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TMI Blog2007 (5) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 76, Rs. 500/ in terms of Section 75A and Rs. 1,000/- in terms of Section 77 of the Act. In the order impugned in the appeal No. S./143/2006, service tax of Rs. 1,98,54,506/- for the period 3/2003 to 9/2004 and Rs. 1,29,39,582/- for the period 9/2004 to 5/2005 were demanded under Section 73. Interest on the service tax amounts was demanded under Section 75 of the Act. Penalties of Rs. 1,98,54,506/- in terms of Section 78, Rs. 500/- in terms of Section 75A, Rs. 100/- per day for failure to pay service tax amounts in terms of Section 76 and Rs. 6,000/- in terms of Section 77 of the Act were imposed. The original authorities have analyzed the contract governing the impugned functions of the O&M contractor. The order impugned in Appeal No. S/116/06 has affirmed the order of the original authority which had categorized the impugned services as of a Management Consultant, Consulting Engineer and Clearing and Forwarding Agent. In the order appealed again in Appeal No. S/143/2006, the same services have been identified as Management Consultancy, Engineering Consultancy, Clearing and Forwarding, Business Auxiliary Service and Maintenance or Repair Service. In this order, various servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNEB to develop plans for recovery of the facility from electrical black out and voltage reduction. As per the Agreement, the contractor would test, supervise loading, unloading, schedule deliveries of lignite loads by trucks/wagons and stock lignite. They would ensure a certain level of inventory at the NLC mine head and the plant site. The contractor would raise invoices on behalf of the owner on TNEB. 4.1 The Agreement mandates CMS to operate, inspect, maintain and repair the facility and procure necessary equipment, spares and consumables. They would operate the facility in such a manner as to achieve 85% plant load factor in a normal year and take necessary steps to achieve the same. They would manage the labour efficiently and attend to disposal of ash and waste generated by the operation of the facility. The O&M contractor shall be paid management expenses for various services. CMS would run the plant taking care of all incidental contingencies arising in day to day administration including staffing, their training, housing, salaries, employment taxes etc. preparation and implementation of operations and maintenance and repair, for which the contractor is responsible. Respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax the services was bad in law. 7. In the order passed, the Dy. Commissioner observed that as per Section 65 of the Act, a service provided to a client in connection with the management of any organization in any manner came under the category of Management Consultant's service. The facility was manned by the staff of the O&M contractor including the General Manager. The staff of the O&M contractor had manned the facility even during the pre-operating period. The O&M contractor coordinated scheduling of lignite trucks, supervised loading of lignite, and accepted deliveries of lignite from NLC at the point of supply. The contractor had operated and maintained the lignite truck weighing equipment at the point of supply and used to take samples of lignite loads. They supervised all activities of the transport contractors on behalf of the owner including the responsibilities of the transport contractors such as providing and maintaining adequate number of trucks and drivers to transport lignite which they supervised. They had to further receive, weigh and maintain prescribed inventory at the mine head and at the site. Thus the Deputy Commissioner found O&M contractor to have manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the operation and maintenance of the plant. He distinguished the instant case on the above basis from the Rolls Royce Indus Power (I) Ltd. v. CCE [2006 (3) S.T.R. 292 (Tribunal) = 2004 (171) E.L.T. 189 (Tri.-Del.)] case. He justified the valuation adopted by the original authority on the ground that the operating cost related to day-to-day expenses in connection with the running of the power plant such as labour employed, their training, travel expenses, office expenses etc. which related to management of the affairs of the owner company. The notice had been issued in time in terms of Section 73 as it existed on 22-9-2003, the date when the Show Cause Notice was issued. 9. In the appeal before the Tribunal against the above order, the appellants submitted that they had administered their own organization and operated the power plant for generation and supply of electricity to TNEB. During 6/2000 to 4/2003 the appellants had been paid a management fee of Rs. 10,63,06,857/-. The expression 'management fee' had been loosely used for the base fee paid by the owner. The owner reimbursed Rs. 8,25,09,115/- for setting up of infrastructure required for operating and maintaining the power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be properly described as a turnkey project for carrying out the operation and maintenance of the plant (the relevant citation was not furnished). It was argued that the O&M Agreement could not be regarded as a contract for rendering services nor could it be vivisected and taxed. They cited the decision in the Rolls Royce Indus. Power (I) Ltd. case (supra) in support of their appeal. In that case it was held that the operator was fully autonomous and responsible for the performance of operation and maintenance. Whatever engineering issues were involved it was for the operator to find solutions for in the course of operation and maintenance. There were no two parties, one giving advice and other accepting it. Service tax was attracted only in case involving rendering of service, in that case, engineering consultancy. From the order of the Dy. Commissioner it was obvious that clearing and forwarding services and consultancy services were ancillary to the main purpose of the agreement, the main purpose of the agreement being to produce electricity. 10. In their case, ST-CMS had engaged Chettinad Lignite Transport Services Pvt. Ltd (CLTS) for lifting lignite from NLC and transpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taff. Therefore, he found that the claim that there was no organization to manage and to render service to, was incorrect. (There was a hierarchy of CMS staff reporting to MD, ST- CMS). He extracted various clauses in the contract to buttress his finding and relied on the clarification in Board's Circular dated 27-6-2001 (supra) which had clarified : "thus management of any organization involves carrying out a wide variety of clearly defined activities across a number of organizational sub-units in a coherent and coordinated manner." He found that unlike in the Rolls Royce Indus. Power (I) Ltd. case (supra), CMS was not wholly independent in its operations. In terms of Section 65 A(2)(b) of the Act, composite services consisting of a combination of different services which could not be classified on the basis of 'most specific description' shall be classified as if they consisted of a service which gave them their essential character. He found that the obligation of CMS to ST-CMS consisted of a combination of services which received its essential character from the services of a Management Consultant as defined in Section 65(65) of the Act. The Commissioner rejected the plea by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to service tax even under the category of "Business Auxiliary Service." Therefore, the operations of the facility did not attract service tax. (ii) The appellants generated electricity on behalf of ST-CMS. Therefore the impugned demand for an activity excluded from the coverage of service tax was not sustainable. (iii) The appellants ran, operated, maintained, repaired, and managed the facility as per contract with ST-CMS for generation of electricity supplied to TNEB. Thus the services of the appellants were executive in nature and were not in the form of any advice or consultancy provided by a Management Constant or Consulting Engineer. The activities or services undertaken by the appellants were for them selves and consumed in operating the facility for generation of electricity. Therefore the impugned order had drawn an erroneous inference. The terms of the contract did not provide for rendering any of the individual services as found. CMS was responsible for generation of electricity and contract did not envisage providing of separate activities/services. The intention behind the contract was obvious and it was only generation of electricity. It was not the case in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng C& F Service to ST-CMS. Activities relating to procuring, transporting and maintaining stock of lignite fuel were activities incidental and ancillary to operation of the facility. Therefore, those activities could only be in relation to operation and day-to-day maintenance of the facility. The scope of C & F Agent's service covered the activity of clearing the goods from the carrier by furnishing necessary documents as an agent on behalf of the principal as also the activity of moving or transporting the goods for delivery. Lignite was transported and delivered to the appellants at the site by a third party. 15. When the generation of electricity amounted to manufacture, the question of providing Business Auxiliary Service did not arise. The O&M Contract was for generation of electricity. Therefore the activity did not come under Business Auxiliary Service. 16. Since the owner had separate contracts with suppliers of equipments for repair and maintenance, the appellants could not be said to have been engaged in repair and maintenance of equipments installed in the facility. The contract did not provide for repair or maintenance of equipment installed in the facility which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the appellants reiterated the written arguments made in support of the appeals. The ld. Counsel explained the doctrine of "Pith & Substance" which, he submitted, had to be resorted to in interpreting the O&M contract. According to him, maintenance of plant was incidental to operation. The agreement was essentially for operation of plant and production of electricity. The ld. Counsel took us through the O&M agreement and highlighted the portions defining the facility and those relating to pre operating services and operating services. The article 4.5 had dealt with owner's responsibility to provide the primary fuel at the site. He also invited our attention to the agreement between ST-CMS and CLTS for transportation of lignite to the project site. Article 5.1 of the agreement had dealt with the transporter's responsibility to deliver lignite at delivery point/plant stockpile. CMS were managing only the owner's equipment (facility). As per the definition of Management Consultant, the said service related to those in connection with the management of any organization. The definition envisaged that there must be a connection between the service and the management of an organizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich expression threw light on the nature of the service rendered. Ld. SDR endeavored to distinguish the Daelim Industrial Co. Ltd., case from the case on hand. The facility (plant) was managed by ST-CMS through CMS. The services of CMS were outsourced by ST-CMS. She cited the Tribunal's decision in 2006 (3) S.T.R. 73 (Tri.- Del.) = 2002 (146) E.L.T. 717 (Tribunal) to support her plea. CMS had experience to run the plant. They put in this experience and thereby rendered Management Consultancy to ST-CMS. She cited the decision of the Supreme Court in Kone Elevators - 2005 (181) E.L.T. 156 (S.C.), to highlight the distinction between works contract and contract for sale. She argued that Section 73 of the Finance Act during the material period did not require 'suppression' to invoke the said Section. 21. The hearing was concluded on 8-1-07 and the order reserved. Later, the Counsel for appellants sought leave to furnish text of a couple of judgments, which had been cited on 8-1-07. On 23-2-07, the said judgments were filed. The ld SDR objected to the Tribunal accepting documents after the hearing was over. The Bench overruled the objection as the Revenue was not prejudiced by the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consultant means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization in any manner and includes any person who renders any advice, consultancy or technical assistance, relating to conceptualizing, devising, development, modification, rectification or upgradation of any working system of any organization". As per the O&M agreement, CMS is responsible for maintenance and operation of the facility to produce electricity to supply it to TNEB as per the PPA between ST-CMS and TNEB. Therefore we find the pith and substance of the agreement, as argued by the appellants, is that CMS shall operate and maintain the facility and produce power for supply to TNEB. In order to serve this object of the agreement, the appellants carry out certain ancillary activities inevitable in the running of a power plant. We find it a fallacy to hold that by carrying out the activities as per the O&M contract, CMS assisted the owner in managing ST-CMS. The O&M contractor has been handed over the facility which it manned with its own staff whom they also trained. The O&M contractor is managing the facility, the power plant, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical assistance to a client in engineering. We find that the appellants did not render any such services to any client as Consulting Engineer. 24.4 We also find that appellants in the Rolls Royce Indus. Power (I) Ltd. case had undertaken the activity of operation and maintenance of a power plant of another firm and generated and supplied power on its behalf like CMS did in the subject case. In that case the Tribunal had observed: "We have perused the records and considered the submissions made by both sides. The issue raised is the true meaning and scope of operation and maintenance agreement dated 14-3-95. The appellant had taken over the plant and was operating and maintaining it in terms of the agreement. A perusal of the agreement makes it clear that it is a contract between owner and an operator. The terms of the contract vest complete freedom and responsibility on the appellant, without any interference by the owner. The owner's right is restricted to entry and access, to be satisfied that the operation is carried out according to standards. He also receives reports about the relevant aspects of operation status and output. The payment for operation and maintenance are dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the operation of the plant for generating power. 27. The order impugned in Appeal No. S/143/06 found the services rendered by CMS to be also Business Auxiliary Service and Maintenance or Repair service. As per the definition in the Act, 'Business Auxiliary Services' means any service in relation to :- "(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or (ii) promotion or marketing of services provided by the client; or (iii) any customer care service provided on behalf of the client; or (iv) procurement of goods or services, which are inputs for the client; or (v) production of goods on behalf of the client; or (vi) provision of service on behalf of the client; or (vii) a service incidental or auxiliary to any activity specified in sub clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customers or vendor, public relation services, management or supervision and includes services as a commission agent, but does not include any information technology service and any activity that amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the operation and maintenance of the facility. He found that though CMS was operating the facility for generating electricity, the entire activity was carried on by CMS on behalf of ST-CMS. The Commissioner also observed : "the agreement also provides for incentive payments/liquidated damages/environmental fines…." This does not happen when any agency provides service to another. A service provider is not responsible to achieve any performance target referring to which it becomes entitled to any reward or incurs penalties. Such provisions in the O&M contract fortify our finding that the appellants were not rendering any advisory services and were engaged in activities which could be measured such as generation of power in the instant case. 31. We have seen that in generating power, the appellant did not render any advice to improve the functioning of the working system of another organization. They ran the facility and organized the required materials through the owner and services of their own staff. These activities did not constitute services to any other person /organisation. These impugned functions were incidental to their main activity of producing power. The O&M contract ..... X X X X Extracts X X X X X X X X Extracts X X X X
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