2006 (3) TMI 759 - AT - Service Tax

Summary

Issues Involved:
1. Whether the contracts awarded to M/s. Larsen & Toubro Ltd. and M/s. Petrofac International Ltd. are liable for service tax as consulting engineering services.
2. Whether the contracts can be vivisected to tax the service portion separately.
3. Applicability of the Tribunal's decision in the case of Daelim Industrial Co. Ltd. and other relevant case laws.
4. Impact of the 46th Constitutional Amendment on the interpretation of works contracts for service tax purposes.

Issue-wise Detailed Analysis:

1. Liability for Service Tax as Consulting Engineering Services:
The department alleged that M/s. Larsen & Toubro Ltd. and M/s. Petrofac International Ltd. did not disclose their provision of taxable services as consulting engineers, leading to show-cause notices demanding service tax and penalties. The contracts included various services like residual process design, detailed engineering, procurement, supply, construction, erection, installation, testing, and commissioning. The department argued that since the value of services was separately mentioned in the contracts, these should be taxed as consulting engineering services.

2. Vivisection of Contracts:
The department contended that the contracts should be vivisected to tax the service portion separately, citing that the value of services was clearly demarcated in the contracts. However, the respondents argued that the contracts were indivisible turnkey contracts for construction, where the design and engineering were integral parts of the overall construction project. They emphasized that the contracts were not standalone agreements for consulting engineering services but were for the construction of complete units.

3. Applicability of Tribunal's Decision in Daelim Industrial Co. Ltd.:
The Commissioner (Appeals) had relied on the Tribunal's decision in Daelim Industrial Co. Ltd., which held that a works contract cannot be vivisected to tax the service portion. The department argued that this decision was not applicable as the contracts in question had separately mentioned service values. The Tribunal reaffirmed that the facts of the present case were covered by the Daelim Industrial Co. Ltd. decision, where it was established that a works contract on a turnkey basis is not a consultancy contract and cannot be vivisected for service tax purposes.

4. Impact of the 46th Constitutional Amendment:
The department argued that the 46th Constitutional Amendment allowed for the division of works contracts into service and goods components for tax purposes. However, the respondents and the Tribunal noted that this amendment was relevant to sales tax and not service tax. The Tribunal cited various case laws, including the Supreme Court's decision in Bharat Sanchar Nigam Ltd. v. UOI, which reiterated that composite contracts could not be split for tax purposes unless they represented two distinct contracts.

Conclusion:
The Tribunal concluded that the contracts in question were essentially for construction and not for consulting engineering services. The services provided were integral to the overall construction contract and could not be separately taxed. The Tribunal upheld the Commissioner (Appeals)'s order, rejecting the department's appeals and confirming that service tax was not applicable to the service portion of these turnkey contracts.