2006 (3) TMI 37 - AT - Service Tax

Service Tax Consulting Engineer Service Construction contract cannot be subject to service tax as consulting engineering service Work contact cannot be vivisected and part of it subjected to service tax

Summary

Issues Involved:
1. Whether the contracts awarded to M/s. Larsen & Toubro Ltd. and M/s. Petrofac International Ltd. for construction and engineering services are liable for service tax.
2. Whether the contracts can be vivisected to tax the service portion separately.
3. Applicability of the Tribunal's decision in the case of M/s. Daelim Industrial Co. Ltd.
4. Impact of the 46th Amendment to the Constitution on the interpretation of service tax provisions.

Detailed Analysis:

1. Liability for Service Tax on Contracts:
The department issued show cause notices to both respondents, alleging non-disclosure of taxable services as consultant engineers and demanded service tax along with penalties. The Commissioner (Appeals) dropped the proceedings, relying on the Tribunal's decision in M/s. Daelim Industrial Co. Ltd., which held that a work contract cannot be vivisected to tax the service portion.

2. Vivisection of Contracts:
The department argued that the contracts explicitly mentioned separate prices for residual process design, detailed engineering, supply, and construction/installation, thus making it unnecessary to vivisect the contracts. They contended that the service portion was clearly identifiable and should be taxed separately. However, the respondents argued that the contracts were for turnkey projects, and the detailed engineering and design were incidental to the main construction work, not standalone services.

3. Applicability of M/s. Daelim Industrial Co. Ltd. Decision:
The Commissioner (Appeals) relied on the Tribunal's decision in M/s. Daelim Industrial Co. Ltd., which was upheld by the Supreme Court, to conclude that the contracts in question were for construction and not for consultancy services. The Tribunal reiterated that a work contract cannot be vivisected, and the services provided as part of the contract cannot be separately taxed.

4. Impact of the 46th Amendment:
The department argued that post the 46th Amendment, which introduced the concept of deemed sales, the contracts could be divided for tax purposes. However, the Tribunal noted that the amendment pertained to sales tax and did not affect the interpretation of service tax laws. The Tribunal emphasized that the principal objective of the contracts was construction, and the associated services were integral to the main contract.

Conclusion:
The Tribunal upheld the Commissioner (Appeals)'s decision, rejecting the department's appeals. It concluded that the contracts were primarily for construction on a turnkey basis, and the services rendered were incidental and integral to the main contract. Therefore, the contracts could not be vivisected to levy service tax on the service portion. The Tribunal reaffirmed the applicability of the decision in M/s. Daelim Industrial Co. Ltd. and clarified that the 46th Amendment did not alter the interpretation of service tax provisions in this context.