2019 (7) TMI 330 - AT - Service Tax

Input Credit - Works Contract services - Composition scheme - Appellant submits that they were given separate contracts for supply of transformer as well as erection and commissioning of same. In purchase order also both the values are appearing separately - HELD THAT - Appellant has supplied the transformer under separate contract on payment of central excise duty and the erection, commissioning of transformer was under separate contract. When the value of both the activity is separately shown, both the activities cannot be clubbed to make it taxable under the Works contract composition scheme. The revenue has nowhere disputed the payment of central excise duty on transformer and therefore once excise duty payment is made on the transformer, the Appellant is eligible for availing credit of cenvat charged on the inputs used in manufacture of Transformers. The inputs used for manufacture of transformer are not inputs for execution of works contract. There is no allegation that the Appellant has taken cenvat credit of duty paid on Transformer which was erected/ commissioned by them - Hence the demand of cenvat against the Appellant is absolutely illegal. Valuation - inclusion of value of transformer which is not used/ consumed in providing service - HELD THAT - Transformer was not used in execution of works contract but it itself was installed/ commissioned and hence there is no meaning of including the value of transformer in value of works contract service. The value of any material which is being used in providing the services can be included. The transformer is not used/ consumed in providing service so as to include its value in assessable value of Works contract. Further even assuming so prior to 06.07.2009, for the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007, there was no requirement of including the value of free issue of material used for carrying out the works contract. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Eligibility to avail CENVAT credit on inputs used in manufacturing transformers.
2. Inclusion of the value of transformers in the value of services for service tax calculation.
3. Imposition of penalties on the appellants.

Issue-wise Detailed Analysis:

1. Eligibility to Avail CENVAT Credit on Inputs Used in Manufacturing Transformers:
The main contention was whether the appellant, M/s IMP Powers Ltd., could avail CENVAT credit on inputs used in manufacturing transformers while discharging service tax liability under the Works Contract Composition Scheme. The adjudicating authority held that the appellant was ineligible for CENVAT credit on inputs due to the composition scheme. However, the tribunal found that the appellant had separate contracts for the supply and erection of transformers, with central excise duty paid on the transformers. The tribunal noted, "The inputs used for manufacture of transformer are not inputs for execution of works contract." Consequently, the demand for CENVAT credit against the appellant was deemed "absolutely illegal."

2. Inclusion of the Value of Transformers in the Value of Services for Service Tax Calculation:
The adjudicating authority included the value of transformers in the value of services to demand differential service tax. The tribunal disagreed, stating, "Transformer was not used in execution of works contract but it itself was installed/commissioned and hence there is no meaning of including the value of transformer in value of works contract service." The tribunal emphasized that the value of materials used in providing services could be included, but the transformer itself was not consumed in providing the service. The tribunal also referenced CBEC Circular No. 150/1/2012-ST and the Tribunal’s order in Essar Projects (India) Ltd., which clarified that for contracts executed before 07.07.2009, the value of free issue materials need not be included.

3. Imposition of Penalties on the Appellants:
The adjudicating authority imposed penalties on the appellants, including M/s IMP Powers Ltd., M/s Sunil Hitech Engineers, and Shri Aaditya Ramniwas Dhoot. The tribunal found that the appellants had a "bonafide belief about tax on supply and services separately being two independent contracts" and thus, there was no reason to impose penalties. The tribunal concluded that the impugned order was "not sustainable" and set aside the penalties.

Conclusion:
The tribunal allowed the appeals, setting aside the adjudicating authority's order, and granted consequential reliefs to the appellants. The tribunal's decision was based on the separation of contracts for supply and erection, the non-inclusion of transformer value in service tax calculations, and the absence of any basis for penalties.