Customs, Excise and Gold Tribunal - Tamil Nadu
The Indian Hume Pipe Co. Ltd. vs Cce on 23 July, 2008
ORDER P. Karthikeyan, Member (T)
1. M/s. The Indian Hume Pipes Co. Ltd. (IHPL), Thanjavur, manufactures pre-stressed concrete pipes (PSC) and clears to Tamil Nadu Water Supply and Drainage Board (TWAD) for use in water supply projects. The department collected details of works contracts executed by IHPL for TWAD during the period 1.7.03 to 30.9.06. After due process of law, the Commissioner found that the assessee had rendered taxable services under the category 'Commissioning or Installation' during 1.7.03 to 9.9.04 and 'Erection, Commissioning or Installation' during the period 10.09.04 to 30.09.06. The activity of erection/commissioning/installation of the pipelines and related structures was undertaken in respect of plants and was liable to service tax. As there was no evidence that some other contractor had paid service tax on the bills raised by the assessee, the Commissioner-demanded service tax of Rs. 1,78,23,890/- (including education cess), interest due thereon under Section 75 of the Act, imposed penalties @ 2% per month/Rs. 200 per day till the date of payment of tax under Section 76 of the Act, penalty of Rs. 1000/- under Section 77 of the Act and penalty of Rs. 1,78,23,890/- on IHPL under Section 78 of the Act.
2. The instant appeal challenges the above order. It is submitted that the notice did not specify the activity sought to be taxed under the entry 'erection, installation or commissioning service'. During 1.7.03 to 30.09.06, definition of installation or commissioning agency had undergone several changes.
From 1.7.03 to 16.6.05.
Levy on 'commissioning or installation' service was effective from 1.7.03. Installation or commissioning service was defined under Section 65(105)(zzd) or the Act as any service provided to a customer by a commissioning or installation agency in relation to installation or commissioning of plant, equipment or machinery. It is claimed that the appellants' activity was not covered under the definition of the term 'installation or commissioning' service. As per the Law Lexicon the word 'installation' meant the bringing of an entire piece of plant on to a site and putting of parts, piece by piece, pipe by pipe, bolt by bolt, weld by weld, until it gradually became, one whole. The term 'commissioning' meant the commencement of an item which had been installed (Webster's Ninth New Collegiate Dictionary).
(a) In the instant case, the pipeline was not being installed or commissioned by the appellants. The appellants did not bring readymade pipeline to the site for installation. The appellants put together parts of pipeline, pipe by pipe, bolt by bolt, weld by weld until it gradually became one whole. This was not installation.
(b) The appellants did not put the pipeline into action. Commissioning could be undertaken of electrical equipments or systems such as air conditioning systems etc. Further, the pipes laid could not be treated as equipment, machinery or plant. Therefore, the activities carried out were not covered by the definition of commissioning and installation.
(c) The civil work undertaken with brick and mortar by the appellants was not included in the above definition as the term 'erection' was included only after 10.09.04. No service tax could be demanded from the appellants for the period from 01.07.03 to 10.09.04, in the absence of 'erection' in the entry.
3. The Commissioner had not given any finding as to how the appellants' activity would be covered by the term 'installation' and 'commissioning'. The Commissioner relied on CBRC Circular No. 62/11/2003-ST dated 21.08.03 to suggest that the clarification "installation of a Booster pump, Air conditioner, Water filter, Water heater etc. would be covered in the definition and be taxable as all these things are machinery or equipment" and decided that activity of laying pipelines would be covered under taxable head of 'erection, installation or commissioning' service. This was erroneous.
3.1 A pipeline could not be installed or commissioned. A pipeline was constructed part by part. The equipments mentioned in the Board's Circular could be installed as such. The Commissioner failed to appreciate the distinction.
From 10.09.04 to 15.06.05 'Erection' service was added lo the existing services of 'Installation and commissioning' with effect from 10.09.04. As per Concise Oxford Dictionary erection meant the act of erecting, and erect meant construct (a building, wall, etc.). As per Cambridge International Dictionary of English, 'erection is the act of making or building a structure'.
Erection was an activity which preceded installation and commissioning of a plant, machinery or equipment. Installation of an equipment or machinery was undertaken on a pre-existing machine. Erection was the act of bringing into existence a plant, equipment or machinery. In other words, activity of erection gave birth to an immovable plant.
In 2004 budget, the scope of service tax under installation and commissioning was extended to erection also. Erection involved civil works, which would otherwise tall under the category of construction services. In the present case, the appellants were not undertaking the activity of erection of pipelines. Erection was relevant in the context of setting up or bringing into existence a plant, equipment or machinery. The appellants did not set up a pipeline but constructed one.
Period from 16.06.05 to 30.09.06 With effect from 16.06.05 to 30.09.06, the definition of the term 'erection, commissioning or installation' was amended to read as under:
"erection, commissioning or installation" means any service provided by a commissioning and installation agency in relation to-
(i) erection, commissioning or installation of a plant, machinery or equipment; or
(ii) installation of-
a) electrical or electronic devices, including wirings or fittings therefore;
b) plumbing, drain laying or other installations for transport of fluids;
c) ...
d) ...
e) ...
f) such other similar services.
4. Pipeline could not be considered as a plant or equipment or machinery. Therefore, the appellants could not be held to be undertaking erection, installation or commissioning. 'Plant' was defined in www.answers.com, as "equipment, including machinery, tools, instruments and fixtures and the buildings containing them, necessary for an industrial or manufacturing operation." The same site defined equipment as under:
machines or major tools necessary to complete a given task. The tools a mechanic needs to repair a machine are an example.
Blacks Law Dictionary defined machine as a device or apparatus consisting of fixed and moving parts that worked together to perform some function. The findings of the Commissioner that combined structure of pipeline, sumps, pump set etc. would constitute 'plant' and therefore, it would be liable to service tax under taxable head 'erection, installation or commissioning' service was an erroneous finding. Long distance pipeline running into kilometers in length could not he considered as plant. The sumps, pump sets etc, were fixed only for regulation and monitoring flow of water through the said pipeline. The said sumps and pump sets etc. were part of construction of pipeline.
The SCN and order suggested that the activity of the appellants was covered under Sub-clause (h) of Clause (ii) of the definition from 16.06. '05. 'Plumbing' and 'drain laying' figured alongwith air conditioning system, lifts, elect ionic de-vices including wiring etc. The legislative intention was therefore clearly to cover only such installations within a commercial or residential building.
4.1 By 2004 Finance Act, a new service under the head 'construction service' was introduced with effect from 10.09.04. This service was defined to mean construction of new building or civil structure or a part thereof. Section 65(30a) of the Act defined construction service as under.
Construction service means,-
a) construction of new building or civil structure or a part thereof; or
b) repair, alteration or distoration of, or similar services in relation to, building or civil structure,...but does not include road, airport, transport terminal, bridge, tunnel, long distance pipeline and dam.
As the activity of construction of pipeline was specifically excluded from 'commercial or industrial construction service' the impugned order was void. It could not be held that since construction of long distance pipeline was excluded from levy of service tax under construction service, it was covered under taxable head of 'erection, installation or commissioning' service. That would render the exclusion granted to long distance pipeline redundant. That could not be the intention of the legislature. The legislature apparently intended to exclude from the levy infrastructural projects such as the construction of roads, dams, railways, bridges, long distance pipelines etc.
5. The appellant has argued that tax was demanded on part of the work carried out by IHPL in turn-key contracts. It was argued that as per the decision in Daelim Industrial Co. v. CCE , a lump sum works contract could not be vivisected and part of it subjected to service tax. The above decision was affirmed by the Apex Court in .
6. Out of the impugned 9 projects, projects at Vedaranyam and Nagapattinam were executed entirely by the appellants and the balance 7 projects undertaken on sub-contract basis. As per Trade Notice No. 7/97 ST dated 4.7.97, of Mumbai Commissionerate-I, 2.4. The services should be rendered to a client directly, and not in the capacity of a sub-consultant or associate consultant to another consulting engineer, who is the prime consultant. In case, services are rendered to the prime consultant, the levy of service tax does not fall on the sub consultant but it falls on the prime or main consulting engineer who raises the bill on his client (which includes the charge for services rendered by the sub-consultant).
In any case, service tax could nor he demanded from IHPL in respect of Rishivandiyam WSS contract as the contract had been concluded on 30.06.2003. The appellants were under bona fide belief that there was no liability to pay service tax in respect of the above project. Therefore, larger period could not be invoked. Further, the appellants had intimated the details of the project whenever a contract was awarded to the appellants. No penalty was imposed. Out of nine contracts, only two contracts involved pumps and where IHPL was the main contractor.
7. The Ld. Consultant for the Revenue argued that the pipelines supporting machinery like pumps etc., sumps and other supporting civil structures built by the assessee could very well be called a plant. The Commissioner had held that activities rendered by the appellants would be covered within the meaning or erection, commissioning or installation service and the corresponding entry since 1.7.03. Argument that the pipeline was not installed or commissioned by IHPL was misleading. The activity involved laying, jointing, testing and commissioning or. PVC pipes which resulted in emergence of a pipe line. The works contract between IHPL and its clients against the turnkey contracts prescribed completing the entire work satisfactorily and commissioning within the stipulated period and maintaining the scheme for the specified period. Pipes were used for transporting water for distribution and hence fell within the definition of equipment. Equipment was a set of necessary tools, clothing etc. for a particular purpose. The exclusion of long distance pipeline from construction service did not mean that same item could not be charged to tax under another heading. Clause 30a underwent a change in 2005 budget omitting this exclusion. The impugned service was not in the course of commerce and had to be classified under erection, installation or commissioning service. The Daelim Industrial Co. (supra) was not relatable to the present case. The Daelim Industrial Co. case decided that a works contract could not be vivisected and the service portion subjected to tax. SLP filed against this order was dismissed by the Apex Court without assigning reasons. Order of the CESTAT in the case of L & T Ltd. v. CCE, Cochin , was made following the ratio of Daelim Industrial Co. Ltd. The Apex Court admitted SLP against this order. Therefore, ratio of Daelim Industrial Co. Ltd. was no longer binding on the Tribunal. In Asian Techs v. CCE , it was held that though the appellant in that case had supplied PSC girders to M/s. Konkan Railway Corporation for construction of bridges under a works contract, excise duty was leviable on PSC girders. It is submitted that in principle, in the face of specific charging provision to levy service tax on certain specified services, the mechanism of agreement to provide and receive services in the form of a composite contract or works contract could not vitiate levy itself. Erection, installation or commissioning was already leviable to service tax.
7.1 Though the appellant contended that they were subcontractors in respect of seven of the nine projects, for which service tax was demanded, appellant did not furnish evidence for the principal contractor having paid the service lax covered by the bills raised by IHPL. The Id. Consultant cited the clarification issued by the Board in Circular No. 96/7/2007-ST dated 23.08.07, which clarified the exigibility to service tax of services outsourced by the main contractor as follows:
'a subcontractor is essentially a taxable service provider, the fact that services provided by such subcontractors are used by the main service provider for completion of his work does not in anyway alter the fact of provision of taxable service by the subcontractor. Service provided by the subcontractors are in the nature of input services, service tax is therefore leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a subcontractor and whether or not such services are used as input services'. It showed that IHPL as subcontractor was also liable to pay tax on the services provided. As regards, Rishivandiyam WSS executed as a subcontractor IHPL claimed that the work was completed on 30.06.03. IHPL had not furnished any conclusive evidence in support of the above claim. The letter dated 26.04.03, of L & T to IHPL cited as evidence was their internal correspondence.
7.2 Appellant had not furnished returns for the material period or disclosed truly all material fads for verifying assessment. Larger period for demanding service tax not paid was correctly invoked in terms of Section 73 of the Act. Penalties were also correctly imposed. Section 73 did not contain rigorous conditions as in Section 11A of the Central Excise Act proviso. Omission or failure of the assessee in the matter of filing return was enough to invoke extended period. Ld Consultant relied on 2008-TIOL-671-CESTAT (Del.), wherein the filing of returns with some bills and abstract of the same was held to be inadequate disclosure to absolve the assessee from the charge of suppression.
8. We have considered the rival arguments. The dispute involves the meaning of the expression and legislative intent behind scope of the levy on erection, commissioning or installation. The impugned order found that up to 16.06.95, the assessee had rendered the taxable activity of erection, commissioning or installation of a plant. The Commissioner found that "plant represented a fixed investment for carrying out certain institutional activity for business". The water supply system involving pipelines is therefore seen as a plant. The activity undertaken by IHPL is construction of pipeline by earthwork excavation, conveying and lowering of PSC/MS pipes and MS specials, AC pipes, PVC pipes, CI/GI pipes and jointing materials into the trench; laying to proper grade and alignment; refilling the trenches with excavated soil after laying of pipes, construction of sluice valve pits, scour valve pits, air valve pits, thrust blocks, etc.
8.1 We find ourselves in agreement with the appellants' reading of the expressions contained in the relevant entry, namely, 'erection, commissioning or installation'. We find it elementary that 'erection' connotes construction or building of a structure and laying of pipeline does not involve erection. We find no ambiguity in the expression installation. It applies to machinery already made which are formally made ready to operate at the site. Installation implies setting up the machinery ready for use, like giving power connections or installing driver software in the case of a machine ran with the aid computer software. Commissioning involves the operationalisation of the machinery after which it starts functioning regularly. In laying of long distance pipeline, earth is dug and pipes laid and jointed, and the pipes pass through sumps with boosters at intervals, if necessary. This activity will not involve erection.
8.2 As rightly argued by IHPL, the CBEC Circular No. 62/11/2003-ST dated 21.08.2003, interalia, clarified the levy to the same effect as follows:
1.2 As commonly understood, the activity of installation means the act of putting an equipment, machinery or plant into its place and making it read)' for use. The activity of installation will start alter erection which would refer to putting up civil structures. Commissioning of a plant would mean operationalising an installed plant/equipment/machinery.
Where as erection became part of the entry only from 10.09.04, from 16.06.05 onwards meaning of 'erection, commissioning or installation' [Section 65(39a)] was enlarged to include installation of various devices and equipments. An entry "plumbing, drain laying, or other installation for transport of fluids" was introduced under Sub-section (ii)(b). The impugned order round that the service involved was specifically covered from 16.06.05 under the same head by the entry "plumbing, drain laying, or other installation for transport of fluids". We are inclined to agree with the appellants that this entry covers such facility provided in a building as it appears in the company of air conditioning system, lifts, electronic devices including wiring etc which are installed in a building. The Commissioner found that "plant represented a fixed investment for carrying out certain institutional activity for business". The Ld. Consultant for the department has tried to defend the interpretation of the Commissioner of the expression plant. The Commissioner's interpretation of a plant would cover a long distance pipeline. We find it difficult to accept the above reading of the word plant in the context it is used. It is an inappropriate selection of the various meanings of this simple word. Plant in popular usage means a cluster of buildings or a building in which machinery are installed usually for manufacture of goods. Long distance pipeline is not even remotely associated with this common understanding of the word plant. We also find that a water supply project is an infrastructure facility and a civic amenity the State provides in public interest and not an activity of commerce or industry. The impugned order also did not hold it to come under a service of commercial or industrial nature as submitted by the Ld. Consultant for the Revenue. Therefore, the impugned order demanding duty on the activity of laying of pipeline interpreting it to be erection, commissioning and installation of a plant is totally misconceived and unacceptable.
8.3 The revenue has attempted to canvas the plea that the ratio of Daelim International Co. Ltd. (supra) is no longer binding in view of admission of SLP against the Larger Bench decision in the case of L & T (supra). It is therefore argued that activities specifically subjected to levy as per the statute do not get excluded from the liability for the reason that the same is rendered as a part of a works contract. We do not wish to address this question in the instant case as it is unnecessary. So also the plea of either side on limitation. We vacate the impugned order and allow the appeal filed by M/s. The Indian Hume Pipes Co. Limited.
(Order pronounced in Open Court on 23.7.08.