2012 (6) TMI 165 - AT - Service Tax

Works Contract Service - Turnkey Contract - whether service provided to the Irrigation and CAD Department of Government of Andhra Pradesh are classifiable under the head works contract service - invocation of extended period of limitation - penalty imposable u/s 76, 77 & 78 - Held that - Scope of work that was executed by Ramky-Murthy JV was a turnkey project in general and an engineering/procurement/construction/commissioning (EPC) project in particular, and what was executed by Maytas-NCC JV for the benefit of the State Government was an EPC project. Hence, services provided satisfy the statutory requirements of works contract defined u/s 65(105)(zzzza) inasmuch as (i) transfer of property in goods was involved in the transaction and VAT was paid on such goods, (ii) the contracts were for the purpose of carrying out irrigation projects of the Government through turnkey/EPC mode, and (iii) none of the contracts was in the excluded category of works contracts. Further, appellants have not been able to establish that any dam was built in execution of any of the EPC contracts and nothing in the text of the definition of WC indicate that turnkey/EPC projects for irrigation are excluded. Retrospective exemption notification - Notification No.41/2009 dated 23.10.2009 exempting works contract in respect of canals is not retrospectively effective. Furthermore, Circular dt. 24/05/2010 also stand unfavorable to appellant. - an exemption notification cannot be given retrospective effect unless it expressly provides for retrospective operation. Non-Taxability in view of introduction of Works Contract w.e.f. 01.06.2007 - Held that - What matters is the fact that the contracts were executed by the appellants and payments received by them after 01/06/2007 and therefore they are liable to pay service tax on the taxable service tax under the head works contract service on the turnkey/EPC contracts in question. Benefit u/s 67(2) - Held that - Benefit of Section 67(2) is liable to be granted to the assessees and accordingly the gross amount charged can be treated as cum-tax value and the service tax element can be deducted from it to arrive at the taxable value of works contract service. Deductions of retention money from gross amount charged - Held that - Retention money was only a deferred payment and the appellants were entitled to receive the gross amount charged in the R.A. Bill. If that be so, there can be no valid claim for deduction of the retention money from the gross amount as rightly held by the adjudicating authority. CENvat credit - Held that - No entitlement of CENVAT credit on inputs used as this benefit is barred under Rule 3(2) of the Works Contract (Composition Scheme) Rules, 2007. But there appears to be no embargo on taking CENVAT credit on capital goods or input services. Extended period of limitation - Held that - Since, Ramky, the leading partner of the Ramky-Murthy JV, was registered with the Department under WCS , filling ST-3 returns and paying service tax in respect of similar turnkey/EPC contracts after 01/06/2007. Hence, Ramky-Murthy JV cannot be assumed to have bona-fide belief that they were not aware of service tax liability under the head WCS in respect of the subject contracts - allegation of suppression of facts with intention to evade tax is sustainable - right invokation of extended period. Penalty u/s 78 - Held that - Section 78 underwent an amendment w.e.f. 10/05/2008 and simultaneous penalty u/s 76 & 78 cannot be imposed. however in present case, since periods of dispute in these two appeals are partly beyond 10/05/2008, hence, matter needs to be examined fresh. Penalty imposed u/s 75, 77 and 76 is sustained.

Issues Involved:
1. Classification of services provided by the appellants under "Works Contract Service" (WCS).
2. Determination of taxable value and permissible deductions.
3. Invocation of the extended period of limitation.
4. Sustainability of penalties imposed under Sections 76, 77, and 78 of the Finance Act, 1994.

Detailed Analysis:

Issue 1: Classification of Services under WCS
The Tribunal examined the nature of the contracts awarded to the appellants by the Government of Andhra Pradesh, which were described as "Turnkey/EPC contracts." The contracts encompassed a wide range of activities, including surveying, investigation, designing, engineering, construction, commissioning, and maintenance. The Tribunal found that these contracts were composite and indivisible, fitting squarely within the definition of "works contract" under clause (e) of Section 65(105)(zzzza) of the Finance Act, 1994. The contracts involved transfer of property in goods, and VAT was paid on such goods. The Tribunal rejected the appellants' argument that their activities could alternatively be classified under "commercial or industrial construction" or "site formation and clearance, excavation and earth moving and demolition," noting that these services did not involve transfer of property in goods. The Tribunal concluded that the services provided by the appellants were classifiable as "works contract service" and not under any other heads.

Issue 2: Determination of Taxable Value and Permissible Deductions
The Tribunal noted that the impugned demands of service tax were quantified based on Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The appellants were allowed to treat the gross amount charged as cum-tax value, deducting the service tax element to arrive at the taxable value. However, the Tribunal rejected the appellants' plea for deduction of retention money from the gross amount charged, as the retention money was only a deferred payment and was eventually received by the appellants. The Tribunal also noted that the appellants were not entitled to claim CENVAT credit on inputs used in the execution of the contracts, but could claim credit on capital goods or input services.

Issue 3: Invocation of the Extended Period of Limitation
The Tribunal found that the appellants were aware of their service tax liability under WCS, as evidenced by the registration and payment of service tax by the leading partner, Ramky, in respect of similar contracts. The Tribunal rejected the plea of "bona fide belief" and noted that the appellants had willfully suppressed material facts and contravened the provisions of the Finance Act with intent to evade payment of service tax. The extended period of limitation under the proviso to Section 73(1) was correctly invoked.

Issue 4: Sustainability of Penalties
The Tribunal did not find any reason to grant the benefit of Section 80 of the Act to the appellants, as there was no reasonable cause for their failures. The penalties imposed under Section 77 were sustained, and the penalties under Section 76 were also sustained in part. However, the penalties under Section 78 were set aside for re-quantification, and the question of imposing Section 76 penalties in certain appeals was remanded for fresh decision.

Conclusion:
1. The services provided by the appellants are classifiable as "works contract service."
2. The taxable value should be re-determined by treating the gross amount charged as cum-tax value and excluding the service tax element.
3. The extended period of limitation is invocable.
4. Penalties under Section 77 are sustained, Section 76 penalties are sustained in part, and Section 78 penalties are set aside for re-quantification.

The appeals were disposed of accordingly, with directions for re-quantification of service tax and penalties, and a reasonable opportunity of being heard was to be given to the appellants on the remanded issues.

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