By TIOL News Service

BANGALORE, JAN 27, 2014: HERE is some good news for contractors executing water supply projects for Government, especially after the weird interpretation by a section of the department that the non-commercial constructions which are excluded under sub-clause (b) of the explanation under the definition of Works Contract service are taxable under sub-clause (e) as EPC / Turnkey contracts. At least there should be some relief at pre-deposit stage in view of this recent order by the Circuit Bench of Tribunal at Hyderabad.

The Petitioner is engaged in providing services to several departments of the Government of Andhra Pradesh i.e. in the Command Area Development; Irrigation; and Public Health Departments on turn-key or non turn-key basis involving works relating to laying of pipelines including associated earth work, excavation, supply, laying, joining, testing and commissioning of water pipelines of various diameters; civil works involving construction of pumping stations; treatment plants and canals; and electro-mechanical works involving erection, commissioning and installation of various pumps, motors and equipments for treatment required to set up water treatment or water supply plants and the like.

For the period prior to 01.06.2007, department classified the services under Erection, Commissioning or Installation service and from 01.06.2007, under works contract service (clause “e”)

In respect of demand for the period prior to 01.06.2007, the Tribunal found a prima facie case for waiver of pre-deposit by following the ratio of Indian Hume Pipe Co. Ltd. Vs. CCE, Trichy 2008-TIOL-1665-CESTAT-MAD wherein the CESTAT had occasion to consider whether undertaking construction of a pipeline for the Government of Tamil Nadu falls within CICS (Commercial or Industrial Construction service) or ECIS (Erection, Commissioning or Installation Service). The Tribunal in that case concluded that the nature of the contract in issue involved putting together parts of pipeline pipe by pipe, bolt by bolt, weld by weld until it becomes one whole and is therefore not an activity falling within ECIS, but one clearly falling under CICS (Commercial or Industrial Construction service).

It is the case of the petitioner that all these works were executed for the State Government, for irrigation projects and for supply of drinking water and not for commerce or industry and therefore there is no liability to service tax.

Prima facie , the Tribunal held that the works executed by the petitioner more appropriately fall within sub-clause (b) of Section 65(25b) of the Act and are therefore CICS and not ECIS as concluded by the adjudicating authority.

For the period from 01.06.2007, the KEY issue is regarding classification of the service under works contract service under clause “e” of Section 65(105)(zzzza). The Tribunal held:

At the current stage of the proceedings and on the basis of the analysis in the adjudication order, it is not very clear whether all works and the associated services executed or provided by the petitioner prior or subsequent to 01/07/2007 were in relation to laying of pipeline or whether a few of these were outside the scope of construction of pipeline and therefore might fall within sub-clause (e) of Section 65(105)(zzzza) of the Act. We, therefore, proceed at this stage of the matter on the basis of the assertion on behalf of the petitioner that all the works pertain to laying/construction of pipeline falling within Section 65(105)(zzzza)/(b) and not sub-clause (e) of the said provision and the observations in para 18.5 of the adjudication order, that these are pipeline construction works.

Since under sub-clause (b) of Section 65(105)(zzzza) of the Act (for the period subsequent to 01/06/2007), inter alia construction of pipeline primarily for the purposes of commerce or industry falls within the ambit of the definition of works contract service and services provided by the petitioner under the several agreements with the State Government were for irrigation or drinking water supply purposes, we are prima facie of the view that these not being commercial or industrial purposes are excluded from exigibility to service tax, as falling outside the purview of the taxable service.