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TMI Blog2010 (5) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... erent 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 there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, various works to be done by the Respondent were specified and separately valued in the contract document itself. The contract as such was one single contract involving handing over of the plant in 'running condition to the principal, after completing various works including designing and engineering, civil works steel structures, erection, testing and commissioning of the plant etc. According to the Respondent, the divisibility of the contract - valued work wise- therefore, cannot be a relevant consideration for holding that service part of the contract relating to consulting engineer or design engineer , should be dissected from rest of the contract and on value thereof, service tax levied. The respondent relied on the 'dominant nature' test for determining the type of the contract. 1.2. The referring Bench noticed that there is no dispute that, theoretically, service tax can be levied on service part and, at the same time, sales tax can be levied on the sale part of the contract and no doubt that service tax can be levied only if the service is a 'taxable service' within the meaning of Finance Act, 1994. In the case of 'turnkey contract', if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plier and the recipient of the supply of goods. Now such transactions are deemed sales. Sub-clause (f) pertains to contract which had been held not t amount to sale in State of Punjab v. M/s. Associated Hotels of India Itd. (Supra). That decision has by this clause been effectively legislatively invalidated. 42. All the sub-clauses of Article 366 (29-A) serve to bring transactions where one or more of the essential ingredients of the sele as defined in the Safe of Goods Act 1930 are absent, within the ambit of purchases an sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerley Limited (sic modified). The amendment especially allows specific composite contract viz. works contract [sub-clause (b)); hire purchase contracts [sub-clause (c)], catering contracts [sub-clause (e)] by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax. 44. Of all different kinds of composite transactions the drafters of the forty-sixth Amendment chose three specific situations, a work contract, a hire purchase contract and a catering contract to bring within the fiction of a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It would thus follow that the dominant nature test cannot be applied in the case of works contract falling under clause (b) of Article 366 (29-A), and therefore it cannot be pressed into service for treating turnkey works contract on different footing. If 'works contract' can be split into sale contract and service contract, a different treatment may not be given to the so-called turnkey contract simply because the contract is on a turnkey basis - although basically a work contract. Accordingly/he Bench was prima facie of the view that Daelim's case was not correctly decided and the finding that the turnkey works contract cannot be vivisected requires consideration. 1.5. The referring Bench expressing its respectful disagreement with the decision in Daelim's case was conscious of the fact that decision in Daelim's case was challenged by the Revenue in the Supreme Court. But its appeal was dismissed vide order dated 02.08.2004 reported in 2004 (165) ELT A181. According to the Bench, summary rejection of the SLP or appeal cannot be construed as affirmation of the judgement (under challenge) on merits; it only means that the Supreme Court declined to interfere w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Had the Legislature intended to exempt turnkey contracts from service tax they would have certainly excluded such contracts by express provision of law. Rather Rules have been made to determine value of services involved in works contract by service tax (Determination of Value) Rules, 2006 and composition scheme of taxation for works contractor has also been introduced by works contract (Composition Scheme for Payment of Service Tax) Rules, 2007. 2.3. Learned JCDR submitted that section 65A (amended w.e.f. 4.5.2003) of the Finance Act, 1994 has made law for classification of taxable service and that brings into its fold different nature of services to the appropriate class. Section 67 of the Finance Act, 1994 prescribes procedure to determine value of taxable service and Rules aforesaid framed deal valuation of complex cases. Therefore works contracts by whatever name that is called by parties, if involves taxable services , such discernible services are classified and valued on case to case basis and taxed under Finance Act, 1994. Therefore the question framed by referral order may be answered in favour of Revenue. 2.4. Relying on the relevant paragraphs of the Judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale. (D). The issue is left unanswered. (E). The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of the goods in the value of the service .[emphasis supplied] 2.5. Revenue's further argument was that Hon'ble Supreme Court clearly laid down the law to the effect that indivisible, composite and Turnkey contracts involve both sale and service. After 46th Constitutional Amendment it has become possible for the State to tax value of the goods involved in these contracts as sale. The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of the goods in the value of the service. This clearly shows that indivisible, composite and Turnkey contracts are made divisible and service element involved therein are taxable under the Provisions of Finance Act, 1994. 2.6. It was further submitted by Revenue that when Turnkey contracts are executed, irrespective of percentage o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing left for denying the Revenue to levy service tax on the service element involved in a Turnkey contract. 2.8. Ld. Joint CDR further argued that when the matter of BSBK Pvt.Ltd .- 2007 (5) STR 124 (Tr.-Del.) was first before the Tribunal for its decision on 27.9.2006 in Service Tax Appeal No.100 of 2005 and its decision reported in 2007 (5) STR 124 (T), it was held by Tribunal in Para 6 of its decision as under and even after remand of the matter from Apex Court in SLP (C) 871 of 2007 in terms of order dated 30.11.2007 reported in 2008 (9) STR J 29 (SC) there is no change of fact of involvement of taxable services in the Turnkey project executed by the said appellant: 6. After hearing the learned authorised representative and pursuing the record, it becomes clear that the respondent had been rendering the taxable service of consulting engineer for the following reason:- 6.1 A perusal of invoice dated 21.6.1997 indicates separate description in respect of designing and engineering showing the exact amount of charged for the services rendered by the respondent. In the same manner invoices dated 25.4.1997, 23.6.1997 and 1.7.1997 all indicate the specific char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visect used profusely by both the sides has turned out quizzical, as Concise oxford Dictionary defines the term vivisect to mean to perform vivisection on and the word vivisection turns out to mean dissection or other painful treatment of living animals for the purpose of scientific research and unduly detailed or ruthless criticism . We revive here what Oliver Wendell Holmes once said about a word such as Vivisect : A word is not a crystal, transparent and unchanged, it is the skin of the living thought and may vary greatly in colour and content, according to the circumstances and the time in which it is used . Therefore, even considering the word vivisect to mean dissect , we find the 'divisible' nature of the contract in the appellant's case has prevented any more dissection possibility, thus distinguishable from the Daelim situation. [emphasis supplied] 3. Learned Counsel Sri P. K. Sahu appearing for the Intervener submitted that exparte decision was made by the Tribunal on 27.09.2006 in Appeal case No.ST/100 of 2005 against BSBK Pvt. Ltd - 2007 (5) STR 124 (Tri.-Del.) for which BSBK Pvt. Ltd went in SLP (Civil) No.871 of 2007 before the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while making reference, Division Bench has not extracted para 43 of the Judgment in BSNL's case in its order to appreciate the reason why services involved in a Turnkey contract cannot be vivisected. The said Para reads as under: 43. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be - did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be diSintegrated. The test for deciding whether a contract falls into one category or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. To support his argument he also took shelter of judgment of Hon'ble Supreme Court in the case of Geo Miller Co (P) Ltd. And Another V. State of M. P. And Others - (2004) 5 SCC 209. He further relied on the Judgment of Hon'ble High Court of Delhi in the case of Federation of Hotels and Restaurant Association of India V. UOI - AIR 2007 Delhi 137 to submit that when supply of articles of mineral water/soft drink in hotel/restaurant do not constitute sale or transfer of commodity, being a service, taxation of service element in Turnkey contract is inconceivable. So also he relied on the judgment of Hon'ble High Court of Madras in the case of Tamil Nadu Hotels Association V. Union of India - 2006 (2) STR 513 (Mad) to submit that aspect of service involved in a Turnkey contract does not fall under Entry 54 of the List II of Seventh Schedule for taxation by dissection. Relying on the Apex Court judgement in Sentinel Rolling Engineering Co. vs. CST - 1978 4 SCC 260, Sri Sahu submitted that execution of Turnkey contract is not complete until an assessee carries out its entire obligation imposed upon it under such contract. 3.6. Learned Counsel for the interveners furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per incuriam and rendering of Engineering and designing service involved in a Turnkey contract does not come under Consultancy Engineering service following decision of Tribunal in the case of Larsen Toubro Ltd. V. CCE, Cochin - 2004 (174 ) ELT 322 (Tri - Del). It was submitted that in view of arguments advanced by the Respondent and interveners, reference was unwarranted, 4. Heard both sides and perused the record as well as gone through the citations placed by both sides. 4.1 At the outset we make it clear that Tribunal being a creature of Statute, we are conscious of our limitations. The issues of constitutionality raised by the parties in the course of hearing received our consideration only on the basis of law laid down by various judgments of Apex Court as hereinafter discussed. 5. Constitutional validity of imposition of service tax under Article 246(1) read with Entry 97 of List I of the Seventh Schedule to the Constitution has been upheld in Gujarat Ambuja Cements Ltd. Vs. Union of India reported in 2006 (3) STR 608 (SC) and Tamil Nadu Mandap Keeper Association case - (2004) 167 ELT 3 (SC) as well as in the case of All India Fedn. of Tax of Tax Practitioners v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of taxable service. What was the economic concept, namely, that there is no distinction between consumption of goods and consumption of services is translated into a legal principle of taxation by the Finance Acts of 1994 and 1998. 5.2 Chapter V of the Finance Act, 1994 deals with Service Tax. It is clarified in the said Act that words and expressions not defined in Chapter V but used therein shall bear the same meaning as given in the Central Excise Act, 1944. Section 67 dealt with valuation of taxable services. Principle of equivalence, emanated from the judgment in Moti Laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad - 1995 (76) ELT 241 (S.C.) was made applicable to Service Tax jurisprudence by Apex Court in All India Federation of Tax Practitioners. It has been held that there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is in-built into the concept of service tax, which has received legal support in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Association of India V. Union of India [1989] 3 SCC 634, 652-653; [1989] 178 ITR 97 (at pages 115 and 116) of the case. In the case, It was held that ............... subjects which in one aspect and for one purpose fall within the power of a particular Legislature may, in another aspect and for another purpose, fall within another legislative power indeed, the law 'with respect to' a subject might incidentally 'affect' another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspect. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects.' (emphasis supplied). Finance Act, 1994 in pith and substance does not levy tax on transfer of property in goods involved in execution of a Turnkey contract. Series of Activities in the nature of service involved in such contract, demonstrating their role, foster execution thereof and offer themselves to the ambit of Finance Act, 1994 if such activities are taxable service . It is open to a Legislatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid: '..... The two taxes, the one levied upon a manufacturer in respect of his goods, the other upon a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the fist time upon the occasion of its sale.. (emphasis supplied). 6.3 Referring to the' aspect' doctrine, Laskin's 'Canadian Constitution Law' states: 'The aspect doctrine bears some resemblance to those just noted but, unlike them, deals not with what the matter is but with what it comes within ... It applies where some of the constitutive elements about whose combination the statute is concerned (that is, they are its matter ); are a kind most often met with in connection with one class of subjects and others are of a kind mostly dealt with in connection with another. As in the case of a pocket gadget compactly assembling knife blade, screwdriver, fishscaler, nailfile, et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts as stated above. Such Imposition was held constitutional by Hon'ble Supreme Court in Builders Association of India V. Union of India - 73 STC 370 (SC) 7.1 In Gannon Dunkerley Co. V. State of Rajasthan- 88 STC 204 (SC) Apex Court held that as a result of the Forty-sixth Amendment, the contract which was single and indivisible has been altered by a legal fiction into a contract which is divisible into one for sale of goods and other for supply of labour and services and as a result, such a contract which was single and indivisible has been brought at par with a contract containing two separate agreements. Value of the goods involved In the execution of a works contract became measure of levy of sales tax contemplated by article 366 (29-A) (b). Taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of establishment of the contractor would have to be apportioned between the part of the contract involving supply of materials and the part involving supply of labour and services. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods. Similar apportionment will have to be made in respect of profits expected on such contract. The profits which are relatable to the supply of materials can be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded. This means the cost of establishment i.e. [overhead expenses of the head office and branch office including rents, salary, electricity, telephone charges, etc., and interest charges to banks and financial institutions] of the contractor as well as the profit earned by him to the extent the same are relatable to supply of labour and services will have to be excluded. The amounts so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or otherwise, machinery and tools used for the execution of the works contract; (v) cost of consumables such as water, electricity, fuel used in the execution of the works contract; (vi) cost of establishment of the contractor relatable to supply of labour and services; (vii) other similar expenses relatable to supply of labour and services; and (viii) profit earned by the service provider relatable to supply of labour and services; (ii) Where Value Added Tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value or transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under clause (I)] 7.6 The Rule 2A of service tax (Determination of Value) Rules, 2006 recognised principle of equivalence as enunciated by Apex Court in All India Federation of Tax Practitioners 2001 (7) STR 625 (SC). This Rule statutorily declared the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing thus segregated, fall into respective fields of taxation under L1st-I and L1st.,II .. of Seventh Schedule of Constitution, Accordingly, the submissions of Interveners and Respondents that without specific amendment to Entry 92C of List I to the Seventh Schedule of the Constitution, segregation of service element involved in a composite contract or Turnkey contract is not permitted and tax on service elements is not leviable' does not appeal to common sense. Since Article 366 dealing with definitions of the expressions used therein is within the body of the Constitution, Article 268 cannot be read in isolation thereof. Segregation of service element from goods involved in the above nature of contracts is permissible when sale of goods involved in such contract is segregated under the constitutional provisions. 9. For the purpose of interpretation of a taxing statute, the fiscal philosophy, a feel of which is necessary to gather the intent and effect of its different clauses, should be applied. [See K.P. Verghese v. Income Tax Officer, Ernakulam and Another, (1981) 4 SCC 173]. A consideration of public policy may also be relevant in interpreting and applying a taxing Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nches 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. 10.1 Entire thrust of Revenue's submission that Constitution has permitted turnkey contract divisible for levy of sales tax by States has equal application under the Constitution for levy of service tax on the discernible or seggreable service elements of such contracts has force. 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. Such proposition finds support from judgment of Apex Court in the case of All India Federation of Tax Practitioners (supra) as well as judgment of BSNL (supra) and Imagic Creative Pvt. Ltd (supra). 11. In view of the aforesaid legal and Constitutional provisions it can irresistibly be concluded that a contract whether composite or Turnkey may involve an activit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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