2011 (3) TMI 826 - AT - Service Tax

Scope of the Consulting Engineering Service - invoices as Drawing , Designing , Engineering or Training - held that - The preparation of basic engineering drawings & detailed engineering drawings, on the basis of which erection and installation work is done and training of the clients personnel in operation & maintenance of the equipments installed is clearly technical assistance provided to the clients and hence the same is covered by the definition of Consulting Engineer s services. Indivisible lumpsum Turnkey Contracts for Designing of erection, installation & commissioning of Instruments and Control Systems - Held that - the contracts in this case have a distinct component of activity, coming within the purview of consulting Engineer s service and service tax under Section 66 read with Section 65 (105) (g) of the Finance Act, 1994 would be chargeable or the amount charged for drawings/designs, Engineering , training, etc. It has been pleaded by the Appellant that the charges for drawings, designing, engineering, training etc. as mentioned in the contract, are only milestone payments, not the actual charges for their activities. This contention is unacceptable, as when from the contracts and the invoices raised by the Appellant, it is clear that they have charged their clients for drawings/designing, Engineering, and technical training. Extended period of limitation - held that - Just because in 1991 a show cause notice had been issued to the Appellant for including Engineering charges and erection, installation and commissioning charges in the assessable value of the instruments and equipments being cleared by them to their clients and demand of differential excise duty on this basis, it could not be presumed by the Departmental officers that during subsequent period also they, in addition to sale of the instruments and control equipment manufactured by them, are also engaged in systems design activity. We are, therefore, of the view that the Appellant are guilty of suppressing the relevant information from the Department and, therefore, longer limitation period of five years for recovery of non-paid service tax has been rightly invoked by the Department. Penalty - held that - Though Section 80 of the Act provides that notwithstanding anything contained in the provisions of Section 76, 77 and 78, no penalty shall be imposable on this assessee for any failure referred to in the said provisions if the assessee proves that there was reasonable cause of the said failure, no valid reason has been given by the appellant for their failure to obtain service tax registration during the period of dispute or at least inform the Department about their activity. - Penalty u/s 78 sustained.

Issues Involved:
1. Whether the activities of the appellant are covered by the definition of Consulting Engineers' service.
2. Whether the appellant's contracts with their customers are indivisible lump sum contracts and if the drawing/designing or training portion can be subjected to service tax.
3. Whether the longer limitation period of five years under Section 73(1) of the Finance Act, 1994 is available to the Department.
4. Whether penalties under Sections 76, 77, and 78 of the Finance Act, 1994 are imposable on the appellant.

Issue-wise Detailed Analysis:

1. Coverage under Consulting Engineers' Service:
The appellant is engaged in the manufacture of telecommunication equipment and other systems, and also provides design, installation, commissioning, and training services. The Department alleged that the appellant provided taxable services as Consulting Engineers from December 1999 to April 2004 without paying service tax. The definition of "Consulting Engineer" under Section 65(31) includes any professionally qualified engineer or engineering firm providing advice, consultancy, or technical assistance. The appellant's activities of preparing engineering drawings and training personnel were found to be covered under this definition. The contracts and invoices showed separate charges for these services, thus confirming the provision of consulting engineer services.

2. Indivisibility and Taxability of Contracts:
The appellant argued that their contracts were indivisible lump sum turnkey contracts and could not be vivisected for service tax purposes. However, the Tribunal held that such contracts could be divided into components for taxation. The Tribunal referred to judgments that supported the view that contracts for design, engineering, supply, erection, installation, and commissioning could be taxed on their service components. The Tribunal also noted that the introduction of Section 65(105)(ZZZZa) for works contract service from 1/6/07 did not imply that such services were not taxable prior to this date. The Tribunal concluded that the appellant's contracts had distinct components of consulting engineer services, which were taxable.

3. Longer Limitation Period:
The appellant contended that the demand was time-barred as the Department was aware of their activities since 1991. However, the Tribunal found that the appellant had not informed the Department about their consulting engineer services and had not obtained service tax registration until January 2004. Therefore, the longer limitation period of five years under Section 73(1) was applicable due to suppression of facts by the appellant.

4. Imposition of Penalties:
The Tribunal upheld the penalties under Sections 76, 77, and 78 of the Finance Act, 1994. Penalty under Section 77 was imposed for failure to obtain service tax registration and file returns. Penalty under Section 76 was imposed for failure to pay service tax by the due date. Penalty under Section 78 was imposed for suppression of facts, as the appellant did not inform the Department about their taxable activities. The Tribunal found no reasonable cause for the appellant's failure to comply with the service tax provisions and upheld the penalties.

Conclusion:
The Tribunal dismissed the appeal, upholding the service tax demand and penalties. The appellant's activities were found to be taxable under consulting engineer services, and the contracts were not considered indivisible for service tax purposes. The longer limitation period was applicable due to suppression of facts, and the penalties were justified.

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