the State Governments to charge sale tax or transfer property in goods involved in transactions, which are not sales transaction under Sale of Goods Act, 1930, cannot be extended to fields other than sales tax, has not been discussed at all, but when a contract is a divisible contract of sales service in which separate intention for sale of goods and rendering of service is discernible, even without invoking the legal fiction of Article 366(29A), it can be said that service tax can be charged on the service component, if the service/services are taxable service under section 65(105) of the Finance Act, 1994. 5.4 It has been pleaded that Government s SLP to Supreme Court against Tribunal s judgment in case of Daelim Industrial Co. Ltd. (supra) was dismissed by the Hon ble Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taxable service tax would be attracted. The question of vivisection of an indivisible work contract is relevant only in the context of charging sales tax on the transfer of property in goods involved in providing of service, for which by 46th Constitutional amendment Article 366(29A) containing extended definition of Tax on sale or purchase of goods was introduced. But there is no need to invoke the legal fiction of Article 366(29A) for charging service tax on a work contract. 5.4.2 The Appellant have cited the judgment of House of Lords in case of British Tele Communications Plc. (supra) and Card Protection Plan Ltd. (supra). 5.4.2.1 In the case of Card Protection Plan Ltd. (supra) the dispute was to whether the service provided by CPP to its Customers which comprised of Insurance against loss of credit card, passport and car keys as well as services of convenience is to be treated as one single supply of service of insurance and hence fully exempt from value added tax or is to be treated as two service transaction of insurance service and of service of convenience, the latter being chargeable to VAT. The House of Lords having regard to the essential features of transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 defines taxable service in relation execution of a work contract as any service provided or to be provided, to any person, by any other person in relation to the execution of a works contract, excluding work contract in respect of roads, airports, railways, transport terminal, bridges, tunnels and dams . As per the Explanation to section 65(105)(zzzza), for the purpose of this sub-clause, work contract means a contract wherein (i) transfer of property in goods involved in execution of such contract is leviable to tax as sale of goods; and (ii) such contract is for the purposes of carrying out (a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluid, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation fireproofing and water proofing, Lift and escalator, fire escape staircases or elevator; or (b) Construction of a new building or a civil structure or a part thereof, or of a pipeline, a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding engineering procurement and construction or commissioning (EPC Project) , which involve transfer of property in goods in execution of such contracts and such transfer of property in goods is liable to Sales tax/VAT as sale of goods. Since the definition of work contract is only for the purpose of clause 65(105)(zzzza) which came into force with effect from 1-6-2007, it is valid only for the period with effect from 1-6-2007 and for the types of contracts mentioned in it. Therefore, for the period prior to 1-6-2007, the meaning of Works Contract as commonly understood i.e., a contract for work and labour and in other words, a service contract has to be adopted and it would not be correct to treat a work contract as something different from a service contract. As discussed in para 5.4.1 above, if such a work contract is an indivisible service contract whether or not involving use of goods which get consumed or get passed on to service receiver either as such or in changed form, and that service is taxable, the works contract will attract service tax and if the work contract is a composite contract involving sale of goods and one or more services and those service are taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, installation or commissioning services , commercial or industrial construction service , residential constructions services were taxable even prior to 1-6-2007, even if the same involved use/supply of goods on which Sales tax VAT was payable. Similarly in respect of EPC contracts which are divisible contracts for design engineering, procurement of goods, erection, installations commissioning, service tax was chargeable even prior to 1-6-2007 on these taxable service component. The taxable services covered by section 65(105)(zzza) and the services covered by section 65(105)(zzd) [erection, installation or commission services], section 65(105)(zzq) (Commercial or industrial construction service) and section 65(105)(zzzh) [residential construction service] are overlapping. While with effect from 1-6-2007, following the principle of harmonious construction, it can be said that while section 65(105)(zzzza) would cover the services defined by section 65(105)(zzd), section 65(105)(zzq), section 65(105)(zzzh) and EPC contracts which involve transfer of property in goods on which tax as sale of goods is leviable, and section 65(105)(zzd), 65(105)(zzq) and section 65(105)(zzzh) will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied that the contracts in this case have a distinct component of activity, coming within the purview of consulting Engineer s service and service tax under section 66 read with section 65(105)(g) of the Finance Act, 1994 would be chargeable on the amount charged for drawings/designs, Engineering , training, etc. It has been pleaded by the Appellant that the charges for drawings, designing, engineering, training etc., as mentioned in the contract, are only milestone payments, not the actual charges for their activities. This contention is unacceptable, as when from the contracts and the invoices raised by the Appellant, it is clear that they have charged their clients for drawings/designing, Engineering, and technical training, if the Appellant claim that the charges as mentioned in the contracts and invoices for drawings/designs, Engineering, training are not for these activities, the burden of proving this by documentary evidence is on them. But no such evidence has been produced. In this regard, the judgment of Hon ble Supreme Court in case of Sentinel Rolling Shutter Engg. Co. (P.) Ltd. (supra) cited by the Appellant wherein Hon ble Court observed that the true nature of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineering and erection, installation and commissioning . In this regard, the Appellant point to the show-cause notice dated 15-1-1991 issued to them for demand of allegedly short paid central excise duty in respect of clearances of instrument and apparatus during 1986-87 on the ground that the amounts recovered by the Appellants from their customers towards Engineering charges and Erection and commissioning charges were not included in the assessable value of the goods. 6.2 The central excise show-cause notice dated 15-1-1991 for including Engineering charges and erection, installation and commissioning charges in the assessable value of the goods cleared by the appellant to their customers and charging differential duty on this basis was dropped vide order-in-original No. 119/94, dated 14-7-1994. Therefore after 14-7-1994, the Department would no longer be interested in engineering charges or erection, installation and commissioning charges . The consulting engineer s service became taxable with effect from 7-7-1997. But the Appellant while providing consulting Engineer s service in form of preparing basic engineering drawing as well as detailed engineering drawing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted when any service tax has not been levied or paid or has been short-levied or short-paid or has been erroneously refunded by the reason of : (a) fraud, or (b) collusion; or (c) will ful misstatement; or (d) suppression of facts or (e) contravention of any of the provisions of Chapters V and VA of Finance Act, 1994 or of the Rules made thereunder. 7.2.1 As discussed in para 6 above, the Appellant s conduct during the period of dispute amounts to suppression of facts, as while they were providing the consulting Engineering service, taxable since 7-7-1997, they till mid January 2004, neither informed the Department about this activity, nor applied for service tax registration, nor paid the service tax. Though section 80 of the Act provides that notwithstanding anything contained in the provisions of sections 76, 77 and 78, no penalty shall be imposable on this assessee for any failure referred to in the said provisions if the assessee proves that there was reasonable cause of the said failure, no valid reason has been given by the appellant for their failure to obtain service tax registration during the period of dispute or at least inform the Department abo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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