2025 (4) TMI 571 - AT - Service Tax

Classification of service - Erection and Commissioning Service or Works Contract Service - exemption under N/N. 11/2010-ST 32/2010-ST and 45/2010-ST. - Invocation of extended period of limitation - penalty. Classification of the services received by the Appellant - HELD THAT - Section 65A(1) provides that classification of taxable services shall be determined according to the terms of the sub-clauses of clause (105) of section 65. Thus sub clause (zzzza) of Section clause (105) of Section 65 specifying taxable services of works contract has been aptly applied by the adjudicating authority while classifying the services of the consortium rendered to the appellant - what emanates from the LOI is that the activities of designing and drawing and model test inland transportation etc. are bundled as ancillary services in their entrustment to the consortium to be rendered by the consortium to the appellant in the course of execution of the composite works contract by the consortium. Since the services of works contract provide the essential character to the entire gamut of services provided by the consortium to the appellant the adjudicating authority has rightly found that the consortium is rendering works contract service to the appellant and the appellant is liable under Section 66A to pay service tax on the entire amount of contract under the category of works contract service . The findings of the Adjudicating Authority in the impugned order classifying the activities of the foreign companies while executing the EPC contract for the appellant under Works Contract Service applying the provisions of Section 65A of the Finance Act 1994 warrants no interference and is accordingly upheld. Whether the services in question are exempt under the Notifications No. 11/2010-ST 32/2010-ST and 45/2010-ST - HELD THAT - These notifications applied to services related to already generated electricity not to the EPC contract services provided by the consortium which were prerequisites for electricity generation. The CBEC Circular No.131/13/2010 ST dated 07.12.2010 merely states in the context of supply of electricity meters for hire that the said activity is an essential activity having direct and close nexus with transmission and distribution of electricity which is understandable as such electricity meters are used for measuring the electricity that is generated transmitted and distributed and has no application in the instant case. The notifications cannot be given a stretched interpretation to bring the works contract services of the consortium of foreign suppliers rendered to the appellant within the ambit of the aforementioned notifications. The benefit of the aforesaid notifications sought to be claimed are not available to the appellant. Invocation of Extended Period of Limitation - HELD THAT - Although from the documents it is evident that the appellant was aware of the concept of works contract and works contract tax and had considered the same in the light of the TNGST and CST regime while arranging the tax matters dehors the fact whether such arrangement was accepted by the State tax authorities or not nevertheless the fact remains that there did prevail a lot of confusion regarding the coverage of services that had the characteristics of works contract upon which the assessee had discharged service tax under different classification of service in the case of ongoing works contract that commenced prior to 01-06-2007. The CBEC Circular No. 128/10/2010-S.T. dated 24-8-2010 concedes the factum of existence of such confusions/disputes - When the assessee entertains a bonafide belief that it is not liable to tax due to issues of interpretational nature the extended period of limitation cannot be invoked and hence the demand made on the appellant is sustainable only for the normal period if any. Penalty - HELD THAT - In the facts and circumstances of the case including considering the fact that the appellant is a Government Undertaking invoking Section 80 of the Finance Act 1994 the penalties imposed in the impugned Order in Original set aside. Conclusion - i) The classification of services as works contract service upheld applying Section 65A of the Finance Act 1994. ii) The exemption under Notifications No. 11/2010-ST 32/2010-ST and 45/2010-ST denied applying a strict interpretation of exemption notifications as per the Supreme Court s guidance. iii) The invocation of the extended period is rejected due to the appellant s bona fide belief and prevailing confusion. iv) Penalties set aside invoking Section 80 of the Finance Act 1994 considering the appellant s status as a government undertaking. The appeal is thus partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

A. Whether the services received by the appellant should be classified as "Erection and Commissioning Service" or "Works Contract Service" for the disputed period.

B. Whether the services in question are exempt under the Notifications No. 11/2010-ST, 32/2010-ST, and 45/2010-ST.

C. Whether the invocation of the extended period of limitation is justified.

D. Whether the demand made on the appellant is sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

A. Classification of the services received by the Appellant.

- Relevant legal framework and precedents: The classification dispute revolves around Section 65(39a) and Section 65(105)(zzzza) of the Finance Act, 1994. The former pertains to "erection, commissioning or installation" services, while the latter defines "works contract" services.

- Court's interpretation and reasoning: The Tribunal determined that the contract was an Engineering, Procurement, and Construction (EPC) contract, which should be classified as a "works contract service" under Section 65(105)(zzzza) due to its composite nature, involving both service and supply of goods.

- Key evidence and findings: The Tribunal noted the issuance of a Letter of Intent (LOI) and payment of advance prior to 01.06.2007, but the actual work commenced after the introduction of service tax on works contract services. The adjudicating authority found no evidence of service tax payment prior to 01.06.2007 under the "Erection, Commissioning or Installation Services" category.

- Application of law to facts: The Tribunal applied Section 65A of the Finance Act, 1994, which mandates classification based on the most specific description, favoring "works contract service" over "erection, commissioning or installation" due to the composite nature of the contract.

- Treatment of competing arguments: The appellant's argument that the classification should remain as "Erection, Commissioning or Installation Services" due to the advance payment prior to 01.06.2007 was rejected. The Tribunal emphasized the need to adopt the correct classification available post-01.06.2007.

- Conclusions: The Tribunal upheld the classification as "works contract service," rejecting the appellant's contention to retain the earlier classification.

B. Exemption under Notifications No. 11/2010-ST, 32/2010-ST, and 45/2010-ST.

- Relevant legal framework and precedents: The appellant claimed exemption based on notifications exempting services related to transmission and distribution of electricity.

- Court's interpretation and reasoning: The Tribunal found that these notifications applied to services related to already generated electricity, not to the EPC contract services provided by the consortium, which were prerequisites for electricity generation.

- Key evidence and findings: The Tribunal noted that the foreign service providers were not engaged in transmission or distribution of electricity, and no electricity was generated at the time of service provision.

- Application of law to facts: The Tribunal applied a strict interpretation of exemption notifications, as mandated by the Supreme Court in Commissioner of Cus (Import) Mumbai v. Dilip Kumar & Company.

- Treatment of competing arguments: The Tribunal considered the appellant's reliance on past decisions and circulars but found them inapplicable due to differing fact circumstances.

- Conclusions: The Tribunal denied the exemption, as the services provided did not fall within the scope of the notifications.

C. Invocation of Extended Period of Limitation.

- Relevant legal framework and precedents: The extended period under Section 73(1) of the Finance Act, 1994, was invoked due to alleged suppression of facts.

- Court's interpretation and reasoning: The Tribunal acknowledged the confusion regarding works contract services during the relevant period, as evidenced by CBEC Circular No. 128/10/2010-S.T.

- Key evidence and findings: The Tribunal found that the appellant had a bona fide belief regarding its tax liability, influenced by prevailing confusion.

- Application of law to facts: The Tribunal concluded that the extended period was not applicable due to the appellant's bona fide belief and the prevailing confusion.

- Treatment of competing arguments: The Tribunal considered the respondent's argument for invoking the extended period but found it unjustified due to the acknowledged confusion.

- Conclusions: The demand was limited to the normal period, rejecting the invocation of the extended period.

D. Sustainability of the Demand.

- Relevant legal framework and precedents: The demand was based on the classification of services and the applicability of the extended period.

- Court's interpretation and reasoning: The Tribunal upheld the demand for the normal period, based on the correct classification as "works contract service."

- Key evidence and findings: The Tribunal found no evidence of service tax payment under the earlier classification prior to 01.06.2007.

- Application of law to facts: The Tribunal applied the correct classification and limited the demand to the normal period, considering the appellant's bona fide belief.

- Treatment of competing arguments: The Tribunal rejected the appellant's arguments for exemption and the earlier classification, upholding the demand for the normal period.

- Conclusions: The demand was sustained for the normal period, with penalties set aside under Section 80 of the Finance Act, 1994, due to the appellant's status as a government undertaking.

3. SIGNIFICANT HOLDINGS

- The Tribunal upheld the classification of services as "works contract service," applying Section 65A of the Finance Act, 1994, and rejecting the appellant's contention for the earlier classification.

- The Tribunal denied the exemption under Notifications No. 11/2010-ST, 32/2010-ST, and 45/2010-ST, applying a strict interpretation of exemption notifications as per the Supreme Court's guidance.

- The Tribunal limited the demand to the normal period, rejecting the invocation of the extended period due to the appellant's bona fide belief and prevailing confusion.

- The Tribunal set aside the penalties, invoking Section 80 of the Finance Act, 1994, considering the appellant's status as a government undertaking.

- The Tribunal modified the impugned Order in Original, restricting the demand to the normal period with applicable interest and setting aside the penalties imposed.