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Service Tax Liability on irrigation projects undertaken on EPC/Turnkey mode - Whether liable for Service Tax under clause (e) of Work Contract definition - CESTAT Larger Bench Rules in favour of assessee

By TIOL News Service

HYDERABAD, APR 29, 2015: IRRIGATION projects undertaken for State Governments are non-commercial in nature and they are excluded from the definition of Commercial or Industrial Construction service. However, there is one sub-clause in the definition of "Works Contract" under Section 65(105)(zzzza) which includes EPC or Turnkey projects under Works Contract service. It is the case of revenue that if any project is undertaken under EPC / Turnkey mode, it is liable for service tax under Works Contract service, notwithstanding its non-commercial nature.

It all started with the (in)famous decision of the Division bench of the Hon'ble Tribunal in Ramky Infrastructure - 2012-TIOL-613-CESTAT-BANG, where it was held that the Turnkey/EPC projects undertaken for execution of irrigation projects are taxable. What followed was a spate of pre deposit directions, beeline by parties to High Court/Supreme Court. Finally, the Supreme Court ordered that a Larger Bench headed by the President of the CESTAT shall decide the batch of appeals. Nearly 80 appeals involving hundreds of crores were at stake.

The Larger Bench heard the arguments from 15th December 2014 to 19th December 2014. A battery of eminent lawyers and specially flown in ARs from Delhi CESTAT, represented revenue before the Bench. In fact, revenue raised a preliminary objection that as per the directions of the Supreme Court, all the cases pending before the CESTAT, Hyderabad Bench have to be taken up and since the CESTAT Hyderabad Bench is yet to be functional they should wait for a clarification from the Supreme Court whether CESTAT, Bangalore can proceed with the matter. However, this preliminary objection was rejected by the Bench.

The Larger Bench decision was pronounced in the CESTAT Principal Bench at New Delhi Yesterday. The Larger Bench ruled:

Clause 'e' of works contract entry 65(105)(zzza) ["turnkey projects, including engineering, procurement and construction or commissioning (EPC) projects"] in the Finance Act 1994 is an ex abundanticautela entry.

EPC contracts would fall under clause 'b' of entry 65(105)(zzza) works contract entry and would be exempt if it is for non-industrial or non-commercial purpose.

Construction of canals would also get excluded under entry 'b'

Laying of pipelines for irrigation purposes would be classified under Commercial or Industrial Construction Service (CICS)and not under Erection, Commissioning or Installation Service (ECIS) service prior to 1.6.2007

When the main contractor sub-contracts the entire contract, there is no works contract by the main contractor.

The order copy is awaited.


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