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TMI Blog2011 (3) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... in any manner is one or more disciplines of engineering became taxable. Under section 65(31). The term . "Consulting Engineers" means any professionally qualified engineer or an engineering firm, who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client is one or more disciplines of engineering. The services of "Installation & Commissioning" and "Repair & Maintenance" became taxable with effect from 1-7-2003 and the Appellant took service tax registration for repair & maintenance on 1-8-2003 and for "installation & commissioning" and "Consulting Engineer's Service" on 20-1-2004. The allegation against the Appellant is that though they were providing taxable services of Consulting engineers even during the period prior to 1-8-2003, they neither took service tax registration nor paid any service tax on the same. According to the Department, during the period from December, 1999 to April, 2004, the Appellant, in terms of their Contracts with their clients, provided taxable service of 'Consulting Engineer" to them and charged an amount of Rs. 8,07,18,925 on which service tax chargeable was Rs. 40,71,946, but they did not pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eer's services could be separated and charged to tax. According to the Department, since the service tax can be levied on the part of the value of the contract, especially when the taxable value of the service is separately known, the charges for drawing/designing, providing training to personnel and other technical assistance are chargeable to service tax. It has also been alleged that the Appellant by not taking any service tax registration and not informing the Department about their Engineering Consultancy activity, have suppressed this information from the Department. The above allegations are incorrect as the Appellant had not provided any Consulting Engineer's service but had executed lump sum turnkey contracts for design, engineering, manufacture, supply, erection, testing and commissioning of control systems. (2) The lower appellate authority has completely overlooked the law laid down by this Tribunal in a series of judgments holding that "lump sum turnkey contracts for design, engineering, manufacture, supply, erection, testing & commissioning" cannot be vivisected to levy service tax on the service components. In this regard, reliance is placed on the Tribunal's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 366(29A) seeks to define "tax on the sale or purchase of goods", which is used in sales tax entries 92 and 92A of List I and entry 54 of List II and, therefore, this definition cannot be adopted for entry tax covered by entry 52 of List II of 7th Schedule. (d) Hon'ble Delhi High Court's judgment in case of Federation of Hotels & Restaurant Association of India v. Union of India AIR 2007 Delhi 137 wherein it was held that supply of mineral water and soft drink in hotels and restaurants does not constitute sale under the provisions of Standards of Weights & Measures Act, 1976 and Standards of Weights & Measures (Packaged Commodities) Rules, 1976 even though by deeming fiction of article 366(29A)(f), supply of these has been considered sale for levy of sales tax. (5) Drawing & designs prepared are to be treated as service provided by the Appellant to themselves, not a consulting engineer's service provided to clients. Just because drawings were to be approved by the clients, it does not mean that the service of consulting engineer's has been provided. In this regard, reliance is placed on Hon'ble Supreme Court's judgment in cases of Patnaik & Co. v. State of Orissa AI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... British Telecommunications Plc. [1999] STC 758, where BT had purchased new cars for its fleet direct from the manufacturers, the contracts with manufacturers were for sale and delivery of the cars and the property in a car passed only on or after its delivery and supplies of transport in form of delivery services were different and distinct from supply of cars, held that since what BT wanted was delivered cars and delivery service was incidental or ancillary to the supply of cars, and only on delivery, the property in cars passed, the contract was one contract for delivered cars and one supply for VAT purpose and BT was not entitled to deduct tax on delivery charges and it was artificial to split the various parts of the transaction into different supplies for VAT purpose. House of Lords in another case of Card Protection Plan Ltd. v. Customs & Excise Commissioners [2001] VKHL 4 where the CPP offered the credit card holders, a card protection plan, which in addition to protecting them against financial loss and inconvenience resulting from loss or theft of their credit cards, passports, and car keys, also included other services to assist the card holders in the event of loss of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansformers & Electricals Kerala v. CCE [2009] 22 STT 96. Same view has been taken by the High Courts and Tribunal in the cases of- (a) M.N. Dastur & Co. Ltd. v. Union of India 2002 (140) ELT 341 (Cal.); (b) Tata Iron & Steel Co. Ltd. v. Union of India 1988 (33) ELT 297 (Patna); (c) CCE v. Kerala State Electricity Board [2006] 5 STT 73 (Ker.); (d) Foster Wheeler Energy Ltd. v. CCE&C [2007] 9 STT 320 (Ahd. - CESTAT); (e) Air Conditioner Co. of India v. CCE [2006] 4 STT 42 (New Delhi - CESTAT); (f) Transweigh (India) Ltd. v. CCE [2007] 6 STT 519 (Mum. - CESTAT); and (g) Indian Farmers Fertilizer Co-operative Ltd. v. CCE [2007] 6 STT 283 (New Delhi -CESTAT). The contracts in this case are identical to the contracts in case of Transformers & Electricals Kerala (supra) (2) A Larger Bench of the Tribunal in case of BSBK (P.) Ltd. (supra) has held that Lump sum Turnkey works contracts can be vivisected and discernible service elements can be segregated and subjected to tax if the service/services are taxable. This judgment of larger Bench is binding on Benches of lesser strength. (3) The lower appellate authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milarly, judgments in case of Sentinel Rolling Shutters & Engg. Co. (P.) Ltd. (supra) and Patnaik & Co. (supra) pertaining to Sales Tax have no relevance to this case. (8) Judgments of House of Lords in cases of Card Protection Plan Ltd. (supra) and British Telecommunications Plc. (supra) being British VAT judgments are of no relevance to this case. (9) Appellant's plea that such contracts involving supply of goods along with basket of activities became taxable as "Work Contract Service" under section 65(105)(zzzza) of the Finance Act, 1994 with effect from 1-6-2007 and prior to 1-6-2007, taxable service of consults Engineer provided as part of a work contract was not taxable, is not correct. The tax entry introduced by section 65(105)(zzzza) of the Finance Act, 1994 with effect from 1-6-2007 is different from other tax entries of the service tax and Hon'ble Bombay High Court's judgment in case of Indian National Shipowner's 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 M/s. Turbotech Precision Engineering (P.) Ltd., holding that an activity under work contract was not taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts with their clients for - Design, engineering, supply, erection, installation, trial - run/testing and commissioning or renovation/upgradation including design and engineering of control & instrumentation system; (b) the contracts had clauses for design & engineering and also mentioned amount to be paid for the same; (c) invoices mentioned separate charges for design, engineering and technical training of the client's personnel; (d) the Appellant obtained service tax registration for "repair and Maintenance service" on 1-8-2003 and for "erection, installation & commissioning" and "consulting engineer's service" on 20-1-2004; and (e) In 1991, a show-cause notice dated 15-1-1991 had been issued to the Appellant for demand of allegedly short paid duty in respect of clearances of instruments and apparatus during 1986-87 on the ground that the amounts charged from the customers towards "engineering charge" and "erection & commissioning charge" had not been included in the assessable value of the goods. 3.1 While according to the Department, the Appellants' activity of preparation of drawing, designs and providing technical training to the clien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems and whether the "drawing/designing" or "training" portion of these contracts can be subjected to service tax under heading Consulting engineering services? Also whether the Appellant's plea that prior to 1-6-2007 Service Tax could not be charged on the taxable service portion of such contracts correct? (3) Whether longer limitation period of 5 years under proviso to section 73(1) of the Finance Act, 1993 is available to the Department for recovery of non-paid service tax. (4) Whether penalty under sections 76, 77 & 78 of the Finance Act, 1994 is imposable on the Appellants? 3.2 Our answer to these questions are as under:- 4. Are the activities of the Appellant, mentioned in the contracts and invoices as "Drawing", "Designing", "Engineering" or "Training" covered by the Definition of Consulting Engineers' service as defined under section 65(105)(g) read with section 65(31) of the Finance Act, 1994? 4.1 "Consulting engineer", as defined in section 65(31) is "any professionally qualified engineer or an engineering firm who, either directly or indirectly renders any advice, consultancy or technical assistance in any manner to a client in one or more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant is that their contracts with their clients are indivisible lump sum turnkey contracts whose objective is delivery of installed and functioning equipment and such contracts cannot be vivisected for charging service tax on component of drawing/designing & training by treating the same as Consulting Engineers service and in this regard, reliance is placed on the judgment of the Tribunal in the case of Daelim Industrial Co. Ltd. (supra), the Department's SLP against which has been dismissed by the Hon'ble Supreme Court vide the order in 2004 (170) ELT A 181. 5.2 Just as sale is transfer of property in goods from seller to the buyer for some consideration, "service", though not defined in the Finance Act, 1994, is an activity by the service provider for the service receiver for some consideration and the service tax levied by the Central Government is the tax on such activity. The 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 in various clauses of section 65(105). Since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price, which essentially consist of two contracts - one for sale of the goods and the other for work and labour". However, a contract for work in which the use of material is ancillary or incidental to the execution of work is a contract for work and labour, not involving sale of goods. The former type of contract is a divisible contract consisting of a contract for sale of goods and contract for service while the latter is an indivisible contract for service not involving for sale. A five Judges Bench of Hon'ble Supreme Court in case of State of Punjab v. Associated Hotels of India Ltd. [Civil Appeal No. 1207 of 1968, dated 4-1-1972] while considering the question as to whether there is sale of goods involved when a Hotelier serves meals to his guests at stated hours and whether the charges for hotel stay charged from the guests can be split up into the charges for lodging and charges for food and the 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials, a portion of the profit earned in the business of bleaching and calendaring could legitimately be attributed to the packing materials and the transaction involved a sale of them for consideration. On a reference, the High Court held that the case was one of contract of service as distinguished from a sale of a principal commodity such as rice in Assam case (1953) 4 STC 129 - (AIR 1953 Assam 42) and salt in Varasukhi and Co. v. Province of Madras [1950] 2 STC 1 - (AIR 1951 Mad. 254). On the other hand, where a contract is to supply such commodity in a packed condition, it could be inferred, though the contract might not be express, that the intention of the parties was to give and accept delivery of the goods in a packed condition and not to take the principal commodity alone, so that in the contract of sale of such a commodity there was implicit the sale of packing materials as well. Even in a contract 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 contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he use of materials is accessory or incidental to the execution of work or it may be a contract for work and use or supply of materials, though not accessory to the execution of contract, is voluntary or gratuitous. In the last class, there is no sale because though property passes, it does not pass for a price. Whether a contract is of first or second class, must depend upon the circumstances, if it is first, it is a composite contract for work and sale of goods, when it is of the second category, it is a contract for execution of work, not involving sale of goods. Hon'ble Supreme Court, in the case of State of Tamil Nadu v. Anandam Vishwanathan [1989] 1 SCC 613 has held that nature of a contract is to be found out on the basis of the intention of the projects. The intention has to be ascertained from the terms of the contract. For example, when a person, who wants to get a house constructed on a plot 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 incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is irrelevant. If the LSTK contract/EPC contract is a composite (divisible) contract for supply of goods and providing of a basket of service, whichever services of the basket of services are taxable under section 65(105), will attract service tax. For the purpose of levy of Service Tax, there is no warrant to treat an EPC contract i.e., a contract for Engineering, design, procurement of goods, erection, installation and commissioning of a plant, which is a composite contract for sale of goods and services, as an indivisible work, contract, just because it is on lump sum and single point responsibility basis, where, failure to perform one part of a contract is treated as failure to perform the entire contract. Service tax is a tax on activities specified in section 65(105) of the Finance Act, 1994 and the same would be chargeable in respect of any contract, when the same are discernible. Tribunal in case of Transformers & Electrical 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 "consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l's order with the Apex Court's order nor the Tribunal's order, the SLP against which was dismissed, becomes a binding precedent under Article 141 of the Constitution. Moreover, Department's SLP to Hon'ble Supreme Court against Tribunal's judgment in case of Larsen & Toubro Ltd. (supra) and CCE&C v. Petroface International Ltd. [Order Nos. A/318 & 319/WZB/2006, dated 21-3-2006] wherein the Tribunal relying upon its judgment in case of Daelim Industrial Co. Ltd. (supra) held that no service tax can be charged on the charges for - "residual process designs and detailed engineering" and "erection, installation, testing and commissioning", in a contract for - "residual process design, detailed engineering, procurement, supply, construction, fabrication, erection, installation, testing and commissioning for certain plant and machinery" on the ground that the contracts are indivisible work contract, has been admitted by the Apex Court and the matter is still pending. 5.4.1 On going through the Tribunal's judgment in cases of Daelim Industrial Co. Ltd. (supra) and Larsen & Toubro Ltd. (supra) and Petrofac International Ltd. (supra) we find that the basis of these judgments is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... British Telecommunications Plc. (supra) BT purchased cars from manufacturers who changed separately for the cases and for the delivery charges - The property in cars passed only on or after delivery. No VAT deduction was available as per the British VAT laws to BT in respect of purchase of cars. The dispute was as to whether deduction of VAT payable on delivery charges was available to BT. It was held by House of Lords that no deduction of VAT on delivery charges would be available to BT and the supply of cars and the service of its delivery is to be treated as one transaction of supply of Car. Hence again, the ratio of this judgment, based on certain feature of this transaction, is not of universal application. The supply of car by a car manufacturer to his customer at his premises when the service of transport is an ancillary service to the supply of car, cannot be compared with the contracts with which 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. 5.5 It has been pleaded that the service of designing erection, installati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng engineering, procurement and construction or commissioning (EPC) projects. Under rule 2A of Service Tax (Determination of Value) Rules, 2006, framed under section 94(1) of the Finance Act, 1994, the assessable value of the 'work contract service' referred to in section 65(105)(zzzza) of the Finance Act, 1994 shall be equivalent to the gross amount charged (excluding VAT/Sales tax paid on transfer of property in goods involved) minus the value of transfer of property in the goods involved in the execution of the said work contract. Alternatively, the assessee at his option could pay duty at the rate prescribed in rule 3(1) of the Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, on the gross amount charges for the work contract. Thus section 65(105)(zzzza) of Finance Act, 1994, read with rule 2A of Service Tax (Determination of Value) Rules, 2006 and Work Contract (Composite Scheme for Payment of Service Tax) Rules, 2007, provides a machinery for assessment of Service Tax on certain types of contracts mentioned in Explanation to section 65(105)(zzzza). On comparing the definition of "works contract" as given in Explanation to section 65(105)(zzzza), with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract involving consulting Engineer's service (preparation of drawings/designs, preparation of operation manuals, or other technical assistance), procurement of goods, erection, installation and commissioning would attract Service Tax on Engineering Consultancy component and erection installation and commissioning component even prior to 1-6-2007. This is so, as discussed above, there is nothing in section 65(105) and section 66 of the Finance Act, 1994 from which it can be inferred that the taxable services defined in various clauses of section 65(105) have to be standalone services and will not attract tax, if they are provided along with other services or providing of the service involves supply/use of goods on which VAT or Sales Tax is payable. Hon'ble Supreme Court in case of Tamil Nadu Kalyan Mandapam Association v. Union of India 2004 (167) ELT 3, while upholding the levy of service tax on catering service has held that catering of food and beverages by an outdoor caterer is a service and service tax on the same will be chargeable on the gross amount charged for the service, even if on the supply of food and beverages, sales tax has been charged by the State Government by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (zzq) and 65(105)(zzzh) involving transfer of property or goods were not taxable. Giving such an interpretation to section 65(105)(zzzza) will be against the intention of the legislation to tax "erection, installation or commissioning services", "commercial or Industrial construction services", or "residential construction service" during the period prior to 1-6-2007. Thus section 65(105)(zzzza) is more like heading 98.01 of Indian Customs Tariff pertaining to Project Imports which provides a separate mode of assessment of Customs duty on a number of machines and other goods imported for initial setting up of a plant or a substantial expansion of an existing plant. The judgment of Hon'ble Bombay High Court in case of Indian National Shipowners' Association (supra) is therefore, not applicable to the services covered under section 65(105)(zzzza) as services covered by this section and section 65(105)(zzd), 65(105) (zzq) and (zzzh) are over lapping. As regards the judgment of Hon'ble Karnataka High Court in case of Turbotech Precisions Engineering (P.) Ltd. (supra) since this judgment does not discuss as to how prior to 1-6-2007, the type of contracts mentioned in Explanation to sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise a contract for work and labour, is of no relevance, as in this case each contract itself contains details of the charges for different items of goods and services. 5.6.1 The Appellant in support of their contention that just because the drawings of the C&I system prepared by them were to be approved by their clients before they could go ahead with procurement of equipments with machinery & materials and the job of erection & installation, it cannot be said that the Appellant's contract with their clients included a contract for providing consulting Engineer's service, have cited Hon'ble Supreme Court's judgment in case of Patnaik & Co. (supra) wherein the Hon'ble Court observed that a contract for sale of goods to be manufactured does not cease to be a contract for sale of goods merely because the process of manufacture is supervised by the purchasers. This judgment is of no relevance to the facts of this case, as approval by their customers of the drawings of C&I system to be installed & commissioned, prepared by the Appellant before the Appellant could go ahead with goods procurement and erection & installation work, can not be said to be supervision. This is simply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied for service tax registration nor paid the same. They took service tax registration for "Consulting Engineer's Service" along with "erection, installation and commissioning service" on 20-1-2004. There is no explanation for non-payment of service tax and not obtaining service tax registration in respect of 'consulting engineer' service during July 1997 to mid January 2004 period. Just because in 1991 a show-cause notice had been issued to the Appellant for including "Engineering charges" and "erection, installation and commissioning charges" in the assessable value of the instruments and equipments being cleared by them to their clients and demand of differential excise duty on this basis, it could not be presumed by the Departmental officers that during subsequent period also they, in addition to sale of the instruments and control equipment manufactured by them, are also engaged in systems design activity. We are, therefore, of the view that the Appellant are guilty of suppressing the relevant information from the Department and, therefore, longer limitation period of five years for recovery of non-paid service tax has been rightly invoked by the Department. 7. Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X
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