2010 (5) TMI 46 - AT - Service Tax

Turnkey Projects - Composite Contracts - Consulting Engineering Services - The moot question was whether turnkey contract can be vivisected? - Whether service by way of advice, consultancy or technical assistance in the case of turnkey contract will attract service tax will have to be determined on the facts of the case? Held that An entry incorporated to the Statute book w.e.f. 1.6.2007 (service tax on works contract) has nothing to do with the severance of the contract to segregate goods and services involved in turnkey contracts. Leviability of service tax on different elements of services certainly depends on the facts and circumstances of each case and classification of the respective services. The Division Bench while dealing with the appeals shall have advantage to look into each case on its own factual matrix and legal back ground as well as respective pleadings. - The plea that because decision of Daelim s case has been followed in the past by different Benches of the Tribunal, that holds the field does not get sanction of law when different aspects of a commercial transaction are liable to tax under different legislations according to the fields of taxation assigned to States and Government of India. - Severability of composite and turnkey contract permitted by Constitution by Article 366 (29-A)(b) cannot be said to have been for the mere purpose of levy of sales tax. Severance discerns service elements of the contracts and provides measure of levy to impose service tax on taxable services A contract whether composite or Turnkey may involve an activity or cluster of activities in the nature of services and such services may be provided in the course of execution of such contracts while incorporating goods into the contract concerned. Such discernible services may be advice, consultancy or technical assistance and depending upon the nature of the activity, they may be classifiable under appropriate category of taxable service under section 65 A of the Finance Act, 1994. When Article 366(29-A)(b) to the Constitution has made indivisible contracts of the aforesaid nature divisible to find out goods component and value thereof, it can be unambiguously be stated that the remnant part of the contract may be attributable to the scope of service tax under the Provisions of Finance Act, 1994.

Summary

Issues Involved:
1. Whether service by way of "advice, consultancy or technical assistance" in a turnkey contract attracts service tax.
2. Whether a turnkey contract can be vivisected to segregate service elements for taxation.

Issue-wise Detailed Analysis:

1. Service Tax on Advice, Consultancy, or Technical Assistance in Turnkey Contracts:

The Tribunal considered whether services such as advice, consultancy, or technical assistance provided under a turnkey contract attract service tax. The Tribunal referred to the decision in Daelim Industrial Co. Ltd. vs. CCE, Vadodara, which held that a turnkey contract could not be vivisected to levy service tax on its parts. However, the Tribunal noted that the referring Bench believed that the divisibility of contracts was not in issue in Daelim's case. The Tribunal also referenced the Supreme Court's decision in Bharat Sanchar Nigam Ltd. (BSNL) vs. Union of India, which discussed the constitutional amendments allowing works contracts to be dissected for sales tax and service tax purposes. The Tribunal concluded that theoretically, service tax could be levied on the service part of a turnkey contract if it qualifies as a taxable service under the Finance Act, 1994.

2. Vivisection of Turnkey Contracts:

The Tribunal examined whether turnkey contracts could be vivisected to segregate and tax service elements. The Tribunal referred to the 46th Amendment to the Constitution, which allowed works contracts to be divisible for taxation purposes. The Tribunal noted that the Supreme Court in BSNL's case upheld the divisibility of works contracts into sale and service components. The Tribunal also highlighted that the dismissal of the Revenue's appeal against Daelim's case by the Supreme Court did not bar reconsideration of the decision. The Tribunal concluded that the decision in Daelim's case was not correctly decided and required reconsideration. The Tribunal further observed that the Finance Act, 1994, and subsequent rules and circulars provided for the classification and valuation of taxable services in composite or turnkey contracts.

Conclusion:

The Tribunal concluded that turnkey contracts could be vivisected, and discernible service elements involved therein could be segregated and classified for service tax under the Finance Act, 1994, provided such services are taxable. The Tribunal directed that the respective appeal cases be placed before the concerned Benches for disposal based on this interpretation.