2013 (12) TMI 796 - AT - Service Tax

Demand of service tax - Two contracts was for supply of indigenous equipment and materials and the other one for the Construction/ Erection/ Installation of plant - Revenue contends that there was artificial bifurcation of contracts and contracts should be treated as one - Revenue also contends that explanation to Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, substituted under Notification No. 23/2009-ST dated 07.7.2009, is not applicable to the applicant s case - Whether two contracts dated 24.08.2007, executed by the appellant with service recipients can be considered as separate contracts or as one contract - Held that - explanation added to Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 is applicable only for those contracts which are entered after 07.7.2009 - It is clear from the Circular issued by CBEC that where execution of works contract has commenced prior to 07.7.2009, in those cases gross amount, for the purpose of payment of service tax, will not include the free of cost supply by the service recipient. In view of the clause of the supply contract, the findings of the adjudicating authority that ownership of the Balance of Plant and items stands transferred only at the time of completion of work, is not correct. In the case of imported equipments as well as the Balance of Plant equipment, the ownership/ title lies with the service recipient when the same are received at site. Accordingly, it has to be held that after receipt of balance equipment, the title/ ownership of the same is transferred to the service recipient. Accordingly, adjudicating authority cannot go beyond the CBEC Circular No. 150/1/2012-ST dated 08.2.2012 wherein it has been clarified that for the works contract executed before 07.7.2009, free of cost supplies are not required to be added to the gross amount, for the purpose of payment of service tax. There is no evidence on record to convey that both, the supply contract and the construction contract were artificially bifurcated after introduction of explanation to Rule 3(1) of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. Therefore, both the contracts dated 24.08.2007 for Supply of equipments and Construction of works has to be treated as distinct and separate contracts and value of supply contract cannot be added to the value of the construction contract for the purpose of service tax liability - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the two contracts dated 24.08.2007 executed by the appellant with service recipients can be considered as separate contracts or as one contract for determining taxable value of the service provided.
2. Applicability of the explanation to Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, to contracts entered before 07.7.2009.
3. Transfer of ownership/title of the Balance of Plant and its impact on service tax liability.
4. Relevance of CBEC Circular No. 150/1/2012-ST dated 08.02.2012 and Circular No. 334/13/2009-TRU dated 06.7.2009 to the case.
5. Applicability of the ITAT judgment dated 28.02.2010 to the present case.

Issue-wise Detailed Analysis:

1. Separate or Composite Contracts:
The primary issue was whether the two contracts, one for supply and the other for construction, should be treated as separate or composite for service tax purposes. The appellant argued that both contracts were independent, with distinct defect liability clauses (Clause 18 in the Supply Contract and Clause 34 in the Construction Contract). The adjudicating authority had previously held that the contracts should be considered as one, but the Tribunal found that the contracts had separate provisions for defects liability, indicating they were distinct.

2. Applicability of Rule 3(1) Explanation:
The appellant contended that the explanation to Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, introduced on 07.7.2009, should not apply to their contracts executed on 24.08.2007. The Tribunal agreed, citing CBEC Circular No. 150/1/2012-ST, which clarified that the explanation applies only to contracts entered after 07.7.2009. Thus, the gross amount for service tax should not include the value of free supplies for contracts commenced before this date.

3. Transfer of Ownership/Title:
The adjudicating authority had held that the ownership of the Balance of Plant transferred only upon completion of the facility. However, the Tribunal found that as per Clause 15.4 of the Supply Contract, the title and ownership transferred to the recipient upon delivery at the site. This contradicted the adjudicating authority's findings and supported the appellant's argument that the supply contract's value should not be added to the construction contract for service tax purposes.

4. Relevance of CBEC Circulars:
The Tribunal emphasized the importance of CBEC Circular No. 150/1/2012-ST and Circular No. 334/13/2009-TRU. These circulars clarified that for contracts executed before 07.7.2009, the value of free supplies should not be included in the gross amount for service tax. The Tribunal found no evidence that the contracts were artificially bifurcated to evade service tax.

5. Applicability of ITAT Judgment:
The Revenue had relied on an ITAT judgment which treated similar contracts as composite. However, the Tribunal noted that income tax law operates differently from service tax law. The Tribunal concluded that the ITAT judgment was not applicable to the present case, as the determination of value under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, is distinct from income tax considerations.

Conclusion:
The Tribunal concluded that the two contracts dated 24.08.2007 should be treated as separate and distinct for service tax purposes. The explanation to Rule 3(1) introduced on 07.7.2009 does not apply to these contracts. The appeal by the appellant was allowed, and the cross-objection by the Revenue was rejected.