2017 (1) TMI 308 - AT - Service Tax

Composite contract with foreign supplier - erection, commissioning or installation services and consulting engineering service - technical assistance, engineering knowhow training etc - Held that - It is evident that the contract involves both supply of goods as well as rendering of various services. Such contracts would be covered within the category of works contract service as a separate service in the statute w.e.f. 01/06/2007 - The Hon ble Supreme Court in the decision of Larsen & Toubro Ltd. 2015 (8) TMI 749 - SUPREME COURT has categorically held that any contract in the nature of works contract cannot be vivisected into its various elements and charged to service tax separately for the period prior to 01/06/2007 when WCS was introduced in the statute - In the present case the import of the machinery alongwith the associated services was complete during the period 2005-2006, before the introduction of WCS. Consequently, we are of the view that the levy of service tax on the service elements by vivisecting the composite contract cannot be upheld. The levy has been upheld on the basis of reverse charge mechanism. Section 66A was introduced into the statute w.e.f. 18/04/2006 providing for levy of service tax on reverse charge basis on the import of service. The position of law is well settled that prior to this date, service tax cannot be levied on reverse charge basis. In the present case, the period of dispute is 2005-2006 - Since all such invoices are prior to 18/04/2006, we have no hesitation in holding that the entire demand of service tax merits to be set aside. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Levy of service tax on activities undertaken by a foreign supplier during 2005-2006.
2. Vivisection of a composite contract for plant and machinery supply for service tax liability.
3. Classification of activities like transfer of engineering knowhow and technical assistance for service tax.
4. Charging service tax under erection, commissioning, or installation services.
5. Applicability of reverse charge mechanism for service tax on imported services.

Analysis:
1. The appellant challenged the demand for service tax on activities by a foreign supplier during 2005-2006, arguing that service tax on imported services only became taxable from 18/04/2006 with the introduction of Section 66A and the Taxation of Services Rules, 2006. They cited CBEC Circulars and case laws to support their position. The tribunal noted that service tax cannot be levied on imported services before 18/04/2006. In this case, all invoices from the foreign supplier were dated before this date, leading to the conclusion that the demand for service tax should be set aside.

2. The appellant contended that a composite contract for plant and machinery supply should not be vivisected to impose service tax on individual activities. They relied on a Supreme Court decision stating that works contract services cannot be divided for service tax before the introduction of Works Contract Service (WCS) in the statute on 01/06/2007. The tribunal agreed, emphasizing that the contract involved both goods supply and services, falling under works contract service, and thus, service tax on separate service elements before 01/06/2007 was not valid.

3. Regarding the classification of activities like transfer of engineering knowhow and technical assistance for service tax, the tribunal noted that these services were part of a composite contract involving plant and machinery supply. The contract listed service elements separately, but the tribunal held that such contracts would be covered within the category of works contract service, especially since the machinery import and associated services were completed before the introduction of WCS in 2007.

4. The appellant objected to the charging of service tax under erection, commissioning, or installation services, arguing that these activities were carried out with technical personnel provided by the foreign supplier. The tribunal did not find merit in this argument, as the overall contract was treated as a composite contract for plant and machinery supply, falling under works contract service.

5. The tribunal also addressed the applicability of the reverse charge mechanism for service tax on imported services. It noted that Section 66A was introduced for levy of service tax on reverse charge basis on imported services from 18/04/2006. Since the disputed period was 2005-2006, and all invoices were issued before 18/04/2006, the tribunal concluded that the entire demand for service tax should be set aside. Consequently, the impugned order was set aside, and the appeal was allowed.