2018 (11) TMI 833 - AT - Service Tax

Composite Works Contract - benefit of composition scheme - Works Contract (composition scheme for payment of Service Tax Rules) 2007 - whether the contracts entered by the appellant should be classified as construction of a pipeline primarily for non- commercial or non-industrial purposes or as turnkey/EPC projects including engineering or commissioning (EPC) projects? Held that - The decision of the Larger Bench in the case of Lanco Infratech Ltd., 2015 (5) TMI 37 - CESTAT BANGALORE (LB) is identical to the dispute in hand, where it was held that construction of canals, laying of pipelines or conduits to export irrigation, water supply or for sewerage disposal when provided to Government or its undertakings for non-commercial non-industrial purposes, even when executed under turnkey projects /EPC contractual mode would fall within the ambit of clause (b), Explanation (ii)(b) of Section 65 (105) (zzzza) and would consequently not be exigible to service tax. The work done by the appellant in the nature of turnkey/EPC projects for Governments with respect to laying of pipes for water supply/sewerage is covered by explanation (ii)(b) of Section 65 (105) zzzza and is not exigible being not for commerce or industry. The demand of interest and penalties are liable to be set aside - the demand itself is not sustainable and the question of eligibility of the appellant for benefit of composition scheme becomes redundant - Appeal allowed - decided in favor of assessee.

Summary

Issues:
Classification of works contracts as construction of pipelines for non-commercial purposes or as turnkey/EPC projects under service tax rules.

Analysis:
The judgment by the Appellate Tribunal CESTAT Hyderabad involved two appeals challenging an Order-in-Original. The appellant, a manufacturer of pipes, entered into works contracts with government departments and municipalities for water supply and sewage systems. The dispute revolved around whether these contracts should be classified as construction of pipelines for non-commercial purposes or as turnkey/EPC projects under service tax rules.

The Tribunal referred to the definition of composite works contract under Section 65(105)(zzzza) and the relevant explanations. The Revenue argued that the contracts were EPC contracts falling under explanation (ii)(e), making them taxable. However, the appellant contended that the contracts were for laying pipelines for non-commercial purposes and thus not chargeable to service tax.

The appellant relied on a precedent set by the Larger Bench in the case of Lanco Infratech Ltd., which held that laying pipelines for non-commercial purposes, even under turnkey projects, fell within the exclusion of explanation (ii)(b) and were not taxable. The Tribunal found this precedent applicable to the current case and ruled in favor of the appellant.

Consequently, the Tribunal set aside the demand for interest and penalties on the appellant. As the demand itself was deemed unsustainable, the question of the appellant's eligibility for the composition scheme benefit became irrelevant. Therefore, the appeal of the appellant was allowed, and the impugned order was set aside, while the appeal of the Revenue was rejected.

In conclusion, the Tribunal's decision clarified the classification of works contracts as construction of pipelines for non-commercial purposes, following the precedent set by the Larger Bench. The judgment provided clarity on the taxability of such contracts under the service tax rules, ultimately benefiting the appellant in this case.