2021 (11) TMI 18 - AT - Service Tax

Taxability - scope of the term Railways Works contract in relation to Mumbai Railway Vikas Corporation Ltd (MRVC) - reverse charge mechanism - services provided to Appellants by the service providers located outside India not having office in India - supply of goods and supply of service separately - contract of supply is a divisible contract or not - whether during the period of dispute, i. e. 2005 to 2010, whether in contract for supply of goods and services incidental to the supply of goods, the services portion can be segregated and subjected to levy of Service Tax? HELD THAT - The contract is not divisible as urged by the learned authorized representative. The contract price includes cost of all items included in the scope of work, technical specifications, specific requirements, drawings and/ or under any other heads of Contract Documents and to complete the subject work on turnkey basis, irrespective of whether all the items for Engineering, Supply and Erection are categorically listed out/ brought out elsewhere or not. The contract price includes cost of all works which are deemed to be performed, executed and supplied by the Supplier as stipulated in the Contract and assigned to various available heads and categories in the price schedule referred to by the authorized representative. A combined reading of clauses contained in the agreement/contract and along with the definitions and explanations given as per the dictionaries, it cannot be agreed upon with the submissions made by the authorized representative that the contract, under consideration is a divisible contract, which could have been vivisected to charge the service tax in respect of certain portion attributable to supervision undertaken by the foreign service provider as per the contract. Further the findings recorded by the Commissioner cannot be agreed upon, whereby he holds that the contract was not a turnkey contract incorporating all the activities specified in the contract as one complete whole. In case of SENTINEL ROLLING SHUTTERS ENGINEERING COMPANY PVT. LTD. VERSUS THE COMMISSIONER OF SALES TAX 1978 (9) TMI 157 - SUPREME COURT wherein the Hon ble Supreme Court was considering whether it was possible to break-up one contract into two segments - one for sale of goods and the others for providing services. The definition of 'Works Contract' do not state that the contracts, of railway do not fall within the scope of work contract service but state that the work contract services, in respect of railways, are excluded from taxable category as defined by the said section. The work contract has been defined by the explanation, and any contract which satisfies to the requirements specified therein will fall under the category of work contract. However if the said contract falls within the exclusion category the same cannot be taxed under the said taxable category. Since the work contracts in respect of railways have been excluded from the definition of taxable service the same cannot be taxed under this category. The appellant being public sector under taking of Ministry of Railway, and the project undertaken is for Railways, cannot be subject to tax in this category even after 1st June 2007. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Classification of services received by Mumbai Railway Vikas Corporation Ltd (MRVC) from foreign service providers.
2. Demand and recovery of service tax under reverse charge mechanism.
3. Applicability of interest and penalties under the Finance Act, 1994.
4. Nature of the contract: whether it is a composite works contract or divisible contract.
5. Applicability of service tax on works contract services related to railways.

Issue-wise Detailed Analysis:

1. Classification of Services:
The Principal Commissioner classified the services received by MRVC from M/s Siemens AG Germany, M/s Siemens Austria, and M/s SAS Sculfort France as "erection, commissioning or installation services" under Sec 65(105)(zzd) read with Sec 65(29) and Sec 65(39a) of the Finance Act, 1994. This classification was based on the nature of the services provided, which included supervision of installation, commissioning, and testing of dual voltage equipment on EMU rakes.

2. Demand and Recovery of Service Tax:
The Commissioner confirmed a demand of service tax amounting to ?3,17,18,820 under Sec 73(2) of the Finance Act, 1994, and ordered MRVC to pay the same under the provisions of Sec 66A read with Sec 68 of the Finance Act, 1994. The service tax already paid by MRVC was appropriated. The demand was based on the reverse charge mechanism since the foreign service providers did not have an office in India.

3. Applicability of Interest and Penalties:
The Commissioner ordered the recovery of interest on the service tax of ?3,17,18,820 from MRVC under Sec 75 of the Finance Act, 1994. However, the Commissioner refrained from imposing any penalties under Sec 76, 77, and 78 of the Finance Act, 1994, considering the circumstances.

4. Nature of the Contract:
MRVC argued that the contracts were composite and indivisible, involving both supply of goods and incidental services, thus falling under the "works contract services" category. The Tribunal, referencing decisions like Larsen and Toubro [2015 (39) STR 913 (SC)], held that works contracts related to railways are excluded from the scope of service tax. The Tribunal found that the contract was indeed composite, involving design, development, manufacture, supply of goods, and incidental services, and thus should be classified as a works contract.

5. Applicability of Service Tax on Works Contract Services Related to Railways:
The Tribunal relied on precedents where it was established that works contracts related to railways are excluded from service tax. Decisions like Delhi Metro Rail Corporation Ltd. [2018 (4) TMI 845 - CESTAT NEW DELHI] and ETA Engineering Pvt. Ltd [2016 (43) S.T.R. 547 (Tri. - Del.)] supported this view. The Tribunal concluded that since the services were part of a works contract related to railways, they were not liable to service tax under any category, including "erection, commissioning or installation services."

Conclusion:
The Tribunal set aside the impugned order, holding that the services received by MRVC were part of a composite works contract related to railways, which is excluded from service tax. The appeal was allowed, and the demand for service tax, interest, and the classification under "erection, commissioning or installation services" was quashed. The Tribunal emphasized the importance of the composite nature of the contract and the specific exclusion of railway-related works contracts from service tax liability.