By TIOL News Service

MUMBAI, JUNE 09, 2015: THE applicant renders Transportation of Gas through pipeline which is a taxable service.

For that purpose, the applicant has to set up pipelines from Kakinada in Andhra Pradesh to Bharuch in Gujarat. The applicant appointed various contractors on jobwork basis who were assigned the work of laying pipeline. The applicant imported raw materials under EPCG scheme and those materials were issued to the contractors. The pipeline was commissioned around February-March 2009.

For laying the pipeline, the applicant also availed certain services namely design and engineering of the pipeline to be laid, GTA services, rent-a-cab services, CHA services, Business Auxiliary services. These aforesaid services were directly availed by the applicant from the service providers for laying the pipeline.

Pursuant to an audit, a SCN was issued to the applicant to deny CENVAT Credit availed on the ground that the services rendered by the contractors resulted in creation of a immovable property.

The applicant is before the CESTAT seeking waiver of pre-deposit of Rs.262.13 crores along with interest and various penalties imposed for the period April 2008 to March 2012 by way of denial of CENVAT Credit on inputs, input services and capital goods.

The break up of this demand is as under -

The applicant inter alia relied on the decision in Gujarat State Petronet Ltd. Order No. A/10473 to 10477/WZB/Ahd/2013 dated 15.4.2013 & Navratna S G Highway Prop. Pvt. Ltd. Vs. CST - 2011-TIOL-1703-CESTAT-AHM to justify the availment of credit.

The AR opposed the contention of applicant by submitting that the service tax paid by the contractor is for laying pipeline which is capital asset, therefore, service tax paid by the contractors does not fall in the category of tax paid on capital goods, input and input services used in providing services. Similarly pipe and other equipment and services procured and supplied by the applicant to contractors were used in laying of the pipeline by the contractor hence these were inputs or input service for the contractors and not for the applicant, therefore, applicant are not entitled to credit of these taxes and duty. Reliance is also placed on the decision in Galaxy Mercantile Ltd. - 2013-TIOL-1442-CESTAT-DEL , (2013-TIOL-751-HC-ALL-ST).

The Member (Judicial) viewed that in the light of the decisions cited, the applicant has made out a case for complete waiver of service tax, interest and penalty demanded from them.

The Member (Technical) had a differing view.

He inter alia observed -

"…The contractors have paid the service tax as a result of the Works Contract Service provided by them which has resulted in the pipeline. The pipeline is an immoveable capital asset as held in similar situations by the Hon'ble Bombay High Court in the case of Bharti Airtel Ltd. 2014-TIOL-1452-HC-MUM-ST as also by the Hon'ble Mumbai High Court in the case of Hutchinson Max Telecom P. Ltd. 2007-TIOL-676-HC-MUM-ST . In those cases, the issue was of admissibility of Cenvat Credit on steel, cement and other infrastructure items used for erection of telecom towers. It was held by the Hon'ble High Court that the resultant product is not goods but immoveable property and therefore, cenvat credit is not admissible on inputs used for erection of telecom towers. Drawing linkage from these decision, it is clear that what has been erected by the contractors is immoveable property and therefore credit of inputs and capital goods used in the erection of pipeline is not admissible….

4. However, as also held by the Tribunal in the case of Gujarat State Petronet Ltd. above, I agree that in respect of services provided by the service providers directly to the appellants, the credit would be admissible."

The Member (T), therefore, observed that the appellant has not made out a case for complete waiver of the adjudged demands and accordingly directed the appellant to pay an amount of Rs.25 crores.

In view of the difference of opinion the matter was referred to the third Member.

The third Member (Judicial) took the following view -

++ It is undisputed that the appellant is rendering the services of transportation of gas through pipeline services, the said activity of the appellant falls under the head of "transport of goods (other than water) through the pipeline or conduit services”. It is seen from the records that the appellant is procuring pipes which are imported by them under EPCG system. The said pipes are then handed over to the pipeline laying contractors, who lay the pipes, undertake the entire job of pipeline and bill the appellant as for providing the services of "commercial or industrial construction services"and there is also no dispute that contractors classification of service is not accepted. It is noted that there is no dispute that as to the fact that the pipeline system which is put in place by the contractors is used for rendering of output services falling under the head of "transport of goods (other than water) through the pipeline or conduit services”. I find that the services rendered by the contractors for laying the pipeline is towards bringing into existence a system which is the back bone for rendering the services of the appellant. In my view the services rendered by the pipeline laying contractors would be eligible for Cenvat credit on the ratio of the law as has been laid down by the Hon'ble High Court in the case of CCE Vs. Sai Samhita Storages (P) Ltd. - 2011-TIOL-863-HC-AP-CX .

++ Other input services which are availed prior to commissioning of the pipeline in March 2009 which are in respect of consulting engineer services, rent-a-cab services, CHA services, BAS for coating pipes, supply of tangible goods services, I find that these services are rendered by the service provider for bringing into existence, pipeline through which the appellant transports the goods and discharges services tax liability. If any services which are rendered for the purpose of providing taxable output services, Cenvat credit, prima facie cannot be denied.

++ As regards the Cenvat credit of the Central Excise duty paid on valves, compressor plmp, pipes, I find that these items are procured by the appellant directly from the manufacturers. Undisputedly, these items are covered under the definition of "capital goods"and the documentary evidences in form of tax invoices indicate sub-heading which are covered under the definition of capital goods. In my considered view, if the items which are covered under the definition of capital goods are procured for bringing into existence in pipeline and are used for purposes; for rendering output services on which the service tax is discharged. Prima facie Cenvat credit of the duty paid cannot be denied.

The Tribunal decision in GSPL sought to be relied upon by the Revenue was held to be not applicable on the ground that the facts involved are different.

In fine, the third Member on reference concurred with the views expressed by the Member(J) of the Division Bench.

And so, the Majority order is -

"…, we grant waiver of the requirement of pre-deposit of service tax, interest and penalty and stay recovery thereof during the pendency of the appeal."

(See 2015-TIOL-1068-CESTAT-MUM)