By TIOL News Service

MUMBAI 29, JULY, 2013: THE Demand for tax is Rs. 212.67 Crores with – penalties and interest extra.

The main plea of the appellant is that the activity undertaken by the appellant in execution of various projects is a works contract. Prior to 01.06.2007, there was no provision in the Finance Act, 1994 to levy service tax on works contract. Power to tax is different from exercising the power to tax by creating a charge and unless there is a charging provision to levy tax and a machinery provision to collect the tax, a tax cannot be levied.

The two Members of the Tribunal did not agree with each other on the major issues before the Bench.

MEMBER (T)

Can a lump sum turnkey works contract be vivisected into supply of goods and supply of services?. The Member (T) observed that the Constitution was amended by the 46 th amendment to provide for vivisection of composite contract in five situations so as to enable the States to levy sales tax on deemed sale basis, by inserting clause 29A in Article 366 of the Constitution of India.The purpose of the amendment is to enable the States to levy sales tax on the supply of goods in the composite works contract which involves both supply of goods and supply of services. If it is held that the works contract cannot be vivisected (for the purpose of levy of service tax), it would completely nullify the said amendment which sought to vivisect the works contract.

He observed that in view of the above decisions of the Apex Court in the BSNL and the All India Federation of Tax Practitioners cases and the larger bench decision in the BSBK case, it is absolutely clear that a composite lump sum turnkey contract can be vivisected into supply of goods and supply of services for the purpose of levy of service tax provided the service(s) involved in transaction are taxable services as defined in section 65(105) of the Finance Act, 1994.So he held that the correct position of law as it prevails today is that a composite works contract can be vivisected and the discernible service element can be subjected to levy of service tax if the law provides for the same.

If an appeal is filed against the Tribunal's order, the Tribunal's order is in jeopardy : The assesse had pleaded that the Tribunal in the assessee's own case had held that lump sum turnkey projects cannot be vivisected and taxed. But the Member(T) observed that Revenue's appeal against the order has been admitted by the Supreme Court. Therefore, the Tribunal's orders are in jeopardy and the same cannot be said to have attained finality as held by the Apex Court in the case of UOI vs. West Coast Paper Mills Ltd.- (2004-TIOL-14-SC-LIMITATION). Hence no reliance can be placed on these decisions.

But the Supreme Court had in Kamlakshi Finance - (2002-TIOL-484-SC-CX-LB) had held that the mere fact that the order of the appellate authority is not "acceptable" to the department--in itself an objectionable phrase and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessee and chaos in administration of the tax laws.

The next argument of the appellant was:

Prior to the introduction of works contract service, the activity undertaken by the appellant was not declared as a taxable service and hence, the service tax levy would not arise: The Member (T) observed, If one carefully compares the provisions of works contract relating to erection, commissioning and installation as defined in Explanation (ii)(a) to section 65(105)(zzzza) with the definition given in 65(39a), it can be seen that the wordings are identical. In other words, the scope of the service with respect to erection, commissioning and installation service remained the same both before 01.06.2007 and with effect from 01.06.2007. Therefore, the argument that no tax was leviable prior to 01.06.2007 on such activity is bereft of any logic. 65(39)(a) read with 65(105)(zzd) did not say that erection, commissioning or installation would be taxable only if it is rendered as a standalone service and not when rendered as part of a works contract. He held: When a composite contract can be vivisected for the purpose of levy of service tax as held by the hon'ble Apex Court in the BSNL case and the larger Bench of this Tribunal in the BSBK case, even if such service was rendered as part of a works contract prior to 01.06.2007, the same would be leviable to service tax under 65(105)(zzd) prior to 01.06.2007.

He completely rejected the contention of the appellant that erection, commissioning and installation service rendered as part of works contract service cannot be levied to service tax prior to 01.06.2007 under section 65(105)(zzd).

On Limitation: The Member (T) held that there was suppression. "The appellant had got registered for "erection, commissioning and installation" services also during the impugned period. Where was the need to get themselves registered, if they were under the bona fide belief that they were not liable to pay service tax? ", asks the Member. He added, " If the appellant honestly believed that they were not liable to pay service tax on works contract prior to 01.06.2007, they should have declared the same in the statutory return. In the absence of such a declaration, the presumption would go against the assesse."

In sum, he held that:

1. A works contract can be vivisected even prior to 01.06.2007 and the service portion discernible in the contract can be subjected to levy of service tax if the law provides for the same.

2. As regards valuation, service tax can be levied only on the consideration charged for the services provided. The value of goods supplied/sold cannot be included for the purpose of computation of service tax demand. The benefit of notification nos. 12/2003-ST, 19/2003-ST and 1/2006-ST has to be extended to the appellant subject to the appellant producing satisfactory documentary evidence for eligibility to the benefit of exemption.

3. The limitation of time-bar does not apply except in one contract.

MEMBER (J)

With all humility, the Member (J) differed:

He agreed that by virtue of Article 366(29A) of the Constitution of India, a composite contract is permitted to be vivisected for the purpose of taxation of the element of transfer of goods involved in the contract or the service part for taxation. But in absence of mandate or provision in the taxing statute (Finance Act, 1994) to bifurcate the composite contract and tax the service component, the same cannot be done. Section 65(39a) define the services of ‘Erection, Commissioning and Installation'. From the plain reading of the provision of law, it is crystal clear that there is no mandate by the legislature to bifurcate the works contract or turnkey contract and tax the service element thereof. The section intends to tax only service contracts or contracts which are predominantly of service nature. He noted that in section 65(105)(zzzza), there is a clear mandate by the legislature to bifurcate the composite contract. He found that there was no such mandate by law in section 65(39)(a) of the Finance Act, 1994.

He held that any levy of service tax on works contract prior to introduction of section 65(105)(zzzza) is also impermissible as the section has been given only prospective effect by the legislature. The activity of ‘erection, commissioning and installation' can be taxable in case of pure labour contracts or where the value of goods involved is negligible say less than 20%. Levy of service tax on works-contract or lump-sum turnkey contract under the provisions of section 65(39a) prior to 01.06.2007 is impermissible as no valid charge have been created. So, he set aside the tax levied in the impugned order.

Limitation: He held that extended period of limitation is not attracted. It is also relevant to mention that after filing the reply to the show-cause notice on 27.12.2008, the Revenue has taken almost four years to finalize the proceedings by the impugned Order-in-Original dated 4.12.2012. The facts are self speaking. That even the Revenue was not clear as to the classification and taxation of the composite works contract for the purpose of Service Tax. Thus, in absence of pre-requisites for attraction of extended period, the impugned order is fit to be set-aside.

Difference of Opinion

In view of the difference of opinion between the two members, the matter is placed before the President to refer the following points to the third Member:-

i) Whether a works contract can be vivisected even prior to 01/06/2007 and the service portion discernible in the contract can be subjected to levy of service tax and in the present case, since the discernible service is "erection, installation and commissioning", the said activity is leviable to service tax under section 65(105)(zzd) read with section 65(39a)/65(28) as they stood at the relevant time prior to 01/06/2007 and under section 65(105)(zzzza) on or after 01/06/2007 as held by Member (Technical), and the matter should be remanded back to the adjudicating authority for re-determination of the value of the taxable service by extending the benefit of notification no. 12/2003-ST, 19/2003-ST & 01/2006-ST; and

ii) The limitation of time bar does not apply except in the case of Contract pertaining to Chennai Petroleum Corporation Ltd. as held by the Member (Technical).

OR

i) Whether a works contract cannot be vivisected prior to 01/06/2007 and subjected to levy of service tax under "erection, installation and commissioning service" as held by Member (Judicial); and

(ii) The demand is time barred as held by the Member (Judicial).

(See 2013-TIOL-1138-CESTAT-MUM)