TMI Blog2012 (6) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... the excluded category of works contracts. Further, appellants have not been able to establish that any "dam" was built in execution of any of the EPC contracts and nothing in the text of the definition of "WC" indicate that turnkey/EPC projects for irrigation are excluded. Retrospective exemption notification - Notification No.41/2009 dated 23.10.2009 exempting works contract in respect of canals is not retrospectively effective. Furthermore, Circular dt. 24/05/2010 also stand unfavorable to appellant. - an exemption notification cannot be given retrospective effect unless it expressly provides for retrospective operation. Non-Taxability in view of introduction of 'Works Contract' w.e.f. 01.06.2007 - Held that:- What matters is the fact that the contracts were executed by the appellants and payments received by them after 01/06/2007 and therefore they are liable to pay service tax on the taxable service tax under the head 'works contract service' on the turnkey/EPC contracts in question. Benefit u/s 67(2) - Held that:- Benefit of Section 67(2) is liable to be granted to the assessees and accordingly the gross amount charged can be treated as cum-tax value and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce confirmed against them by the Commissioner in adjudication of the relevant show-cause notices covering various periods as shown below:- Appeal No. Date of SCN Period of dispute OIO No. and date S. Tax + Education Cess Penalty imposed u/s 76 Penalty imposed u/s 77 Penalty imposed u/s 78 ST/476/2009 24/10/2008 June 2007 to May 2008 No.14/2009-ST dt. 17/2/2009 Rs.2,79,12,913/- @2% of service tax per month Rs.1000/- Rs.2.8 crores ST/1589/2010 25/08/2009 June 2008 to March 2009 No.15/2010-ST dt. 29/3/2010 Rs.2,57,97,663/- @2% of service tax per month Rs.5000/- --- ST/432/2010 18/06/2009 June 2007 to Sept 2008 No.51/2009-ST dt. 30/11/2009 Rs.13,46,28,909/- @2% of service tax per month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te-II, Suryapet Mandal, Nalgonda District. 3 HNSS (Handri Neeva Sujala Sravanthi) Phase-II Package No.4 (Km 260.00 to Km 280.00) EPC Turnkey System SHE 5 EPC/2006-07 15/12/2006 60.41 Description/scope of work: Investigation, preparation of Hydraulic particulars, designs, drawings and each work excavation of HNSS main canal reach from Km 260.00 to Km 280.00 and distributor system to feed an ayacut of 2500 acres under Khariff - ID under HNSS Phase-II in Anantapur District, A.P. 4 HNSS (Handri Neeva Sujala Sravanthi) Phase-II-Km 20.00 to Km 30.00) EPC Turnkey System SHE 2/EPC/2006-07 23/04/2007 74.70 Description/scope of work: Investigation, preparation of Hydraulic particulars, designs, drawings and each work excavation of Punganur Branch canal from Km 20.00 to Km 30.00 including formation of Cherlapalli Reservoir, Constructions of CM and CD works and distributor system to feed an ayacut of 5,500 ac. Khareef I.D. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued show-cause notice dt. 24/10/2008, invoking the extended period of limitation prescribed under the proviso to Section 73(1) of the Finance Act, 1994 (a) for recovery of ₹ 2,79,12,913/- as service tax and education cesses from the appellant under the head 'works contract service' for the period from June 2007 to May 2008, (b) recovery of interest on the said amount under Section 75 of the Act, and (c) imposition of penalties on the appellant under Sections 76 to 78 of the Act. 2.2. Ramky-Murthy JV, in an elaborate reply to the show cause notice, contested the demand of service tax and allied proposals on numerous grounds. They claimed that they were not liable to pay service tax under the head 'WCS'. In this connection, they claimed support from certain circulars of CBEC, certain decisions etc. They also contested the demand on the ground of limitation. According to them, the extended period of limitation was not invocable in their case. In this connection also, reliance was placed on certain decisions of the Supreme Court. The quantification of tax was also objected to on a few grounds. The proposal for imposing penalties was also contested on cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross amount billed to the contractee for the period of dispute. It appeared to the investigators that the appellant was evading payment of service tax on WCS, which was leviable in terms of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. Therefore a show-cause notice was issued to Maytas-NCC JV on 18/06/2009 (a) demanding an amount of over ₹ 13.46 crores as service tax and education cesses on 'WCS' provided by them to the contractee during the period of dispute, (b) demanding interest thereon under Section 75 and (c) proposing penalties under Sections 76, 77 and 78 of the Finance Act, 1994. The demand of service tax was in respect of EPC contracts executed by the appellant for the contractee. The essential particulars of these contracts, including the description/scope of works, were also stated in the show-cause notice, as follows:- Name of the contractee: Irrigation and CAD Dept., Government of Andhra Pradesh; represented by the Superintending Engineer, concerned: Sl. No. Brief Title of contract Type of Project as per the Agreement/Contract documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght Main Canal from Km 52.450 to Km 107.00 and its Distributory system and field channels of Thotapalli Barrage Project near Thotapalli (V), Garugubilli (M) of Vizianagaram District. 6 Lingala (Chitravati Balancing Reservoir Right Canal) Project Turnkey Contract 3 SC/2004-05 25-10-04 148.05 Description/Scope of work: Investigation, design, preparation of hydraulic particulars, estimates and execution of works of Chitravathi balancing reservoir Right Canal (Lingala Canal) from Km 0/0 to Km 53/0 and its distributories including construction of CM and CD work earthwork excavation, forming embankment and construction of CM and CD works etc., complete to irrigate an ayacut of 25000 acres (approx,) including construction of link canal to P.B.C cross regulator and head regulator and lift irrigation system, supply and fabrication of Hydro Mechanical components and erection of vertical gates, stop log gates and its accessories of Lingala Irrigation scheme in Cuddapah District. 7 GNSS Phase II Package 10/06 EPC Turnkey C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing interest thereon under Section 75 of the Act and (c) imposing penalties under Sections 76 to 78 of the Act. 5. The legal provisions 5.1. The adjudicating authority has brought the appellants' services within the ambit of turnkey projects including engineering, procurement and construction or commissioning (EPC) projects specified under clause (e) of the definition of works contract under Section 65(105)(zzzza) of the Finance Act, 1994. The appellants argued, inter alia, before the adjudicating authority that their activities were more specifically covered by construction of a new building or a civil structure or a part thereof or of a pipeline or a conduit mentioned in clause (b) of the definition of works contract and that, as the construction was not for any commercial or industrial purpose, it remained outside the scope of the full text of clause (b) and consequently outside the scope of works contract . The provisions of Section 65(105)(zzzza) of the Finance Act, 1994 read as under: Section 65: In this chapter, unless the context otherwise requires (105) - Taxable service means any service provided or to be provided - (zzzza) to any per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , shall be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable; 5.3. Before the adjudicating authority, it was also argued that the subject projects consisted essentially of construction of civil structures, pipelines and conduits falling within the taxable category of commercial or industrial construction service only and would not fall within the scope of WCS . Section 65(25b) provides the definition of commercial or industrial construction service as under:- Section 65(25b) Commercial or industrial construction service means: (a) construction of a new building or a civil structure or a part thereof or (b) construction of pipeline or conduit; or (c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure, or (d) repair, alteration, renovation or restoration of or similar services in relation to, buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial construction under Section 65(25b) of the Finance Act, 1994, but since the construction undertaken by the appellant was not intended for commerce or industry, it is not exigible to service tax. Normally, Government constructions for noncommercial purposes would not be taxable. Even constructions for the use of organizations or institutions established solely for educational, religious, charitable, health, sanitation or philanthropic purposes and not for the purpose of making profit are not taxable, being non-commercial in nature [Circular No.80/10/2004-ST dt. 17/09/2004 relied on]. As the canal system was built under Government projects for non-commercial/non-industrial purposes, the activity is not chargeable to service tax. Only when a canal system is developed as a revenue generating measure, service tax can be charged on the construction activity [Circular No.116/10/2009-ST dt. 15/09/2009 relied on]. 6.2. Alternatively, the activities of the appellant could be classified under the head site formation and clearance, excavation and earthmoving, and demolition defined under Section 65(97a) of the Finance Act, 1994. The activities specified in the inclusive definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2009 was issued to exempt works contracts (falling under Section 65(105)(zzzza) of the Act) in respect of canals constructed for non-commercial/nonindustrial purposes, from payment of service tax. The circular issued by the Board on 15/09/2009, prior to the Notification, also clarified the non-taxability of canals constructed for non-commercial purposes. Hence the intention of the Government was always to exclude construction of such canals from levy of service tax. It is not in dispute that the activity was not taxable as WCS prior to 01/06/2007. It is not taxable from 23/10/2009 by virtue of the above exemption Notification. In view of the clarification issued by the Board prior to the issue of the Notification by the Government, the Notification should be given retrospective effect. Whether the activity should be chargeable to service tax for the 'intervening period' i.e., from 01/06/2007 to 22/10/2009, may also be considered in the light of the following decisions: WPIL Ltd. vs. CCE [2005(181) ELT 359 (SC)] Sujana Metal Industries Ltd. vs. CCE [2011 (273) ELT 112 (Tri. Bang.)] 6.6. Where the activity in question stands excluded from levy of tax under two cat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing decisions:- CCE, Ludhiana vs. Pannu Property Dealers andOrs. CCE, Ludhiana vs. Silver Oak Gardens Resort [2008(9) STR 481 (Tri. Del.)] The Financers vs. CCE, Jaipur [2007(8) STR 7 (Tri. Del.)] 7. The submissions for Maytas-NCC JV 7.1. The learned counsel for the appellant adopted all the above arguments. He raised an additional contention to the effect that there was no transfer of property from the appellant to the contractee, that the transfer of property was from the sub-contractor to the contractee and that the transaction between the appellant and the contractee (Government of Andhra Pradesh) did not satisfy the first condition pertaining to transfer of property in goods used in the execution of the contract. For this very reason, the appellant cannot be held to have provided 'WCS' to the contractee. In this connection, the counsel referred to a sub-contract agreement executed between the appellant and one M/s. Ratna Infrastructure Projects Ltd. 7.2. The learned counsel relied on M Ramakrishna Reddy vs. CCE [2009(13) STR 661 (Tril. Bang.)] and also on a few stay orders passed by this Bench in cases involving 'WCS'. 7.3. He a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a contract is also an essential requirement for treating the activity as taxable service of works contract . For all these reasons, the activities undertaken by the appellants under the EPC contracts are to be classified only as 'WCS' covered by clause (e) of the definition of works contract under Section 65(105)(zzzza)of the Finance Act, 1994. 8.2. Neither commercial or industrial construction service nor site formation and clearance services prescribed the requirement of transfer of property in goods. On the contrary, turnkey/EPC contracts involved transfer of property. The activities in question were much beyond the scope of commercial or industrial construction service defined under clause (25b) or site formation and clearance services defined under clause (97a) of Section 65 of the Act and the same squarely fell within the purview of WCS defined under Section 65(105)(zzzza) of the Act. The activities are taxable under clause (e) of Section 65(105)(zzzza) of the Act, irrespective of whether they were for the purposes of commerce or industry. 8.3. Board's Circular No.80/10/2004-ST dt. 17/09/2004 was issued in the context of introduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tom Projects India Ltd. vs. CST [2011 (23) STR 489 (Tri. Del.)] 8.5. In respect of turnkey/EPC contracts, no generalized exclusion is provided for non-commercial or non-industrial nature of the end product/facility. Such exclusion, however, continues to be provided for construction services. Thus there is clear legislative intent (i) to exclude only construction of non-commercial and nonindustrial buildings/structures from WCS and (ii) to include all turnkey/EPC contracts within the purview of levy of service tax under WCS excepting the specifically excluded items such as roads, airports etc. If, indeed, it was the intention to exclude all works relating to irrigation projects from the purview of WCS, the legislature would have mentioned irrigation projects among the excluded items under the definition of WCS. The exclusion is only for the specified items which do not include irrigation projects . The intent of taxing all other EPC/turnkey contracts (irrespective of whether or not for commercial or industrial purpose) is clearly and unambiguously reflected in the statutory provisions and definitions. 8.6. There is no merit in the argument that clause (b) of the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not clarificatory. It is an exemption notification simpliciter, which was issued in respect of a specified service for the first time. It does not contain anything to indicate that it purported to operate retrospectively. Reliance placed on CC vs. Spice Telecom [2006(203) ELT 538 (SC)] 8.11. As the demand of service tax in this case is under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, the appellants are not eligible for CENVAT credit on inputs/materials. 8.12. Under the above Rules, the only permissible deduction from the gross amount charged is the VAT paid on the materials used in the execution of the contracts, and no other deduction is envisaged. Therefore, the appellants' claim for abatement of retention money from the gross amount is not admissible. 8.13. As Rule 3(1) of the above Rules stipulates that the gross amount charged for the works contract shall be the value for payment of service tax notwithstanding the provisions of Section 67, the benefit of cum-tax treatment of gross value under Section 67 cannot be claimed by the appellants. This is so particularly as the contract value in these cases does not include any se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereto as also from the scope of the works executed under the contracts. of course, this exercise has to be undertaken with reference to the definition of 'works contract' embodied in Explanation to Section 65(105)(zzzza) of the Finance Act, 1994. 10.2. The particulars of the contracts awarded to Ramky Murthy JV by the State Government and executed by the former have been stated in para (2.1.) of this order. Similarly, the particulars of the contracts awarded to Maytas-NCC JV by the State Government and executed by the former have been stated in para (4.1.) of this order. We find that the contracts were described and understood by the parties as Turnkey/EPC contracts . 10.3. We have also examined the scope of work stated in the specimen contract documents filed by the two JVs. The contract awarded to Ramky-Murthy JV by the State Government in respect of SRSP STAGE-II is indicated as shown below:- Surveying, investigation, sub-soil exploration, fixing alignment, designing and engineering of Dam and appurtenant works, canal sections of Main canals, Branch canals, Distributaries, Minors, Sub-Minors and Field Channels, Drains etc., preparation of ayacut regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d area plans etc. as per the criteria of Irrigation Department, relevant IS Codes, CWC Manuals, Departmental Codes, Circulars issued by Department from time to time etc., (d) cost analysis itemwise for the entire work on the basis of approved alignment and design etc., (e) preparation of temporary land acquisition cases and pursuing the same with LAO and getting approval/award from the competent authority, (f) construction of barrage and appurtenant works and whole canal system as per the approved design-drawings, specifications of the Department, relevant IS Codes, CWC Manuals, Circulars etc., (g) formation of inspection path/service road and plantation of shade trees along the banks of earth dams/canals, (h) commissioning and trial of the constructed dam/barrage and appurtenant works and the canal system, (i) maintenance during the defect liability period of 24 months from the date of completion certificate and (j) beautification of earth dam site and canal structure sites. It is clear from the scope of work that what was, indeed, executed by Ramky-Murthy JV was a turnkey project in general and an engineering/procurement/construction/commissioning (EPC) project in particular, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance Act, 1994 are roads, airports, railways, transport terminals, bridges, tunnels and dams. Irrigation canals do not find a place here. The mention of dams in the excluded category is of no aid to the appellants' case either inasmuch as these dams -- not a word defined or explained anywhere under the Finance Act, 1994/Rules thereunder - have to be understood according to the common parlance. These are gigantic RCC structures built across rivers and are not to be confused with the earth dams/barrages/constructed by the appellants as part of some of the EPC projects for irrigation. Even according to the appellants, a major share of the cost of execution of each project was on account of excavation works. If real dams were built by the appellants, this would not be the cost profile. In any case, the appellants have not been able to establish that any dam was built in execution of any of the EPC contracts awarded by the State Government. This apart, the scope of the expression works contract in respect of dams --- used in the exclusion clause of Section 65(105)(zzzza) of the Finance Act, 1994 ---- has to be correctly understood. The scope, in our view, is limited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucture, pipeline or conduit) cannot encompass the entire gamut of any of the contracts awarded by the Government and executed by the appellants and any such activity for non-commercial/non-industrial purposes is not envisaged under clause (b). Therefore, within the definition of works contract, the projects executed by the appellants can fit in clause (e) only. 10.10. It has also been argued on behalf of the appellants that their activities under the subject contracts could, alternatively, be classified under other entries like commercial or industrial construction [clause (25b) of Section 65] or site formation and clearance, excavation, earth moving and demolition [clause (97a) of Section 65]. These strenuous arguments have also been found to be untenable. It is not in dispute that the projects awarded to the appellants by the Government of Andhra Pradesh were executed by them for irrigation purposes of the Government. These purposes are, undisputedly and indisputably, non-commercial and non-industrial. If that be so, there is no question of classifying the works under the head 'commercial or industrial construction service' inasmuch as the statutory definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is classifiable as works contract service only. There is no other possible entry under Section 65 of the Act to cover the EPC projects executed by the appellants. Therefore, Section 65A(2) of the Act, which lays down certain principles to govern classification of a taxable service which is prima facie classifiable under two or more entries under Section 65(105), has no application in this case as rightly submitted by the Special Consultant for the Department. 10.11. It is not in dispute that the subject contracts required the contractee (State Government) to pay lump sum to the appellants against R.A. Bills raised by them from time to time. Neither the contracts nor the bills provided any break-up of the amount with reference to different items of work. These facts also clearly indicate the composite, indivisible nature of the contracts. Such composite contracts/projects encompassing a wide spectrum of activities ranging from survey and investigation to beautification of the finished facility are appropriately called 'turnkey contracts/projects'. An EPC project is a species, of which turnkey project is the genus. In other words, all turnkey projects cannot be EPC pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned counsel has referred to various circulars issued on 17/9/2004, 27/07/2005, 04/01/2008, 15/09/2009, 24/05/2010 etc. The first two circulars were issued prior to 01/06/2007, the date w.e.f. which works contract service was introduced as a taxable service and, therefore, those circulars cannot have anything to do with works contract service. The circular dt. 04/01/2008 was issued to clarify that a service provider who paid service tax prior to 01/06/2007 for certain taxable services was not entitled to change the classification of those services as a composite service after 01/06/2007 for the purpose of payment of service tax under composition scheme. This clarification is not applicable to the facts of this case. The circular dt. 15/09/2009 was issued to clarify, inter alia, that works contracts in respect of roads, ..... and dams were exempt from payment of service tax if such contracts were executed through EPC mode. But no works contract in respect of dams was awarded to the appellants and therefore the benefit of the said circular also cannot be claimed by them. The said circular also did not refer to irrigation projects. We have already referred to the circular dt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suing another Notification No.95/94-CE dt. 25/04/1994 wherein parts of PD pumps were also included as an exempted item. The question before the apex court was whether, on these facts, Notification No.95/94 could be held to be clarificatory in nature. This question was held in favour of the assessee by the court holding that Notification No.95/94 being clarificatory was retrospective in operation. Such or similar circumstances do not exist in the present case. Therefore the appellants cannot claim the benefit of exemption under Notification No. 41/2009-ST ibid. 10.17. Certain other decisions were also cited by the learned counsel, some in the context of discussing non-commercial/non-industrial purposes of certain water supply schemes and some other decisions in the context of applying Section 65A provisions of the Finance Act, 1994 to classification of a given activity as taxable service under Section 65(105) of the Act. We have already expressed our views in similar contexts, which are against the appellants. Therefore, the cited decisions are not applicable. The decision in M. Ramakrishna Reddy's case cited by the learned counsel for Maytas-NCCJV is also not of any aid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debit to any account, has been made in relation to the said contract on or before the 7 th day of July, 2009. The Explanation was added w.e.f. 7/7/2009 and the same is not applicable to a works contract, the execution of which commenced on or before 07/07/2009 or where any payment (except by way of credit or debit to any account) was made in relation to the contract on or before 07/07/2009. The periods of dispute in the present cases are all prior to 07/07/2009. The Explanation appears to be inapplicable to these cases. It would follow that the gross amount charged for the works contract has to be determined for purposes of Rule 3(1) in accordance with the parent provision viz. Section 67 of the Finance Act. The appellants are liable to pay service tax@ 2% upto 28/02/2008 and @ 4% thereafter on the gross amount charged so determined for each works contract. The question before us is what should be the gross amount charged . 11.2. The adjudicating authority has not accepted the plea for treating the gross amount charged as cum-tax value on the premise that Rule 3(1) does not permit abatement of service tax from the gross amount charged in the determination of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject involved engineering, procurement, construction and commissioning, which was enough to bring the entire project within the ambit of clause (e) of the definition of works contract in the Explanation to Section 65(105)(zzzza) of the Finance Act, 1994. There was no room for doubt about the coverage of EPC contracts within the plain and clear language of clause (e). Therefore the appellants can hardly plead that they did not pay service tax on the works contracts by reason of bona fide belief that they were not liable to pay such tax. The material facts related to the EPC projects executed by them were not disclosed to the Department. Registration under WCS' was taken and ST-3 returns filed only when compelled to do so. Even in some of the ST-3 returns, the material particulars were not disclosed to the department. It was submitted on behalf of Maytas-NCC JV that they had filed certain revised returns disclosing the material facts. But even these revised returns did not disclose reason for the exemption claimed therein. No benefit of any exemption notification or of exclusion from specific taxable service was claimed. The original returns also had not disclosed the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be examined afresh by the adjudicating authority as the periods of dispute in these two appeals are partly beyond 10/05/2008. 14. On the basis of the findings recorded by us, it is ordered as follows: vii) The service provided by the appellants to the Government of Andhra Pradesh under the subject contracts is classifiable as works contract service' under Section 65(105)(zzzza) of the Finance Act, 1994; viii) The appellants are liable to pay service tax on the correct taxable value to be determined by the adjudicating authority having regard to the findings recorded in para (11) above; ix) The extended period of limitation is invocable in these cases; x) The penalties imposed on the appellants under Section 77 of the Finance Act, 1994 are sustained. The Section 76 penalty challenged in appeal No.ST/1589/2010 is also sustained. The penalties imposed under Section 78 of the Act are set aside for re-quantification. The Section 76 penalties challenged in appeals ST/476/2009 and ST/432/2010 are also set aside for fresh decision as to whether such penalty is liable to be imposed on the assessees and, if so, to what extent; xi) The appellants are liable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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