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TMI Blog2011 (3) TMI 538X X X X Extracts X X X X X X X X Extracts X X X X ..... stems including training of operation and maintenance personnel, supervision of maintenance of train control, signalling and telecommunication systems, supply of spares and operation and maintenance manual" for the section of DMRC between Shahdara to Rithala and Vishwavidhyalaya to Central Secretariat. The consortium was led by the Appellant Company. The contract was for a fixed lump sum price of Rs. 1,29,58,97,046 plus Euro 6,82,18,300 and USD 1,93,09,380 in foreign currency, which had been apportioned amongst the members of the consortium in the manner set forth in the contract documents. The contract was divided into six sections on geographical basis. Each section was divided into various "cost centres", which give detailed break up of the work at different stages (milestone activity) along with the charges for the same. Cost Centre A preparing includes the plans for various activities, preparation of preliminary systems design for Train Control, Signalling and Telecommunication, etc. Cost centre B is for preparing complete specification for various sub-systems, final designs for Train Control, Signalling and Telecommunication System, as built drawings and complete configuratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant company were registered with Service Tax Department since 17-7-1997 for "Consulting Engineers' Service" and initially, while in respect of their contract (SYS-I) with DMRC, they had paid service tax amounting to Rs. 33,60,883, thereafter in view of Hon'ble Supreme Court's decision in case of Daelim Industrial Co. Ltd. v. CCE 2003 (155) ELT 457 (New Delhi - CESTAT), they stopped further payment of service tax in respect of their contract with DMRC as it is an indivisible lump sum turnkey works contract; and (2) appellant's contract with DMRC (SYS-I) was for setting up of electronic system for the signalling/Train control and communication in some sections of Delhi Metro which included design, equipment supply, installation and commissioning of the system. 1.3-2 Shri Kinshook Chaturvedi, JE (Signalling), DMRC in his statement dated 18-11-2005 stated that - (1) DMRC's contract (SYS-I) with the consortium led by the Appellant company is for setting up of electronic system for signalling, train control and communication system and the scope for the contract includes the designing, supply of equipment, erection, installation and commissioning of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) The value for each cost centre was further divided into "milestones" - milestone being completion of certain verifiable activities by a certain dates and the payments, whose break up had also been mentioned into rupee portion and foreign currency portion, were released on achieving the 'milestones' - full payment if the milestone is achieved by the due date and payment after deducting damages in case of delay. (4) The value for each items of machinery/equipment and service had been mentioned in the contract itself. In fact detailed price break up for various equipments, machinery, parts and various services - design, erection work, installation, testing, commissioning etc. had been given by the contracts while submitting their price bids and had been finalized after itemwise negotiations with the successful bidder before the award of the contract. (5) The SYS-I contract appeared to have distinct sale of goods and service (mainly Engineering Consultancy and installation & commissioning) components about 43 per cent of the cost of contract was attributable to Engineering Consultancy Service and Installation & Commissioning services and about 57 per cent of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) the Commissioner has confirmed the demands mainly on the grounds that - (a) Since the payment is based on cost centres, the contract loses the character of indivisibility - the contract is a works contract but the same is divisible into the different identifiable activities for which separate pricing has been done; (b) While the activities undertaken for cost centres A & B are covered under "Consulting Engineers' Services", the activities undertaken for cost centres D & E are covered under, "erection, commissioning or installation" services; (c) The Appellants were initially paying service tax on the basis of cost centres but after some time they stopped paying the tax in view of Tribunal's judgments in case of Daelim Industrial Co. Ltd. (supra), the Government's SLP against which was dismissed by Hon'ble Supreme Court; and (d) Service tax is chargeable on service component of a works contract as after 46th Constitutional Amendment. Article 366(29A)(b) of the Constitution of India permits the works contract to be split; The above grounds for confirming service tax demands and imposing penalty are without any basis. (2) The DMRC has award ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hotels & Restaurants Association of India v. Union of India AIR 2007 Delhi-137 wherein it was held that supply of mineral water & soft drinks in hotel and restaurants does not constitute sale for the purpose of Standards of Weights & Measures Act, 1976 and Standards of Weights & Measures (Packaged Commodities) Rules, even though by deeming fiction of Article 366(29A)(f) of the Constitution of India these have been considered as sale for levy of sales tax. Therefore the legal fiction of Article 366(29A) cannot be applied for vivisection of an indivisible works contract to subject its service component to service tax. (4) The Appellant and other consortium members had handed over a completely constructed, installed and functioning, communication and signalling system. This service became taxable with effect from 1-6-2007 as "Works Contract Service" under section 65(105)(zzzza) of the Finance Act, 1994. Bombay High Court in case of Indian National Shipowners' Association v. Union of India [2009] 19 STT 408 has held that if an activity is covered under a new taxing entry, then such service would not be taxable under any earlier entry. Hon'ble Karnataka High Court in case of CS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract for design, engineering, supply, installation, testing & commissioning of a train control signalling and tele-communication system of a particular section of Delhi. Metro is delivery of installed and functioning system for a lump sum amount with single point responsibility. Such a service is different and distinct from its component activities - designing/engineering, manufacture/supply of goods, erection, installation, testing or commissioning and the same being an indivisible contract, cannot be vivisected for charging service tax on its components which may be covered by the definition of "Consulting Engineers' Service" or "Erection, Commissioning or Installation Service". (9) In terms of CBEC's Circular No. 123/5/2010-TRU, dated 24-5-2010, setting up of signalling and train control system cannot be regarded as an activity of erection, commissioning or installation of any plant or equipment. (10) House of Lords, in case of Customs & Excise Commission v. British Telecommunication Plc [1999] STC-758, where BT had purchased new cars for its fleet direct from the manufactures, the contracts with manufactures were for sale and delivery of the cars and the propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reparing plans, preliminary drawings, detailed drawings, etc. and for various items of work relating to "erection, installation & commissioning", as mentioned in the contract are the actual charges of those items of work as the price bids given by the consortium led by the Appellant against the tender floated by DMRC were itemwise and after acceptance of those bids, there were itemwise negotiations alter which the prices had been finalized. If the Appellant claims that the charges for various items of work and goods, as mentioned in the contract, are not the actual charges for those items, the burden of proving, this by documentary evidence is on them, which has not been discharges by them. (3) The adjudicating authority has found that the items of work in cost centres "A" & "B" are "consulting Engineer's Service", as all such jobs come under the ambit of "technical advice or consultancy" or "technical assistance". Similarly, the items of work mentioned in cost centres D & E are services falling under "erection, commissioning or installation service". (4) The contract of the consortium led by the Appellant with DMRC is basically an EPC contract, which are divisible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing summary dismissal without any reasoned order, does not lay down any law. (8) In this case, admittedly, the intention of the contract is handing over a fully functional Train control, signalling and telecommunication system for a section of Delhi Metro. This is nothing but a contract for "erection, installation & commissioning", an activity which was very much taxable during the period of dispute. Appellant's plea that such contracts involving supply of goods along with a basket of activities became taxable as "work contract service" under section 65(105)(zzzza) with effect from 1-6-2007 is not correct. "Erection, installation or commissioning service", even if involving supply of goods was taxable during the period prior to 1-6-2007 also. Hon'ble Bombay High Court's judgment in case of Indian National Shipowners' Association (supra) cited by the Appellant is not applicable to the facts of this case. The judgment of Hon'ble Karnataka High Court in case of Turbotech Precision Engg. (P.) Ltd. (supra) holding that an activity under work contracts was not taxable prior to 1-6-2007 is not a binding precedent, as no reasoning has been given for arriving at this conclusion. &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench in case of BSBK (P.) Ltd. (supra) should have followed Jyoti Ltd. (supra) or should have referred to a Five Member Bench. (4) Learned DR has not given any response to Appellant's submission that decision of Larger Bench in case of BSBK (P.) Ltd. is erroneous and per incuriam as it has failed to consider the ruling of Hon'ble Supreme Court in a series of judgments holding that the deeming fiction of Article 366(29A) is confined only to "tax on sale or purchase of goods and cannot be extended to areas other than sales tax. (5) Taxability of an service depends not only on the "activity" undertaken but also whether there is any understanding between the parties to perform that activity for a consideration. In a turnkey contract, a contractor has to perform several activities, which if undertaken under a standalone understanding between the parties may be taxable under separate categories - engineering, transportation of goods, procurement of goods, erection, installation, commissioning, etc. This does not mean that a turnkey contractor is providing all these services. The dominant objective of the turnkey contract is to hand over a completely set up functional system to the cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been completed by the due date, full payment is released and in case of delay, payment is released after deducting the penalty for the period of delay. The bills are presented by the contractors at the end of every month on the basis of milestone activities completed. (7) Shri Kinshook Chaturvedi, Junior Engineer (Signalling), DMRC, in his statement dated 18-11-2005 recorded under section 14 of the Central Excise Act, 1944 has stated that- (a) for award of this contract, sealed tenders had been invited in the prescribed format and each bidder was to submit with his tender the 'milestone payment schedule' in prescribed tabular form showing the anticipated cumulative value of works & supplies for different Cost centres for each section. (b) after selecting the lowest bidder, specific amount for each activity & supply was negotiated, final price was decided and total financial package was determined, and (c) detailed price break for various equipment, machinery & parts thereof and various services such as design, installation, testing, commissioning, erection etc., as mentioned in the "Schedule of milestone payment and pricing document'' is the actual price f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion" services would be chargeable to service tax. Another main contention of the appellant is that there is no wilful mis-statement, suppression of facts or contravention of the provisions of Finance Act, 1994 or of the Rules made thereunder with intent to evade the payment of service tax and therefore neither longer limitation period under proviso to section 73(1) of the Finance Act, 1994 is available to the Department for recovery of allegedly non-paid service tax nor penalty under sections 76 & 78 ibid is imposable, while the department's allegation in this regard is that the appellant have suppressed the relevant information from the department and, therefore, provisions of section 73(a) for recovery of non-paid tax and penal provisions of sections 76 & 78 have been rightly invoked. Thus, the question to be decided on the cases are as under:- (1) Whether the contract of the appellant led consortium with DMRC (SYS-1) is an indivisible lump sum turnkey contract for supply of a functional train control, signalling & telecommunication system in some particular sections of Delhi Metro or whether the same is a divisible contract for supply of goods (machinery, equipment, etc.) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services which attract service tax are defined in various clauses of section 65(105) of the Finance Act, 1994 and as per the provisions of section 66 ibid, a tax at the rate specified in this section is chargeable on all the services referred to is various clauses of section 65(105). Since the rate of tax specified in section 66 is ad valorem rate, the assessable value on which it is chargeable is determined under section 67 read with Service Tax (Determination of Value) Rules, 2006, which, if the entire consideration for service is in money, is the gross amount charged for the service and the gross amount includes the value of the other services and the goods, if any, used, for providing the service - the goods used for providing the service may get consumed while providing the service or may get passed on, to the service receiver either as such or in charged form. A contract for a particular service involving use of other ancillary service and/or goods for providing the service is an indivisible contract for that service and such contract will attract service tax if the service, the provision of which is the intention of the contract, is taxable. If such a service contract involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges for food be subjected to sales tax, the Hon'ble Court also considered the question as to when a contract can be said to be a contract for sale as well as service and in para 8 of the judgment observed that unless there is an intention in the contract to charge for the goods used in providing the service, the contract cannot be treated as divisible contract - one for sale and another for service and the revenue would not be entitled to split up the contract value, estimate approximately the charges for such material and charge sales tax on the same. In this regard, para 8 of the judgment is reproduced below :- "8. In a case arising under the Assam Sales Tax Act, 1947 though there was no express sale in respect of gunny bags in which rice, an exempted commodity, was supplied to Government, they were held to form assessable turnover. There was, however, in that case evidence that the assessees had charged the Government for those bags. [Mohanlal Jogani Rice & Atta Mills v. State of Assam [1953] 4 STC 129 - (AIR 1953 Assam 42)]. In D. Masanda and Co. v. CST [1957] 8 STC 370 - (AIR 1957 Madhya Pradesh 76) the question was whether photographic materials imported and used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract of service, such as bleaching and calendaring, where the goods after such processing are delivered packed, a sale of packing materials is possible, quite apart from the contract of service. The question in such cases would be one of evidence, whether there is such a contract besides the one of service. Where, however, there are no such distinct contracts and the contract is one and indivisible, the essential part of which is one of services, packing would be part of or incidental to the services, and unless an intention to charge for the materials used in the packing can be spelt out, the revenue would not be entitled to split up the contract, estimate approximately the charges for such materials and treat them as chargeable on the mere ground that the transaction involved transfer of packing materials, whose value must have been taken into consideration while fixing charges for the service. Such an implied contract of supply of packing materials was inferred in a contract of service namely, drying raw tobacco in Krishna and Co. Ltd. v. State of Andhra Pradesh (1956) 7 STC 26 - (AIR 1957 Andhra Pradesh 706). But the decision in that case did not rest on there being a transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lot of land owned by him, negotiates with a building Contractor-cum-Architect after telling him about his requirement - plinth area, number of bedrooms, size of drawing room etc. and enters into contract with him for construction of house for a specified sum, even though the job may include preparation of detailed design of the house before starting the construction, the contract will be a contract for - construction service. But if as per his contract with the building contractor, first detailed design of the house is to be prepared by the contractor as per his requirement and satisfaction and only after finalization of the drawing, the construction work is to be started and based on the charges for preparation of drawing and charges for construction, including material used for construction, a lump sum price is fixed after negotiation, this will be a composite contract for architect's service as well as construction service. 4.2-2 Thus whether a contract is a composite contract for sale of goods as well as providing of service, depends upon whether there is such intention in the contract and such intention has to be ascertained from the terms of the contract. Similarly if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Transformers & Electricals Kerala (supra) has held that a contract for design & engineering, manufacture, installation and commissioning of transformers, where the contractor has charged separately for design & engineering job is a divisible contract and service tax under "Consulting Engineer's service" head would be chargeable on the amount charges by the Appellant for design and Engineering. This judgment of Tribunal has been upheld by Hon'ble Kerala High Court vide judgment reported as Transformers & Electricals Kerala's case (supra). Same view has been taken by the Tribunal in case of Transweigh(India) Ltd. (supra) and by a Larger Bench of the Tribunal in the case of BSBK (P.) Ltd. (supra). Though it has been pleaded that the Larger Bench of the Tribunal in its judgment in case of BSBK (P.) Ltd. (supra), while holding that severability of composite and turnkey contract is permitted by Constitution of India not merely for levy of sales tax but also for service tax and that Article 366(29A)(b) read with Articles 286A and 246 of the Constitution enable segregation of value of goods from different elements of service involved in composite contract and segregated elements fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract, has been admitted by the Apex Court and the matter is still pending. 4.4-1 On going through the Tribunal's judgment in cases of Daelim Industrial Co. Ltd. (supra), Larsen & Toubro Ltd. (supra) and Petrofac International Ltd. (supra) we find that the basis of these judgments is the preposition that a '"work contract cannot be vivisected and part of it subjected to tax". This preposition itself is fallacious. A work contract is a contract for work and labour i.e., a service contract. If it is an indivisible service contract and the service is taxable under section 65(105); service tax would be chargeable. If it is a divisible/composite contract involving sale as well as service, the service part, if taxable under section 65(105) of the Finance Act, 1994 would be taxable. Thus for the purpose of charging service tax, the question of divisibility or indivisibility of the work contract, which is nothing but a service contract, is irrelevant. The moment a work contract is called indivisible, the question will arise as to work contract for what? The indivisible work contract would certainly be for some service and if that service is taxable service tax would be attracted. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are concerned in the present case, where each component of the contract design and Engineering, supply of goods as well as erection, installation & commissioning is important and distinct. 4.5 In the present case, the contract of the appellant led consultation with DMRC is for "Design, manufacture, supply, installation, testing and commissioning of Train control, signalling and telecommunication system" for some particular sections of Delhi Metro. The contract is divided into five geographical sections -R1 (Shahdara - Tis Hazari), R2 (Tis-Hazari - Trinagar), R3 (Trinagar - Rithala), M1 (Vishwavidhyalaya - ISBT), M2 (ISBT- Central Secretariat) and MS (Miscellaneous). The contract gives the break up of the total contract price into the price for various sections. Price for each section- R1, R2, R3, M1, M2 & MS is divided into five cost centres. As discussed in para 3.1 above, cost centre A is for preparing works program for complete job, preparing preliminary design for train control, signalling and telecommunication systems, preparing specification for line side equipments and indoor equipments, preparing layout plans for equipment and cables, preparing layout plans for earthing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract in this case is not simply for installation & commissioning of train control, signalling and telecommunication system but is for "design, manufacture, supply, installation, testing and commissioning of train control, 'signalling and telecommunication system'. As per clause 5.1 of the General Condition of the contract, the contractor shall carry out and be responsible for the design of the works which shall be prepared by qualified designers who are engineers or other qualified professionals well-experienced in relevant design work. As per clause 5.8 of the General Condition, if any patent registered design or software is developed by the contractor specifically for the works, the title thereto shall vest in DMRC. As per clause 18.1 of the General Condition, the contractor shall effect and maintain professional indemnity insurance for a specified amount in respect of any design of the works to be carried out by or on behalf of the contractor and this insurance shall ensure the contractor's liability in case of professional negligence or error in the design of the works. Similarly there are detailed provisions in the General Conditions regarding installation of equipment, te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, in the contract itself there is clear demarcation between goods supply and service and within services, there is clear demarcation between the services of designing and other technical assistance and the services of installation, testing and commissioning. It is also worth noting that in this contract, the price of equipment/parts and cables/optic fibre is not absolutely fixed, as it may vary depending upon changes in the rates of sales tax and excise duty. 4.5-4 As regards the judgment of Hon'ble Supreme Court in case of Patnaik & Co. (supra) cited by the appellant, this judgment is also of no relevance to the facts of this case. Approval of designs by the DMRC before the contractor could go ahead with goods supply and erection, installation & commissioning job cannot be said to be supervision. 4.5-5 In this case, the plea of the appellant that the contract of the appellant with DMRC for "Design, Manufacture, Supply, Installation, Testing & Commissioning of trains control, signalling and telecommunication system" is an indivisible works contract, which cannot be vivisected for charging service tax on its service component, is fallacious; as if this plea of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment & cables, preliminary hazard analysis, specifications for train control, signalling & communication system, preparing final drawings of the system and the designing work and other similar technical assistance are clearly covered by the definition of Consulting Engineer's Service". 5.2 Under section 65(105)(zzd) read with section 65(29) and 65(39a), introduced with effect from 1-6-2003, the service in relation to commissioning and installation of plant, machinery or equipment become taxable. With effect from 10-9-2004, "erection" was also added and the taxable service become 'erection, installation or commissioning'. With effect from 16-6-2005, the scope of this service was enlarged to include installation of- (a) electrical and electronic devices, including wiring or fittings therefore, or (b) Plumbing, drain laying or other installations for transport of fluid, (c) Heating, ventilation or air-conditioning including preparation of duct work and sheet metal work; (d) Thermal insulation, sound insulation, fire proofing or water proofing; (e) Lift and escalator, fire escape stair cases or travelators; and (f) Such othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defines taxable service in relation execution of a work contract - as "any service provided or to be provided, to any person, by any other person in relation to the execution of a works contract, excluding work contract in respect of roads, airports, railways, transport terminal, bridges, tunnels and dams". As per the Explanation to section 65(105)(zzzza), for the purpose of this sub-clause, 'work contract' means a contract wherein - (i) transfer of property in goods involved in execution of such contract is leviable to tax as sale of goods; and (ii) such contract is for the purposes of carrying out - (a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluid, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation fireproofing and water proofing, Lift and escalator, fire escape staircases or elevator; or (b) Construction of a new building or a civil structure or a part thereof, or o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) or contracts for "Turnkey projects including engineering procurement and construction or commissioning (EPC Project)", which involve transfer of property in goods in execution of such contracts and such transfer of property in goods is liable to Sales tax/VAT as sale of goods. Since the definition of "work contract" is only for the purpose of clause 65(105)(zzzza) which came into force with effect from 1-6-2007, it is valid only for the period with effect from 1-6-2007 and for the types of contracts mentioned in it. Therefore, for the period prior to 1-6-2007, the meaning of 'Works Contract' as commonly understood i.e., a contract for work and labour and in other words, a service contract has to be adopted and it would not be correct to treat a work contract as something different from a service contract. As discussed in para 5.4-1 above, if such a work contract is an indivisible service contract whether or not involving use of goods which get consumed or get passed on to service receive either as such or in changed form, and that service is taxable, the works contract will attract service tax and if the work contract is a composite contract involving sale of goods and one or mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rior to 1-6-2007 as, as discussed above, "erection, installation or commissioning services", "commercial or industrial construction service", residential constructions services were taxable even prior to 1-6-2007, even if the same involved use/supply of goods on which Sales tax VAT was payable. Similarly in respect of EPC contracts which are divisible contracts for design & engineering, procurement of goods, erection, installations & commissioning, service tax was chargeable even prior to 1-6-2007 on these taxable service component. The taxable services covered by section 65(105)(zzza) and the services covered by section 65(105)(zzd) [erection, installation or commissioning services], section 65(105)(zzq) (Commercial or industrial construction service) and section 65(105)(zzzh) [residential construction service] are over lapping. While with effect from 1-6-2007, following the principle of harmonious construction, it can be said that while section 65(105)(zzzza) would cover the services defined by section 65(105)(zzd), section 65(105)(zzq), section 65(105)(zzzh) and EPC contracts which involve transfer of property is goods on which tax as sale of goods is leviable, and section 65(10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contract, without giving any intimation to the Department, they subsequently stopped paying service tax in respect of this contract and even stopped declaring in their ST-3 returns, the amounts received from DMRC for jobs covered by the definition of 'Consulting Engineer's Service' and 'Erection, Installation or Commissioning Service'. Since the payment of service tax is under self-assessment system under which an assessee is expected to determine his service tax liability correctly, pay the tax and thereafter declare the value of taxable service including the value of non-taxable services, tax payable and the tax paid in the six monthly ST-3 returns, the appellant's action of not declaring the amounts received in respect of the jobs covered under cost centres A & B and D & F in the ST-3 return and not paying service tax in respect of the same, amounts to suppression of the relevant information with intent to evade the payment of tax. Therefore, we are satisfied that longer limitation period under proviso to section 73(1) has been correctly invoked and the tax demand is within time. 8. Whether penalty under sections 76 and 78 of the Finance Act, 1994 is imposable on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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