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2015 (5) TMI 37 - AT - Service TaxWorks contract - classification of contract after 01.06.2007 where contract entered into prior to 01.06.2007 - whether works contract is a taxable service only w.e.f. 01.06.2007 - Erection, Commissioning or Installation Service - services are not primarily for industry or commerce - aying of pipelines/ conduits for lift irrigation systems for transmission of water or for sewerage disposal - Scope of the term Dam - execution of the whole or a part of the work is sub-contracted on back to back basis by the main contractor (which is a joint venture) to sub contractors. Held that - Laying of pipelines/ conduits for lift irrigation systems for transmission of water or for sewerage disposal, undertaken for Government/ Government undertakings and involving associated activities like trenching, soil preparation and filling, supporting masonry work, jointing of pipes, electro-mechanical works or pumping stations and like activity, is classifiable only under Commercial or Industrial Construction Service (CICS) for the period upto 01.06.2007 and not under Erection, Commissioning or Installation Service (ECIS) Construction of canals for irrigation or water supply; construction or laying of pipelines/ conduits for lift irrigation conceived and integrated into a dam project, must be classified as works contract in respect of dam and is thus excluded from the scope of Works Contract Service defined in Section 65(105)(zzzza) of the Act, in view of the exclusionary clause in the provision; Turnkey/ EPC project contracts, enumerated in clause (e), Explanation (ii) in Section 65(105)(zzzza) of the Act is a descriptive and ex abundant cautela drafting methodology. In the light of the decision in Alstom Projects India Ltd ., fortified by the Special Bench decision (dated 19.03.2015) in Larsen & Toubro Ltd. reference, a turnkey/ EPC contract is taxable prior to 01.06.2007 as well. On and since 01.06.2007, turnkey/ EPC contracts must be classified on the basis of the essential character of the service provided thereby, with the aid of classification guidelines set out in Section 65A(2) of the Act. Consequently, a turnkey/ EPC contract must be classified under any of the clauses (a) to (d), Explanation (ii), Section 65(105)(zzzza). The bundled bouquet of services provided as turnkey/ EPC contract, classifiable as Commercial or Industrial Construction Service (CICS) prior to 01.06.2007, would be classifiable under clause (b), Explanation (ii), Section 65(105)(zzzza) on and from 01.06.2007 and would not be exigible to service tax if the rendition of service thereby is primarily for non-commercial, non industrial purpose, in view of the exclusionary clause in clause (b) of the definition of WCS. Construction of canals under a dam for transmission of water or sewerage; or construction of pipelines or conduits for conveyance of water for irrigation, domestic consumption or sewerage disposal even where executed as turnkey/ EPC contracts; (i) would be classifiable under clause (b), Explanation (ii) of Section 65(105) (zzzza); (ii) construction of canals, pipelines or conduits for Government/ Government undertakings for augmentation of irrigation, water supply or sewerage disposal would be for a non-commercial, non-industrial purpose or user and thus excluded in view of the exclusionary clause in clause (b) of WCS definition; and (iii) construction of canals, pipelines or conduits for transmission of water including by lift irrigation would be, when these works are conceived as integrated to a dam project, works contract in respect of a dam and thereby excluded from the purview of WCS. Construction of canals/ pipelines/ conduits to support irrigation, water supply or for sewerage disposal, when provided to Government/ Government undertakings would be for non-commercial, non-industrial purposes, even when executed under turnkey/ EPC contractual mode and would fall within the ambit of clause (b), Explanation (ii) of Section 65(105)(zzzza); and would consequently not be exigible to service tax, in view of the exclusion enacted in clause (b) This is the only possible and harmonious interpretation possible of the several clauses under Explanation (ii) of Section 65 (105)(zzzza), a distinct taxable service defined with constituent elements thereof substantially drawn from elements of pre-existing taxable services like ECIS, CICS or COCS; and other services when bundled to amount to turnkey/ EPC; Where under an agreement, whether termed as works contract, turnkey or EPC, the principal contractor, in terms of the agreement with the employer/ contractee, assigns the works to a sub-contractor and the transfer of property in goods involved in the execution of such works passes on accretion to or incorporation into the works on the property belonging to the employer/ contractee, the principal contractor cannot be considered to have provided the taxable (works contract) service enumerated and defined in Section 65(105)(zzzza) of the Act.
Issues Involved:
1. Classification of services related to laying pipelines for lift irrigation, transmission, and distribution of drinking water or sewerage. 2. Taxability of construction of canals for irrigation purposes and laying of pipelines for Government/ Government undertakings under Works Contract Service (WCS). 3. Interpretation of turnkey projects, including Engineering, Procurement, and Construction (EPC) projects under WCS. 4. Classification of construction services for Government/ Government undertakings under WCS. 5. Service tax liability when the main contractor sub-contracts the entire work to sub-contractors. Detailed Analysis: Issue A: Classification of Services for Laying Pipelines The Tribunal examined whether laying pipelines for lift irrigation, transmission, and distribution of drinking water or sewerage for Government/ Government undertakings should be classified under Erection, Commissioning, or Installation Service (ECIS) or Commercial or Industrial Construction Service (CICS). The Tribunal concluded that such services should be classified under CICS for the period up to 01.06.2007 and not under ECIS. This conclusion was based on the nature of the activities involved, such as trenching, soil preparation, supporting masonry work, and jointing of pipes, which align more closely with CICS. Issue B, C, and D: Taxability of Construction of Canals and Pipelines The Tribunal addressed whether the construction of canals for irrigation and laying pipelines for Government/ Government undertakings falls under WCS. It was determined that: 1. Construction of canals and pipelines for irrigation or water supply, integrated into a dam project, should be classified as works contract "in respect of dam" and is excluded from WCS. 2. Turnkey/EPC projects are descriptive and not distinct taxable services. These projects should be classified based on the essential character of the service provided, using classification guidelines in Section 65A(2) of the Act. 3. Construction of canals or pipelines for Government/ Government undertakings for non-commercial, non-industrial purposes falls under clause (b) of WCS and is not subject to service tax due to the exclusionary clause. Issue E: Service Tax Liability for Sub-Contracted Work The Tribunal considered whether the main contractor is liable for service tax when the entire work is sub-contracted. It concluded that if the principal contractor assigns the work to a sub-contractor and the transfer of property in goods involved in the execution of such work passes to the employer through the sub-contractor, the principal contractor cannot be considered to have provided the taxable service under Section 65(105)(zzzza) of the Act. This conclusion is based on the Supreme Court's judgment in State of A.P. vs. Larsen & Toubro Ltd., which clarified that the transfer of property occurs through the sub-contractor, not the main contractor. Conclusion: The Tribunal's judgment clarified the classification and taxability of various construction-related services provided to Government/ Government undertakings. It established that such services should be classified under CICS and are not subject to service tax if they are for non-commercial, non-industrial purposes. Additionally, it was determined that the main contractor is not liable for service tax if the work is entirely sub-contracted. The appeals were remitted for determination on merits by the appropriate Bench, in accordance with the conclusions recorded on the five issues.
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