2014 (8) TMI 741 - AT - Service Tax

Works Contract - Split of Turnkey project - intention of parties - appellant splitting contract into two, one with the main party, namely, China National Automotive Industry International Corporation for supply of equipment and another with the authorized person in India for erection and commissioning - Held that - a number of meetings and discussions were held between the appellants and SOKEO who were representing CNAICO and after these meetings and negotiations about prices Letter of intent was issued by the appellant to CANICO. It is important to note that even the said Letter of intent was issued through SOKEO. The Letter of intent very clearly speaks about the design, engineering, manufacture, testing, supply, transportation, storage at site, erection, testing and commissioning of plant and equipment. The two turbines were not manufactured by CNAICO but got manufactured from Nanjing Turbine & Electric Machinery (Group) Co Ltd. It was also observed from the said Letter of intent that CNAICO was to depute NTC for the supervision of erection job to be undertaken by SOKEO at the project site on free of charge basis. The Letter of intent makes it clear that designs system, engineering, procurement, manufacture, quality control, testing, packing and forwarding, deputation of supervisory engineer shall be the responsibility of CNAICO. Further the said Letter of intent states that certain equipments were to be procured locally and finally the equipment are to be installed at the site. It would thus be seen from the said Rule that clause (i) of sub-rule (1) provides that value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. We also note that the goods supplied by CNAICO have been cleared on payment of Customs duty after determining the value of such goods and therefore it should be possible to determine the value of transfer of property in goods involved in the execution of the said works contract and thereafter value of the service portion. The normal rate of service tax would be applicable on the value of service so determined. Penalty under Sections 77 and 78 of the Finance Act, 1994 is not imposable. Due to the fact that the appellants cannot be compelled to opt for the Composition Scheme and the value has to be determined as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006, the matter will require re-examination by the original authority and the question of penalty under Sections 77 and 78 can be re-determined thereafter only. In our view, if appellants contention that they have paid to CNAICO only for the supply of goods is true then the value for service portion will become nil and therefore it would have implication on penalty imposable - Matter remanded back - Decided in favour of assessee.

Issues Involved:
1. Determination of whether the contracts between the appellant, CNAICO, and SOKEO constitute a single composite works contract.
2. Liability for service tax under the works contract service on a reverse charge basis.
3. Applicability of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.
4. Invocation of the extended period for demand.
5. Imposition of penalties under Sections 77 and 78 of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Determination of Composite Works Contract:
The appellants are engaged in generating electricity and contracted CNAICO and SOKEO for setting up a power plant. The contracts were split into two parts: one for supply of equipment with CNAICO and another for erection and commissioning with SOKEO. The appellant argued that these are separate contracts, one for supply of goods and the other for services, and thus should not be treated as a composite contract. However, the tribunal observed that the Letter of Intent and subsequent agreements indicated that SOKEO was the authorized representative of CNAICO, and the overall responsibility for the project lay with CNAICO. The tribunal concluded that the two contracts must be read together as a single composite contract for a turnkey project, thus falling under the definition of works contract service as per Section 65(105)(zzzza).

2. Liability for Service Tax on Reverse Charge Basis:
The tribunal held that the services provided by CNAICO, when combined with those provided by SOKEO, constituted a works contract service. Therefore, the appellant was liable to pay service tax on a reverse charge basis under Section 66A of the Finance Act, 1994. The tribunal emphasized that the contracts, when read together, clearly indicated a turnkey project, thus making the appellant liable for service tax on the entire contract.

3. Applicability of Composition Scheme:
The appellant contended that they should not be compelled to opt for the Composition Scheme under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The tribunal agreed, stating that opting for the Composition Scheme is optional and cannot be imposed by the Revenue. Instead, the value of the works contract service should be determined as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006, which allows for the deduction of the value of goods involved in the execution of the contract from the gross amount charged.

4. Invocation of Extended Period:
The appellant argued that the extended period for demand should not be invoked as there was no suppression of facts with intent to evade payment of duty. However, the tribunal observed that the appellant did not disclose the payments made for services in their service tax returns, which constituted suppression of facts. Therefore, the invocation of the extended period was justified.

5. Imposition of Penalties:
The appellant contended that penalties under Sections 77 and 78 of the Finance Act, 1994 should not be imposed as the case involved interpretation of law. The tribunal noted that the determination of penalties would depend on the re-examination of the value of the service portion as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006. If it is found that the payments to CNAICO were solely for the supply of goods, the value of the service portion would be nil, impacting the imposition of penalties. Consequently, the matter was remanded to the original authority for re-examination and re-determination of penalties.

Conclusion:
The appeals were allowed by way of remand for re-examination of the value of the service portion and re-determination of penalties, with the tribunal emphasizing that the contracts between the appellant, CNAICO, and SOKEO constituted a single composite works contract liable for service tax on a reverse charge basis. The tribunal also clarified that opting for the Composition Scheme is optional and cannot be imposed by the Revenue.

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