Custom, Excise & Service Tax Tribunal
Gupta Energy Pvt Ltd vs Commissioner Of Customs & Central ... on 5 August, 2014
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. I Appeal Nos. ST/09/2012 & ST/693/12 (Arising out of Order-in-Original No. 12/Service Tax/2011-12/C dated 30.09.2011 & Order-in-Original No. 40/ST/2012/C dated 31.7.2012 both passed by Commissioner of Customs & Central Excise, Nagpur.) For approval and signature: Honble Mr.S.S. Kang, Vice President Honble Mr. P.K. Jain, Member (Technical) ==========================================================
1. Whether Press Reporters may be allowed to see : No 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 :Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy : Seen of the Order?
4. Whether Order is to be circulated to the Departmental : Yes authorities?
========================================================== Gupta Energy Pvt Ltd Appellant (Represented by: Mr. Badrinarayanan, advocate) Vs Commissioner of Customs & Central Excise, Nagpur Respondent (Represented by: Mr. Rakesh Goyal, Additional Commissioner (AR) ) CORAM:
Honble Mr.S.S. Kang, Vice President Honble Mr. P.K. Jain, Member (Technical) Date of Hearing : 23.04.2014 Date of Decision: 05.08.2014 ORDER NO..
Per: P.K. Jain
1. The two appeals are of for two consecutive periods.
2. Common issue is involved, hence both the appeals are being taken up together.
3. Brief facts of the case are that the appellants are engaged in the business of generation of electricity. For this purpose they were to set up a power plant at Usegaon, District Chandrapur. For setting up this power plant they made enquiries with China National Automotive Industry International Corporation (hereinafter referred to as CNAICO). Another company with name SOKEO Power Private Ltd (SOKEO for short) is a Hyderabad based company and is representative of CNAICO in India. From the correspondence between the appellant and CNAICO it is evident that the appellant awarded turnkey project for design, engineering, manufacture, testing, supply, transportation, site storage, erection, testing and commissioning of plant and machinery for setting up of the power plant. After discussions with SOEKO authorized representative of CNAICO including issuing letter of intent, finalizing price and other detailed, the appellant had made two contracts one with CNAICO and another with SOKEO, the representative of CNAICO. It is to be added that CNAICO are not the manufacturer of steam turbine but the same are procured by them from another company in China NTC. The total work as mentioned earlier was split up into two parts. First part was covered in the contract with CNAICO and other part was covered by second contract with SOKEO, the representative to SOKEO. Appellants claim is that the first contract is for supply of equipment while the second contract is for erection and commissioning. In respect of first contract no service tax is paid and for the second contract SOKEO has paid service tax under erection and commissioning service. Revenues case is that the total work is for design, engineering, manufacture, testing, supply of equipment, transportation, erection, commissioning etc is therefore a turnkey project and it would appropriately be covered under the service works contract and the appellants are therefore liable to pay service tax under the works contract service on reverse charge basis for the amount paid by them to CNAICO. Revenue has raised the demand based upon composition scheme.
4. The learned advocate for the appellants main argument is that initial letter of intent was only on expression of interest and has no legal force. The legal force is only in two agreements one with CNAICO and other with SOKEO. According to the learned advocate the first agreement is only for supply of goods and therefore no service tax is liable to be paid in respect of the same. It was further submitted that contract for sale of goods is different from contract for work and labour. According to the learned advocate, once a written document is existing the terms as existing, in the document alone could decide and govern the intention of the parties and in the two agreements there is no clause which even suggest that the above contract for supply of goods and supply of service are integral. The said contracts are not composite in nature. One contract does not refer to other. There is separate consideration given in each of the contract. The learned advocate argued that adjudicating authoritys finding that the two contracts are integral is without any basis. In support of this contention he quoted the Honble Supreme Court in Ishikawajma-Harima Heavy Indus Ltd vs Director of Income Tax 2007 (6) STR (SC). The learned advocate for the appellant also quoted the Honble Supreme Courts decision in the case of Hindustan Shipyard Ltd vs State of Andhra Pradesh reported in 2000 (6) SCC 579 wherein the question for consideration was whether a contract of ship building constituted a sale or works contract. The learned advocate also quoted judgment of the Honble High Court of Gujarat in Elecon Engineering Co reported in 1993 (90) STC 74 (Guj). In the said case Elecon Engg Co supplied certain equipment to Fertilizer Corporation of India and the contract has two components, one for supply of the equipment and other for services and these were shown separately and the Honble Gujarat High Court took a view that it is a composite contract and it was divisible and therefore the Honble High Court concluded that the transaction was one of sale of handling system and also sale of other services. Similar view has been taken by the Honble Madras High Court in the case of State of Tamil Nadu vs Titanium Equipments and Anode Manufacturing Corporation Ltd reported in 1998 (110) STR (43) (Mad). In addition to these, few more judgments were also quoted which are of similar nature.
5. The learned advocate for the appellant submitted that CNAICO is responsible only for the shipment of the goods at port in China and thereafter the responsibility passed on to SOKEO. The appellants have paid price of the goods at the time of shipment at the port in China. Subsequent action by SOKEO is relating to services in India and for the same SOKEO has paid service tax and learned advocate for the appellants further argued that the two contracts cannot be combined to make them liable for works contract. The learned advocate for the appellants further stated that even if it is assumed that the two contracts forms together works contract still the department has issued the notice under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and has asked them to pay 4% duty on the total amount of contract. The learned advocate for the appellants argued that the said Composition Scheme is an optional scheme and cannot be thrust upon them. They also submitted that Ministry of Finance vide Circular No. B-1/16/2007-TRU dated 22.5.2007 have clarified that service tax will be leviable only on the services portion provided in relation to execution of works contract. He further argued that even if the two contracts are considered as composite contract then they are required to pay service tax at the normal rate i.e. 10.3% on value of services as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006.
6. Another contention of the learned advocate for the appellants is that extended period is not invocable in the instant case as there was no suppression of facts with intent to evade payment of duty by the appellant. The appellants were under bona fide belief that they are not liable to pay service tax for the reasons mentioned above. They also quoted number of judgments in support of their contention that extended period of limitation is not invocable.
7. It was also submitted that penalties under Sections 77 and 78 of the Finance Act, 1994 are not imposable as the case involves interpretation of law.
8. The learned Additional Commissioner (AR), on the other hand, submitted that Letter of intent dated 13.03.2009 was issued by the appellant to CNAICO through SOKEO for design, engineering, manufacture, testing, supply, transportation, storage at site, erection, testing and commissioning of plant and equipment. Appellants thereafter had split the works into a Supply Agreement dated 24.3.2009 and Erection Contract dated 23.04.2009 with SOKEO. It is to be noted that SOKEO is the authorized representative of CNAICO and is entirely responsible for co-ordination for the entire scope of supply. It was submitted that the appellant has tried to portray that CNAICO and SOKEO are independent entities. It is evident from the Letter of intent dated 13.03.2009 that the same was issued to CNAICO through SOKEO. Further in para 3 regarding responsibility of contract, it is stated that overall responsibility of the contract lies with CNAICO whereas SOKEO will be one point agency responsible for execution of the entire package of supply, erection and commissioning. Even the Supply Agreement dated 24.03.2009 between the appellant and CNAICO clearly states that SOKEO is authorized representative of CNAICO and is entrusted with the responsibility of co-ordination for the entire scope of supply. The learned A.R. submitted that from the above it is very clear that SOKEO is not an independent entity and was the authorized representative of CNAICO with the responsibility of co-ordination for the entire scope of supply. The services provided by SOKEO were on behalf of CNAICO. Thus this was a single contract given to CNAICO. Thus the overall contract is of a works contract service and the appellants are liable to pay service tax under Section 66A of the Finance Act, 1994.
9. It was also submitted that charges for erection, testing and commissioning are just Rs. 1.75 crores as against Rs. 59.75 crores for supply items and thus the service portion is less than 3% of the total cost. Composition Scheme envisaged service portion of 33% of the total cost as per the industry practice.
10. The learned A.R. submitted that the Supply Agreement dated 24.03.2009 is not an agreement for only sale of goods but includes service elements like deputing engineers for supervision of erection job, designing, testing, quality control etc. Further as per statement of Shri T.K. Manna, General Manager dated 28.01.2010 it was stated that it is not possible to bifurcate the charges of design etc in the price. Thus as per their own admission it is not a divisible contract. Hence service tax has been demanded on the total receipt of 4.12% of the gross amount charged. It was also submitted that if any benefit of Notification No. 12/2003 is claimed by the appellant, the appellant has to produce documentary evidence like purchase invoice of CNAICO. It was also submitted that purchase invoices of the goods and materials issued to CNAICO by M/s Nanjing Turbine & Electric Machinery (Group) Co Ltd would be required and not on the sale invoices of CNAICO which includes service elements and profits.
11. We have considered the submissions of both sides. We have gone through the correspondence between the appellant, CNAICO and SOKEO. We observe that a number of meetings and discussions were held between the appellants and SOKEO who were representing CNAICO and after these meetings and negotiations about prices Letter of intent was issued by the appellant to CNAICO. It is important to note that even the said Letter of intent was issued through SOKEO. The Letter of intent very clearly speaks about the design, engineering, manufacture, testing, supply, transportation, storage at site, erection, testing and commissioning of plant and equipment. The two turbines were not manufactured by CNAICO but got manufactured from Nanjing Turbine & Electric Machinery (Group) Co Ltd. It was also observed from the said Letter of intent that CNAICO was to depute NTC for the supervision of erection job to be undertaken by SOKEO at the project site on free of charge basis. The Letter of intent makes it clear that designs system, engineering, procurement, manufacture, quality control, testing, packing and forwarding, deputation of supervisory engineer shall be the responsibility of CNAICO. Further the said Letter of intent states that certain equipments were to be procured locally and finally the equipment are to be installed at the site. Thus two contracts were made, one with CNAICO for whatever is to be done abroad and the second one dated 23.4.2009 with SOKEO for whatever is to be done in India. Responsibility was combined viz CNAICO and of SOKEO, the authorized representative of CNAICO.
12. The works contract service is defined under Section 65 (105) (zzzza) which reads as under:
(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.
Explanation: For the purpose of this sub-clause, works contract means a contract wherein,-
(i) transfer of property in goods involved in the 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 fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or
(c) construction of a new residential complex or a part thereof; or
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or
(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;
13. It can be seen from the above definition that the works contract means a contract wherein transfer of goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for purpose of carrying out amongst others turnkey projects including engineering, procurement and construction or commissioning (EPC) projects. From the Letter of intent, it is very clear that the appellants have given the turnkey project to CNAICO who in turn have undertaken the design and procurement of items from various sources, turbine from NTC and other ancillary equipments from domestic sources in India. SOKEO is the authorized representative of CNAICO and they were undertaking the activities relating to the said turnkey project within India right from the clearance of the goods, transportation of goods, erection, commissioning, coordinating with CNAICO as also suppliers in India, ensure supply etc. We have no doubt in our mind that the two contracts have to be read together and the two contracts when read together are for the turnkey projects including EPC projects. In our view, the fact that the total project or initial Letter of intent has been split up into two contracts one with CNAICO and other with SOKEO who is the authorized representative of CNAICO and has been doing everything on behalf of CNAICO has to be considered as one single composite contract and this contract would come within the scope of works contract service, viz. turnkey project. We accordingly hold that the services provided by CNAICO is works contract service and therefore the appellants are liable to pay service tax on reverse charge basis.
14. The learned advocate for the appellants has quoted case of Ishikawajma-Harima Heavy Indus. Ltd vs Director of Income Tax (supra). We have gone through the said judgment of the Honble Supreme Court. It was in the context of Income Tax and relating to double taxation. The facts in that case were that the appellant had entered into a contract and constituted a consortium of number of companies to execute certain contract where the liability and work of each members of the consortium were separately defined and the said consortium entered into contract with Petronet LNG Ltd. We find that the fact of that case are not comparable to the present case, as here the initial Letter of intent was for the total turnkey project and later on the same contract is split up into two contracts one with CNAICO and other with SOKEO the authorized representative of CNAICO. Moreover, the issues for determination were as under, -
1. On the facts and circumstances of the case, whether the amounts, received/receivable by the applicant from Petronet LNG for offshore supply of equipments, materials, etc. are liable to tax in India under trie provisions of the Act and India- Japan tax treaty?
2. If the answer to (1) is in the affirmative in view of Explanation (a) to section (1)(i) of the Act and/or Article (1) read together with the protocol of the India-Japan tax treaty, to what extent are the amounts reasonably attributable to the operations carried out in India and accordingly taxable in India?
3. On the facts and circumstances of the case, whether the amounts received/receivable by the applicant from Petronet LNG for offshore services are chargeable to tax in India under the Act and/or the India-Japan tax treaty?
4. If the answer to (3) above is in the affirmative, to what extent would be amounts received/receivable for such services be chargeable to tax in India under the Act and/or the India-Japan tax treaty?
5. If the answer to (3) above in the affirmative, would be applicant be entitled to claim deduction for expenses incurred in computing the income from offshore services under the Act and/or the India-Japan treaty?
15. We also note that in the said judgment the Honble Supreme Court has observed that the terms and conditions are to be read in as a whole and it must be construed keeping in view the intention of parties. Applicability of tax law depends upon the nature of contract but it should not be construed keeping them in view. In the present case the whole issue has therefore to be seen with reference to Letter of intent and thereafter splitting the same into two one with the main party and another with the authorized person in India and therefore in our view the facts are distinguishable and does not support the cause of appellant. Appellant has also quoted number of other judgments, which are all relating to sales tax as observed by Honble Supreme Court in above case, the terms and conditions are to be read as a whole and it must be construed keeping in view the intention of the parties. We have gone through said case law. Facts in the present case are distinguishable and are entirely different as in this case the Letter of intent was one and two contracts with CNAICO and other with its representative in India SOKEO and hence are not applicable. We do not consider it necessary to discuss each of these case laws.
16. As far as the appellants contention that the department cannot force them to go for composition scheme under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, we agree with the appellants contention. Revenue cannot force a person to go for the Composition Scheme. This is evident from Rule 3 (i) of the Works Contract/Composition Scheme for Payment of Service Tax) Rules, 2007:
Rule 3.(1)
Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to [Four]1 per cent. of the gross amount charged for the works contract.
Explanation.- For the purposes of this rule, gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.
17. Rule 2A of the Service Tax (Determination of Value) Rules, 2006 provides for determination of value of services involved in execution of the project. The said Rule reads as under:
2A. Determination of value of services involved in the execution of a works contract:
(1) Subject to the provisions of section 67, the value of taxable service in relation to services involved in the execution of a works contract (hereinafter referred to as works contract service), referred to in sub-clause (zzzza) of clause (105) of section 65 of the Act, shall be determined by the service provider in the following manner:-
(i) Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.
Explanation.- For the purposes of this rule,-
(a) gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract;
(b) value of works contract service shall include,-
(i) labour charges for execution of the works;
(ii) amount paid to a sub-contractor for labour and services;
(iii) charges for planning, designing and architects fees;
(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
(v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract;
(vi) cost of establishment of the contractor relatable to supply of labour and services;
(vii) other similar expenses relatable to supply of labour and services; and
(viii) profit earned by the service provider relatable to supply of labour and services;
(ii) Where Value Added Tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under clause (i).
18. It would thus be seen from the said Rule that clause (i) of sub-rule (1) provides that value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. We also note that the goods supplied by CNAICO have been cleared on payment of Customs duty after determining the value of such goods and therefore it should be possible to determine the value of transfer of property in goods involved in the execution of the said works contract and thereafter value of the service portion. The normal rate of service tax would applicable on the value of service so determined.
19. The appellants have also submitted that extended period is not invocable and they have not done any suppression or concealment. We observe that appellant were filing service tax returns but did not indicate anything about above payments on services and therefore there is suppression of facts.
20. It has also been submitted that penalty under Sections 77 and 78 of the Finance Act, 1994 is not imposable. Due to the fact that the appellants cannot be compelled to opt for the Composition Scheme and the value has to be determined as per Rule 2 A of the Service Tax (Determination of Value) Rules, 2006, the matter will require reexamination by the original authority and the question of penalty under Sections 77 and 78 can be redetermined thereafter only. In our view, if appellants contention that they have paid to CNAICO only for the supply of goods is true then the value for service portion will become nil and therefore it would have implication on penalty imposable.
21. The appeals are allowed by way of remand in above terms.
(Pronounced in Court on 05.8.2014.) (S.S. Kang) Vice President (P.K. Jain) Member (Technical) rk 14