TMI Blog2011 (3) TMI 826X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Extended period of limitation - held that:- Just because in 1991 a show cause notice had been issued to the Appellant for including "Engineering charges" and "erection, installation and commissioning charges" in the assessable value of the instruments and equipments being cleared by them to their clients and demand of differential excise duty on this basis, it could not be presumed by the Departmental officers that during subsequent period also they, in addition to sale of the instruments and control equipment manufactured by them, are also engaged in systems design activity. We are, therefore, of the view that the Appellant are guilty of suppressing the relevant information from the Department and, therefore, longer limitation period of five years for recovery of non-paid service tax has been rightly invoked by the Department. Penalty - held that:- Though Section 80 of the Act provides that notwithstanding anything ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 2004, the Appellant, in terms of their Contracts with their clients, provided taxable service of 'Consulting Engineer" to them and charged an amount of Rs.8,07,18,925/- on which service tax chargeable was Rs.40,71,946/-, but they did not pay any service tax in respect of this service provided to their clients. It is also alleged that they never informed the Department that they are providing the taxable service of Consulting Engineers and that the department came to know about this from their website www.ilkota.nic.in. In view of these facts, a show cause notice dated 28.01.2005 was issued to the Appellant for- (a) recovery of allegedly non-paid service tax amounting to Rs.40,71,946/- under Section 73(1) of the Finance Act, 1994 along with interest on it at the applicable rate under Section 75 ibid, and (b) imposition of penalty on them under Section 76, 77 and 78 of the Finance Act, 1994 for contravention of the provisions of Section 68, 67 70 of the Act read with Rule 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 31.01.2006 by which- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that "lump sum turnkey contracts for design, engineering, manufacture, supply, erection, testing commissioning" can not be vivisected to levy service tax on the service components. In this regard, reliance is placed on the Tribunal's judgments in cases of Daelim Industrial Co. Ltd. Vs. CCE, Vadodara reported in 2003 (155) ELT 457 and Larsen Toubro Ltd. vs. Commissioner reported in 2004 (174) ELT 322. The SLP filed by the Department against the judgment in the case of Daelim Industrial Co. Ltd. Vs. CCE, Vadodara (supra) has been dismissed by Hon'ble Supreme Court vide judgment reported in 2004 (170) ELT A181 (SC). (3) Dominant objective of a lump sum turnkey contract for design, engineering, supply, erection, installation, testing commissioning of machinery and equipment is delivery of installed plant or equipment for a lump sum amount single 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, can not be vivisected for charging service tax on its component which may be covered by the definition of Consulti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awing designs prepared are to be treated as service provided by the Appellant to themselves, not a consulting engineer's service provided to clients. Just because drawings were to be approved by the clients, it does not mean that the service of consulting engineer's has been provided. In this regard, reliance is placed on Hon'ble Supreme Court's judgment in cases of Patnaik Co. vs. State of Orissa, reported in AIR 1965 SC - 1655, wherein it was held that a contract for the sale of goods to be manufactured by the seller does not cease to be a contract for sale of goods merely because the process of manufacture is supervised by the purchaser. (6) separate amount indicated in the contract for "drawing/designing or engineering" is only a milestone payment to be released by the clients on preparation and approval of drawings and designs - it can not be treated as value attributable to the drawings designing, as the contracts performed are lump sum Turnkey indivisible contracts. In this regard, reliance is placed on Hon'ble Supreme Court's judgment in case of Sentinel Rolling Shutters Engineering Co. Pvt. Ltd. vs. Commissioner of Sales Tax reported in (1978) 4 - SCC - 260 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion into different supplies for VAT purpose. House of Lords in another case of Card Protection Plan Ltd. vs. Customs Excise Commissioners [(2001) VKHL/4], where the CPP offered the credit card holders, a card protection plan, which in addition to protecting them against financial loss and inconvenience resulting from loss or theft of their credit cards, passports, and car keys, also included other services to assist the card holders in the event of loss of their credit cards, held that for the purpose of VAT, the supply of service by CPP was to be regarded as supply of insurance service and other ancillary service cannot be separated from the principal supply of insurance service for the purpose of VAT. The ratio of those two judgments of the House of Lords is squarely applicable to the facts of this case. (9) In a number of contracts the activity was outside Kota and demand of service tax in respect of such contracts is beyond jurisdiction. (10) The Department, at least since 1991, was aware of the Appellant's activity of drawing and designing, erection, installation commissioning of the equipment at their client' premises, which is clear from show cause notice dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Ltd. vs. CCE, Mumbai (para 5 6), reported in 2006 (3) S.T.R. - 281 (CESTAT - DB); and (g) Indian Farmers Fertilizer Coop. Ltd. vs. CCE, (para 10, 15, 16 17) reported in 2007 (5) S.T.R. - 281 (Cestat). The contracts in this case are identical to the contracts in case of Transformers Electricals, Kerala vs. CCE (supra) (2) A Larger Bench of the Tribunal in case of CCE, Raipur vs. BSBK Pvt. Ltd. reported in 2010 (253) E.L.T. 522 (CESTAT - LB) has held that Lumpsum Turnkey works contracts can be vivisected and discernible service elements can be segregated and subjected to tax if the service/services are taxable. This judgment of larger bench is binding on benches of lesser strength. (3) The lower appellate authority after examining all the contracts has held that the contracts show the rubric of "advice", "consultancy" and "technical assistance" and these have been performed, and payments have been received. When from the contracts it is clear that in terms of the contract, the Appellant were required to prepare the drawings and designs, get the same approved from the clients and thereafter start the work of procurement of equipment, erection, installa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance to this case. (9) Appellant's plea that such contracts involving supply of goods alongwith basket of activities became taxable as "Work Contract Service" u/s 65(105) (2222a) of the Finance Act, 1994 w.e.f. 1/6/07 and prior to 1/6/07, taxable service of consults Engineer provided as part of a work contract was not taxable, is not correct. The tax entry introduced by Section 65(105)(ZZZZa) of the Finance Act, 1994 w.e.f. 1.6.07 is different from other tax entries of the service tax and Hon'ble Bombay High Court's judgment in case of Indian National Shipowner's Association (Supra) citied by the Appellant is not applicable to the facts of this case. The judgment of Hon'ble Karnataka High Court in case of M/s Turbotech Precision Engineering Pvt. Ltd., holding that an activity under work contract was not taxable prior to 1/6/07 is not a binging precedent, as no reasons, have been given in this judgment for arriving at this conclusion. A work contract is a service contract and if that service is taxable prior to 1/6/07, there is no reason why it would not attract service prior to 1/6/07, even if it is provided as a lumpsum work contract. (10) Since the consulting Engineer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neering and technical training of the client's personnel; (d) the Appellant obtained service tax registration for "repair and Maintenance service" on 1.8.03 and for "erection, installation commissioning" and "consulting engineer's service" on 20.01.2004; and (e) In 1991, a show cause notice dated 15.01.91 had been issued to the Appellant for demand of allegedly short paid duty in respect of clearances of instruments and apparatus during 1986-87 on the ground that the amounts charged from the customers towards "engineering charge" and "erection commissioning charge" had not been included in the assessable value of the goods. 3.1 While according to the Department, the Appellants' activity of preparation of drawing, designs and providing technical training to the clients' personnel is consulting Engineers' service, as defined by Section 65 (105) (g) read with section 65 (31) of the Finance Act, 1994 and the Appellant in order to evade the tax on this service being provided by them, neither obtained service tax registration when Consulting Engineers' service became taxable w.e.f. July, 1997 nor informed the department about this activity and therefore, longer limitati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable to the Department for recovery of non-paid service tax. (4) Whether penalty under Section 76, 77 78 of the Finance Act, 1994 is imposable on the Appellants? 3.2 Our answer to these questions are as under- 4. Are the activities of the Appellant, mentioned in the contracts and invoices as "Drawing", "Designing", "Engineering" or "Training" covered by the Definition of Consulting Engineers' service as defined under Section 65 (105)(g) read with Section 65 (31) of the Finance Act, 1994? 4.1 "Consulting engineer", as defined in Section 65 (31) is "any professionally qualified engineer or an engineering firm who, either directly or indirectly renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering". 4.1.1 Section 65 (105) (g) defines Consulting Engineer's service as - "any service provided to a client, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering." 4.1.2 As per the Circular No.B43/5/97-TRU dated 2.7.97 of the Central Board of Excise Customs regarding the scope of "Consulting engineer' service", whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's SLP against which has been dismissed by the Hon'ble Supreme Court vide the order reported in 2004 (170) ELT A 181 (SC) . 5.2 Just as sale is transfer of property in goods from seller to the buyer for some consideration, "service", though not defined in the Finance Act, 1994, is an activity by the service provider for the service receiver for some consideration and the service tax levied by the Central Government is the tax on such activity. The services which attract service tax are defined in various clauses of Section 65 (105) of the Finance Act, 1994 and as per the provisions of Section 66 ibid, a tax at the rate specified in this section is chargeable on all the services referred to is various clauses of Section 65 (105). Since the rate of tax specified in Section 66 is ad-valorem rate, the assessable value on which it is chargeable is determined under Section 67 read with Service Tax (Determination of Value) Rules, 2006, which, if the entire consideration for service is in money, is the gross amount charged for the service and the gross amount includes the value of the other services and the goods, if any, used, for providing the service - the goods used for providing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act for sale of goods and contract for service while the' latter is an indivisible contract for service not involving for sale. A five Judges bench of Hon'ble Supreme Court in case of State of Punjab vs. M/s Associated Hotels of India Ltd., while considering the question as to whether there is sale of goods involved when a Hotelier serves meals to his guests at stated hours and whether the charges for hotel stay charged from the guests can be split up into the charges for lodging and charges for food and the charges for food be subjected to sales tax, the Hon'ble Court also considered the question as to when a contract can be said to be a contract for sale as well as service and in para 8 of the judgment observed that unless there is an intention in the contract to charge for the goods used in providing the service, the contract cannot be treated as divisible contract - one for sale and another for service and the Revenue would not be entitled to split up the contract value, estimate approximately the charges for such material and charge sales tax on the same. In this regard, para 8 of the judgment is reproduced below:- "8. In a case arising under the Assam Sales Tax Act, 194 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 953 Assam 42) and salt in Varasukhi and Co. v. Province of Madras, (1950) 2 STC 1 - (AIR 1951 Mad 254). On the other hand, where a contract is to supply such commodity in a packed condition, it could be inferred, though the contract might not be express, that the intention of the parties was to give and accept delivery of the goods in a packed condition and not to take the principal commodity alone, so that in the contract of sale of such a commodity there was implicit the sale of packing materials as well. Even in a contract of service, such as bleaching and calendaring, where the goods after such processing are delivered packed, a sale of packing materials is possible, quite apart from the contract of service. The question in such cases would be one of evidence, whether there is such a contract besides the one of service. Where, however, there are no such distinct contracts and the contract is one and indivisible, the essential part of which is one of services, packing would be part of or incidental to the services, and unless an intention to charge for the materials used in the packing can be spelt out, the Revenue would not be entitled to split up the contract, estimate approxi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces, if it is first, it is a composite contract for work and sale of goods, when it is of the second category, it is a contract for execution of work, not involving sale of goods. Hon'ble Supreme Court, in the case of State of Tamil Nadu Vs. Anandam Vishwanathan reported in (1989) 1 SCC-613 has held that nature of a contract is to be found out on the basis of the intention of the parties. The intention has to be ascertained from the terms of the contract. For example, when a person, who wants to get a house constructed on a plot of land owned by him, negotiates with a building contractor cum Architect after telling him about his requirement - plinth area, number of bedrooms, size of drawing room etc. and enters into contract with him for construction of house for a specified sum, even though the job may include preparation of detailed design of the house before starting the construction, the contract will be a contract for - construction service. But if as per his contract with the building contractor, first detailed design of the house is to be prepared by the contractor as per his requirement and satisfaction and only after finalization of the drawing, the construction work is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of goods, erection, installation and commissioning of a plant, which is a composite contract for sale of goods and services, as an indivisible work contract, just because it is on lump sum and single point responsibility basis, where failure to perform one part of a contract is treated as failure to perform the entire contract. Service tax is a tax on activities specified in Section 65(105) of the Finance Act, 1994 and the same would be chargeable in respect of any contract, when the same are discernible. Tribunal in case of Transformers Electricals Kerala vs. CCE reported in 2008 (9) S.T.R. 285 (Tri - Bang.) has held that a contract for design engineering, manufacture, installation and commissioning of transformers, where the contractor has charged separately for design engineering job is a divisible contract and service tax under "consulting Engineer's service" head would be chargeable on the amount charges by the Appellant for design and Engineering. This judgment of Tribunal has been upheld by Hon'ble Kerala High Court vide judgment reported as 2009 (14) STR - 737 (Ker.). Same view has been taken by the Tribunal in case of Transweigh (India) Ltd. vs. CCE, Mumbai rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution. Moreover, Department's SLP to Hon'ble Supreme Court against Tribunal's judgment in case of M/s Larsen Toubro Ltd, (supra) and M/s Petrotac International Ltd. vs. CCE, Vadodara - II reported as (2006-TIOL-490-CESTAT-MUM)., wherein the Tribunal relying upon its judgment in case of Daelim Industrial Co. Ltd. vs. CCE, Vadodara (supra) held that no service tax can be charged on the charges for - "residual process designs and detailed engineering" and "erection, installation, testing and commissioning", in a contract for - "residual process design, detailed engineering, procurement, supply, construction, fabrication, erection, installation, testing and commissioning for certain plant and machinery" on the ground that the contracts are indivisible work contract, has been admitted by the apex court and the matter is still pending. 5.4.1 On going through the Tribunal's judgment in cases of M/s Daelim Industrial Co. Ltd. Vs. CCE, Vadodara (supra) and M/s Larsen Toubro Ltd. and M/s Petrotac International Ltd. vs. CCE, Vadodara - II we find that the basis of these judgments is the preposition that a "work contract cannot be vivisected and part of it subjected to tax". This preposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Telecommunications, BT purchased cars from manufacturers who changed separately for the cases and for the delivery charges - The property in cars passed only on or after delivery. No VAT deduction was available as per the British VAT laws to BT in respect of purchase of cars. The dispute was as to whether deduction of VAT payable on delivery charges was available to BT. It was held by House of Lands that no deduction of VAT on delivery charges would be available to BT and the supply of cars and the service of its delivery is to be treated as one transaction of supply of Car. Hence again, the ratio of this judgment, based on certain feature of this transaction, is not of universal application. The supply of Car by a Car manufacturer to his customer at his premises when the service of transport is an ancillary service to the supply of car, can not be compared with the contracts with which we are concerned in the present case, where each component of the contract design and Engineering, supply of goods as well as erection, installation commissioning is important and distinct. 5.5 It has been pleaded that the service of designing erection, installation commission alongwith goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... projects. Under Rule 2A of Service Tax (Determination of value) Rules, 2006, framed under Section 94(1) of the Finance Act, 1994, the assessable value of the 'work contract service' referred to in Section 65(105) (ZZZZa) of the Finance Act, 1994 shall be equivalent to the gross amount charged (excluding VAT/Sales tax paid on transfer of property in goods involved) minus the value of transfer of property in the goods involved in the execution of the said work contract. Alternatively, the assessee at his option could pay duty at the rate prescribed in Rule 3 (1) of the Work Contract (Composition Scheme for payment of Service Tax) Rules, 2007, on the gross amount charges for the work contract. Thus Section 65(105) (ZZZZa) of Finance Act, 1994, read with Rule 2A of Service Tax (Determination of value) Rules 2006 and Work Contract (Composite Scheme for payment of Service Tax) Rules 2007, provides a machinery for assessment of Service Tax on certain types of contracts mentioned in Explanation to Section 65(105) (ZZZZa). On comparing the definition of "works contract" as given in Explanation to Section 65(105) (ZZZZa), with the definitions of (a) 'erection, commissioning or installation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reparation of operation manuals, or other technical assistance), procurement of goods, erection, installation and commissioning would attract Service Tax on Engineering Consultancy component and erection installation and commissioning component even prior to 1/6/07. This is so, as. discussed above, there is nothing in Sec 65(105) and Section 66 of the Finance Act, 1994 from which it can be inferred that the taxable services defined in various clauses of Section 65(105) have to be standalone services and will not attract tax, if they are provided along with other services or providing of the service involves supply/use of goods on which VAT or Sales Tax is payable. Hon'ble Supreme Court in case of Tamil Nadu Kalyan Mandapam Association Vs. Union of India, reported in 2004 (167) E.L.T. 3 (S.C.), while upholding the levy of service tax on catering service has held that catering of food and beverages by an outdoor caterer is a service and service tax on the same will be chargeable on the gross amount charged for the service, even if on the supply of food and beverages, sales tax has been charged by the State Government by treating the same as sale under Article 366(29A) (f) of the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not taxable. Giving such an interpretation to Section 65(105)(ZZZZa) will be against the intention of the legislation to tax "erection, installation or commissioning services", "commercial or industrial construction services", or "residential construction service' during the period prior to 1.6.07. Thus Section 65(105) (ZZZZa) is more like heading 98.01 of Indian Customs Tariff pertaining to Project Imports which provides a separate mode of assessment of Customs duty on a number of machines and other goods imported for initial setting up of a plant or a substantial expansion of an existing plant. The judgment of Hon'ble Bombay High Court in case of India National Shipowners Association (supra) is, therefore, not applicable to the services covered under Section 65(105) (ZZZZa) as services covered by this Section and Section 65(105)(ZZd), 65(105), (ZZq) and (ZZZh) are over lapping. As regards the judgment of Hon'ble Karnataka High Court in case of Turbotech precisions Engineering P. Ltd. (supra) since this judgment does not discuss as to how prior to 1.6.07, the type of contracts mentioned in Explanation to Section 65(105) (ZZZZa) were not taxable under Section 65 (105) (ZZd), 65 (10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract for work and labour, is of no relevance, as in this case each contract itself contains details of the charges for different items of goods and services. 5.6.1 The Appellant in support of their contention that just because the drawings of the C I system prepared by them were to be approved by their clients before they could go ahead with procurement of equipments with machinery materials and the job of erection installation, it can not be said that the Appellant's contract with their clients included a contract for providing consulting Engineer's service, have cited Hon'ble Supreme Court's judgment in case of Patnaik Co. Vs. State of Union (supra) wherein the Hon'ble court observed that a contract for sale of goods to be manufactured does not cease to be a contract for sale of goods merely because the process of manufacture is supervised by the purchasers. This judgment is of no relevance to the facts of this case, as approval by their customers of the drawings of C I system to be installed commissioned, prepared by the Appellant before the Appellant could go ahead with goods procurement and erection installation work, can not be said to be supervision. This is simp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion nor paid the same. They took service tax registration for "consulting Engineer's Service" alongwith "erection, installation and commissioning service" on 20/1/04. There is no explanation for non-payment of service tax and not obtaining service tax registration in respect of 'consulting engineer' service during July 1997 to mid January 2004 period. Just because in 1991 a show cause notice had been issued to the Appellant for including "Engineering charges" and "erection, installation and commissioning charges" in the assessable value of the instruments and equipments being cleared by them to their clients and demand of differential excise duty on this basis, it could not be presumed by the Departmental officers that during subsequent period also they, in addition to sale of the instruments and control equipment manufactured by them, are also engaged in systems design activity. We are, therefore, of the view that the Appellant are guilty of suppressing the relevant information from the Department and, therefore, longer limitation period of five years for recovery of non-paid service tax has been rightly invoked by the Department. 7. Whether penalty under Section 76. 77 and 78 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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