Custom, Excise & Service Tax Tribunal
Cce, Raipur vs M/S Bsbk Pvt. Ltd on 24 April, 2008
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH COURT NO. 1
Service Tax Appeal No. 100 of 2005
(Arising out of Order-in-Appeal No. 28/RPR-II/2005 dated 28.04.2005 passed by the Commissioner (Appeals) Central Excise, Raipur-II).
DATES OF HEARING : 23 & 24.04.2008
DATE OF DECISION : .10.2008
FOR APPROVAL AND SIGNATURE :
HONBLE MR. JUSTICE S.N. JHA, PRESIDENT
HONBLE MR. M. VEERAIYAN, MEMBER (TECHNICAL)
1. Whether Press Reporters may be allowed to see the order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982 ?.
2. Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not ?
3. Whether their Lordships wish to see the fair copy of the Order ?
4. Whether Order is to be circulated to the Departmental Authorities?
CCE, Raipur . Appellant
(Rep by Sh. Amit Jain, DR)
versus
M/s BSBK Pvt. Ltd. . Respondent
(Rep. by Sh. Sanjay Grover, Adv.) CORAM : HONBLE MR. JUSTICE S.N. JHA, PRESIDENT HONBLE MR. M. VEERAIYAN, MEMBER (T) ORDER NO._______________________________ PER JUSTICE S.N. JHA:
This appeal by the Revenue is directed against the order-in-appeal of Commissioner (Appeals) dated 28.04.2005 setting aside the order-in-original of the Assistant Commissioner, Central Excise, Bhilai, and allowing the appeal of the assessee-respondent.
2. The respondent, M/s BSBK Pvt. Ltd., are engaged in the business of execution of turnkey contracts for engineering works like drawing, designing, engineering, fabrication, testing, erection and commissioning of plants & equipments at the site of their clients. On scrutiny of the records, the officials of the Central Excise found that during the period from 07.07.1997 to 31.03.2002, the respondent had received from their clients amounts for different services including those falling under consulting engineer service a taxable service - but failed to pay service tax on it. Show cause notice was issued followed by adjudication by the Assistant Commissioner, Central Excise, who finally by order dated 02.02.2005 held that for the period in question the respondent were liable to pay Rs. 12,36,516/- as service tax on the amount of Rs. 2,47,30,312/- received on account of design and engineering work done by them. Respondent were also held liable to pay penalty equal to the amount of tax under Section 76 of the Finance Act, and further penalties of Rs. 2,000/- under Section 77 and Rs. 500/- under Section 75-A of the said Act. The respondent preferred appeal before the Commissioner (Appeals) who set aside this order. Hence this appeal by the Revenue.
3. Before proceeding further, it may be mentioned that the service in relation to the execution of a works contract has been included in the definition of taxable service vide sub-clause zzzz(a) of clause (105) of Section 65 of the Finance Act w.e.f. 01.07.2007. Earlier, since in relation to advice, consultation or technical assistance by a consulting engineer was included within the ambit of taxable service with effect from 07.07.1997. In the instant case, the dispute relates to the consulting engineer service from 07.07.1997 to 31.03.2002.
4. The case of the respondent is that in a case of turn-key works contract, service tax is not payable as the contract can not be vivisected and the services relating to design and engineering forms a minor portion of the total work. The case of the Revenue on the other hand is that works contract in respect of turnkey projects can be dissected on the basis of supply of goods, materials the property in which passes on in some form or the other on the one hand and the services rendered on the other hand. In other words, the contract can be divided into sale contract and service contract in accord with the 46th amendment in the Constitution of India. In the grounds of appeal, reference is made to the CBECs Circular No. 49/11/2002-ST dated 18.12.2002 holding that in the case of turnkey project, a lot of preparatory work is required to be done, such as, soil testing, survey, planning, designing, drawing etc. before the civil construction work can commence. The design and drawing proposed by the construction company i.e the contractor is subject to approval of the plan and any modification suggested by the client has to be incorporated in the design. This portion of the work falls in the realm of consulting engineer service and hence taxable.
5. It may be stated here that the divisibility of contract is not in issue either in law or even on facts. Conceptually, after view the 46th Amendment in serving clause (29-A) in Article 366 of the Constitution, a works contract can be dissected for the purpose of levy of sales tax and service tax. As a matter of fact, in the present case, various works to be done by the respondent have been specified and separately valued in the contract document itself. The case of the respondent, however, is that, what is divisible is the value of the contract i.e price for different kinds of work; the contract as such is 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. The divisibility of the contract valued work wise therefore, cannot be a relevant consideration for holding that the 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 relies on the dominant nature test for determining the type of the contract.
6. The respondent relies on the decisions of the Tribunal in Daelim Industrial Co. Ltd. vs CCE, Vadodara, 2003 (155) ELT 457 (T); Ircon International Ltd. vs CCE, Mumbai-IV, 2006 (1) STR 46 (T); CCE, Bhopal vs Shapoorji Pollanji & Co. Ltd., 2006 (1) STR 164 (T); CCE, Raipur vs Beekay Engg. Corporation, 2006 (3) STR 168 (T); Schenk Jenson & Nicholson Ltd. vs CCE, Ranchi, 2006 (1) STR 183 (T); Emerson Process Management Power & Water Solution Inc. vs CCE, Kanpur, 2006 (3) STR 508 (T); Turbotech Precision Engg. P. Ltd. vs CCE, Bangalore-III, 2006 (3) STR 765 (T); and Air Liquide Engg. India Pvt. Ltd. vs CC & CE, Hyderabad-II, 2008 (9) STR 486 (T). In fact, the decision in Daelim Industrial Co. Ltd. (supra) was followed in other cases.
7. In Daelim (supra) it was held :
Thus, a perusal of the clauses of the contract leaves no doubt that the appellant contract with IOC was a work contract on turnkey basis and not a consultancy contract. It is well settled that a work contract cannot be vivisected and part of it subjected to tax. The impugned orders have proceeded to do precisely that. Therefore, they are required to be set aside. The Tribunal noticed the decision in State of Punjab vs Associated Hotels India Ltd., (1972) 1 Supreme Court Cases 472.
8. We are, prima facie, of the view that the decision in Daelim (supra) is not in accord with the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. (BSNL) vs Union of India, (2006) 3 Supreme Court Cases 1. After referring to different sub-clauses of Clause (29-A) inserted in Article 366 of the Constitution of India by the 46th amendment, a three Judge Bench of the Apex Court held :
41. Sub-clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Sub-clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley was directly overcome. Sub-clause (c) deals with hire purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under sub-clause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, contrary to A.V. Meiyappans decision a lease of a negative print of a picture would be a sale. Sub-clause (e) covers cases which in law may not have amounted to sale because the member of an incorporated association would have in a sense begun both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales. Sub-clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab v. M/s. Associated Hotels of India Ltd. (supra). That decision has by this clause been effectively legislatively invalidated.
42. All the sub-clauses of Article 366(29A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerly Limited (sic modified). The amendment especially allows specific composite contracts viz. works contracts [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 the different kinds of composite transactions the drafters of the Forty-sixth Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been Constitutionally permitted in sub-clauses (b) and (f) of Clause (29A) of Art. 366, there is no other service which has been permitted to be so split. For example, the sub-clauses of Art. 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.
45. 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 Dunkerleys 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 other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test.
9. The decision in Associated Hotels India Ltd. (supra) was held to be effectively legislatively invalidated (by the 46th amendment), and the dominant nature test or substance test was held to be applicable only in cases not falling under any of the clauses of Article 366(29-A). 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 turn-key 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 works contract. We are prima facie of the view that Daelim was not correctly decided and the finding that the turnkey works contract cannot be vivisected requires reconsideration. We are conscious of the fact that the decision in Daelim was challenged by the Revenue in the Supreme Court, but the appeal was dismissed vide order dated 02.08.2004 reported in 2004 (165) ELT A181. It is well settled that summary rejection of the SLP or appeal cannot be construed as affirmation of the judgment (under challenge) on merits; it only means that the Supreme Court declined to interfere with the judgment. The dismissal of the appeal, therefore, will not operate as a bar to reconsideration of the decision by the Tribunal.
10. 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. No doubt, 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 they are not split only on the ground that the contract is on turnkey project basis, a question may arise as to whether the entire contract will be sale contract. The answer apparently would be in the negative. Only that part of the contract which falls under clause (b) of Article 366(29-A) - amounting to deemed sale will constitute sale contract on which sales tax can be levied. What will happen to the rest of the contract? Whether it will go out of the net of the service tax? Answer again, will be in the negative. No doubt, as observed above, and it goes without saying, the service will have to qualify as taxable service. The case of the respondent is that the service by way of advice, consultancy or technical assistance is provided by MECON as the consultant and they are merely recipient of the service from them.
11. Whether service by way of advice, consultancy or technical assistance in the case of turnkey contract will attract service tax will have to be determined on the facts of the case. But the moot question is whether turnkey contract can be vivisected. The conclusion in Daelim case (supra) on the point, prima facie, being not in accordance with law, we are of the view that it would be appropriate to refer this case to the Larger Bench to consider the correctness of the decision.
12. This appeal is accordingly referred to Larger Bench.
13. The records of the appeal may be placed before the President for constituting the Larger Bench.
(Pronounced in the open Court on the day of October, 2008)
(JUSTICE S.N. JHA)
PRESIDENT
(M. VEERAIYAN)
MEMBER (TECHNICAL)
Golay
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH COURT NO. 1
Service Tax Appeal No. 100 of 2005
CCE, Raipur . Appellant
versus
M/s BSBK Pvt. Ltd. . Respondent
Kindly list this case for pronounced before the Honble President in Court No. 1 on 24.10.2008.
(J.K. GOLAY) SR. P.S A.R. (Service Tax)