TMI Blog2017 (6) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... lants having declared a different nature of activity before the VAT authorities. Be that as it may, for the purposes of the service tax law, deduction of cost of materials and consumables can be permitted only if there is a sale involved and there being no sale involved in the entire exercise, appellant has necessarily to discharge tax liability on the entire gross value of the maintenance or repair services on the full amount demarcated by them as maintenance or repair service, being 45% of the total amount paid to them - when the appellants themselves have vivisected the contract by apportioning 45% towards maintenance charges and 55% as operation fee, the contention raised by them that it is a composite contract is only to be brushed aside. Major Maintenance Reserve (MMR) - taxability - Held that: - Held that: - MMR amount is in the nature of a deposit by the appellant with the power company, a sort of guarantee and a ready reserve for the power company for any major maintenance. One such Trust and Retention of Amount agreement dated 16.12.1999 has been perused by us. This agreement is between the power company (SPCPL), the lender and the lending banks, from which it is clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Reserve (MMR) and on activities of operation of power plant to produce electricity. 2. Brief facts are that a Power Purchase Agreement was entered in May 1998 between Tamilnadu Electricity Board (TNEB) and Samalpatti Power Company (SPCL), whereby the company was entrusted with the work to develop, design, engineer, finance, procure, construct, own, operate, maintain and repair, a diesel generator based power generating unit in Tamilnadu so as to make available and sell the power to TNEB. The company, SPCL, was also given the right to enter into contracts for operation and maintenance of the power plant with any person experienced in such activities. Accordingly, on 3.12.1999, SPCL as the owner of the power plant entered into an Operation and Maintenance Agreement with Ogden, Madhya Pradesh Operating Power Ltd., as Operator. The power generated in the power plant is sold to TNEB under a Power Purchase Agreement. M/s. Ogden was taken over by the appellants namely, M/s. Covanta Samalpatti Operating Pvt. Ltd. Later, the name of the appellants was changed as M/s.Shapoorji Pallonji Samalpatti Operator Services Pvt. Ltd which got merged with M/s.Shapoorji Pallonji Infrastructure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llants are liable to pay service tax on the activities of maintenance and repair of power plant as well as operation charges and the MMR deposit. 2.2 As per clause 4.3 of the Operation and Maintenance Agreement the appellants are entitled to Operator Fee equal to 4% of the capital cost of the plant by way of operation and maintenance and insurance expenses. Out of this 4% fee, 3.2% has been allocated adhoc by appellant towards operation and maintenance and 0.8% towards insurance charges. Based on expenses, the appellants have again split the operation and maintenance charge of 3.2% in the ratio of 55% towards operation and 45% towards maintenance charges. This operator fee is applicable for Period-III which is the operating period. Period-I and Period-II are pre-mobilization period and mobilization/testing period respectively. 2.3 The appellants were paying service tax on maintenance and repair charges (on 45% of the operating fee) with effect from 1.7.2003 when these services became taxable. They were paying service tax under this category on the 45% of the Operator Fee received by them. Later, they entertained a view that they are not liable to pay service tax on such mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 08.02.2007 July 2003 to March 2006 Service tax demand on cost of spares and consumables used in providing maintenance service. Service Tax demand on Major Maintenance Reserve (MMR) deducted by SPCPL at the time of payment. 1,34,19,204 U/s 75 U/s 76 And INR 150,00,000 U/s 78 2. ST/283/2012 SCN No.193/2007 Dt.18/10/2007 April 2006 to March 2007 Service tax demand on cost of spares and consumables used in providing maintenance service. Service Tax demand on Major Maintenance Reserve (MMR) deducted by SPCPL at the time of payment. 82,688- Cost, 8,05,214,-MMR Total: 8,87,902 U/s 75 U/s 76 3. ST/282/2012 SCN No. 5/2007 Dt.06/09/2007 July 2006 to June 2007 Service tax demand on operation charges (55% of the invoice value) 35,19077 (As disallowed r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LNTS:- 6.1 Submissions of the appellants are threefold namely (a) that the demand on the maintenance and repair services is not sustainable for the reasons that the agreement is to provide operation and maintenance of the power plant, hence maintenance services if any, are consumed by self and are not liable to service tax. That though appellant has been paying service tax on maintenance and repair services, the demand under this (on the 45%) is unsustainable. b) It is further submitted that the inclusion of the spares and consumables on which VAT is being paid by appellant would itself show that it is a composite contract and consequently prior to 1/6/2007 composite contracts are not taxable as held by the Hon ble Supreme Court in the case of Larsen and Toubro reported in 2015 (39) STR 913 . Moreover the maintenance repair activities were only for up keep of the power plant and cannot be taxed since it would be a service to keep the power plant in operation/running. (c) That the entire operations are to generate and provide electricity amounting to manufacture of goods on behalf of the client, since the principal, Samalpatti Power Company (SPCL), had contracted with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r plant also. According to the department the activity would fall under Management of Immovable property coming under BAS. The demand on the consideration for operating the power plant is totally unsustainable under the head management of immovable property . The legal position that operation of the power plant does not amount to Management, maintenance and repair services is well settled by a number of decisions, the latest being in the case of CLP Power India Private Limited Vs Commissioner of Service tax, Mumbai, Final order number A/90709 90712/16 /STB dated 1/6/2016. This decision clearly holds that the consideration received for Operation of the power plant is not liable to service tax. Moreover the activity of generation/production of electricity would attract Business Auxilliary service which is excluded from levy of service tax as electricity is an excisable good. Learned counsel relied on the following decisions:- ( a) CMS Operation Maintenance Co. (P) Ltd Vs CCE - 2007 (7) STR 369 (Tri-Chennai) (b) Rolls Royce Industrial Power (1) Ltd Vs CCE - 2006(3) STR 292 (Tri)- (c) Commissioner of Central Excise Vs. Larsen and Toubro Ltd. - 2015 (39) ST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visected, this argument does not help their case in view of the decision of the Larger Bench of the Tribunal in the case of Commissioner of Central Excise, Raipur Vs. BSBK Pvt. Ltd reported in 2010 (18) S.T.R. 555 (Tri.LB). 7.6 The argument of the appellants that they correctly paid the tax as per Section 67 of the Finance Act 1994 (the Act) and that they are also entitled to the input credit on the spare parts used as per CENVAT Credit Rules 2004 cannot be accepted for the simple reason that once they paid the tax as per section 67, according to which the value of spare parts sold are not to be added for determining the Gross value on which the tax is payable, then on the very same spare parts no CENVAT credit can be availed. 7.7 Going by the definition of maintenance or repair service with effect from 1.7.2003, if the argument of appellant is to be accepted that being composite contract no service tax can be levied, as the contract cannot be called as a maintenance contract per se then at least with effect from 16.6.2005, the maintenance service provided by the appellants to the SPCPL would be chargeable to service tax in view of the amended definition of Maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice provided by the client: or [Explanation For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, service in relation to promotion or marketing of service provided by the client , includes any service provided in relation to promotion or marketing of games of change, organised, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo:] (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 [Explanation For the removal of doubts it is hereby declared that for the purposes of this sub-clause, inputs means all goods or services intended for use by the client;] (v) production or processing of goods for, or 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 develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... major maintenance as agreed between the Operator, the Owner and the Lenders. Upon the date being the first anniversary of COD, the Operator shall deposit in cash or by way of letter of credit in a Major Maintenance Reserve Account, to be established pursuant to the Trust and Retention Account Agreement to be executed amongst the Lenders, the Owner and the account bank, the sum of ₹ 1,1806 million. Thereafter, the Operator shall deposit the sum of ₹ 1,1806 million in cash or by way of letter of credit into the Major Maintenance Reserve Account on the last Business Day of each consecutive month until the aggregate amount of the Major Maintenance Reserve Account equals to ₹ 63.75 million. The Owner, the Operator and the Lenders intend to review annually the Major Maintenance Reserve Funding Schedule at approximately the same time that the Annual Operating Plan in being reviewed. Discernably, MMR is a reserve created under a trust for the purpose of providing funds for meeting the expenses in case of major maintenance of the power plant. It is not a case that the owners of the power company are withholding part of their fees / charges payable to the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, though with nil rate of duty. We have to say that this argument of the appellant is not without substance. The major activity in the power plant is production of electricity which is an excisable product. Further, activity of production of electricity cannot be equated with management of immovable property. In a situation where the property is entrusted for management, the dominant intention would be to manage the property to raise profits whereas in the present case, it is for generation of electricity. The contention of the department may be applicable to a situation where the management is handed over to a management company for the sole purpose of management of the immovable property. In the present case, the sole purpose is not management of immovable property. Further, the management, if any, of the power plant is done by the appellants and is only incidental to the activity of generation of electricity. The activity carried out in the power plant is not solely management of power plant, but operation of the same. The word operation is not used in the definition of 'Maintenance and repair' services which is relied by department as amended with effect from 16.06.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was intended to ensure generation and supply of power as per PPA and not for rendering any service to the owner. (b) Rolls Royce Indus. Power (I) Ltd. Vs. Commissioner of Central Excise, Vishakhapatnam 2006 (3) STR 292 (Tri.) 6. 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 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 owners 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 determined under the various clauses of the contract. In addition to the lump sum payment, it also provides for bonus and penalty. The terms of the contract do not envisage or involve providing any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following manner:- (i) ST/175/2007 - It is held that cost of consumables and spares used in providing maintenance service to be included in gross value and the appeal in that respect is dismissed. The demand of service tax on Major Maintenance Reserve (MMR) is set aside and appeal on that aspect is allowed. (ii) ST/283/2012 - cost of consumables and spares used in providing maintenance service upheld and the appeal in that respect is dismissed and demand of service tax on Major Maintenance Reserve (MMR) is set aside and appeal on that aspect is allowed. However, though the service tax demand corresponding to this issue is been upheld along with interest thereon, taking note of the fact that as there was undeniable confusion on the taxability per se, on these services, the penalties imposed in the orders impugned are set aside. It is also stated that since the appellants did not disclose the entire gross value of taxable services in the ST-3 returns and the returns reflected the value only after deduction of cost of materials, the notice issued invoking extended period is right and proper. The appeal Nos. St/175/2007 and ST/283/2012 are partly allowed with conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X
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