Custom, Excise & Service Tax Tribunal
Larsen &Amp Toubro Ltd vs Cce Nagpur on 13 March, 2020
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
MUMBAI
WEST ZONAL BENCH
SERVICE TAX APPEAL NO: 88574 of 2014
[Arising out of Order-in-Original No: 08/ST/2014/C dated 19th May 2014 passed
by the Commissioner of Central Excise & Customs, Nagpur.]
Larsen & Toubro Ltd
MIPD - EM/CM Equipment Service Center,
Logistics Park, Amravati Road, Village Nimje,
Taluk Kamleshwar, Nagpur - 440 023 ... Appellant
versus
Commissioner of Customs, Central Excise & ...Respondent
Service Tax PB No. 81, Civil Lines, Telangkhedi Road, Nagpur - 440 001 WITH SERVICE TAX APPEAL NO: 87472 of 2015 [Arising out of Order-in-Original No: 21-22/ST/2015/C dated 31st August 2015 passed by the Commissioner of Central Excise & Customs, Nagpur - II.] Larsen & Toubro Ltd MIPD - EM/CM Equipment Service Center, Logistics Park, Amravati Road, Village Nimje, Taluk Kamleshwar, Nagpur - 440 023 ... Appellant versus Commissioner of Customs, Central Excise & ...Respondent Service Tax PB No. 81, Civil Lines, Telangkhedi Road, Nagpur - 440 001 APPEARANCE:
Shri Prakash Shah with Shri Mohit Rawal, Advocates for the appellant Ms P Vinitha Sekhar, Additional Commissioner (AR) for the respondent ST/88574/2014 & ST/87472/2015 2 CORAM:
HON'BLE MR C J MATHEW, MEMBER (TECHNICAL) HON'BLE DR SUVENDU KUMAR PATI, MEMBER (JUDICIAL) FINAL ORDER NO: A/85595-85596/2020 DATE OF HEARING: 07/08/2019 DATE OF DECISION: 13/03/2020 PER: C J MATHEW In these two appeals of M/s Larsen & Toubro Ltd are impugned orders-in-original of Commissioner of Central Excise & Customs, Nagpur-one disposing off a notice for the period from 2007-08 to 2011- 12 and the other disposing off a demand-cum-notice for 2012-13 up to 30th June 2012 as well as a separate notice for the rest of the year, confirming demand of ₹ 16,23,30,904 and ₹ 1,34,33,460 in the first dated 19th May 2014 and of ₹ 45,37,447 and ₹ 11,16,77,190 in the second dated 31st August 2015. Demand for interest, under section 75 of Finance Act, 1994, and imposition of penalties, under the relevant provisions of Finance Act, 1994, are also under challenge along with that on the differential tax sought to be recovered under section 73 of Finance Act, 1994.
2. There is no dispute that proceedings which were initiated are ST/88574/2014 & ST/87472/2015 3 limited to the 'full maintenance contract' entered into by the appellant with various entities involving repair and servicing of 'earthmoving equipment' supplied by them and that the appellant had been discharging tax liability on the labour component in accordance with the taxable service, viz., '(zzg) means any service provided or be provided to any person, by any person in relation to management, maintenance or repair of any goods or equipments including maintenance, management or repair of immovable or movable properties etc. but excluding motor vehicles' in section 65 (105) of Finance Act, 1994. In the impugned orders, the adjudicating authority has enhanced the assessable value to include the cost of materials that were claimed to have been invoiced separately and the cost of consumables supplied by the recipient of the service.
3. According to the adjudicating authority, the claim of separate invoicing of the materials utilised in rendering the service does not detract from the mandate of section 67 of Finance Act, 1994 as clarified in circular no. 96/7/2007-ST dated 23th August 2007 of Central Board of Excise & Customs requiring the goods used in the course of providing service to be treated as inputs and the cost thereof to form an integral part of the value of taxable service and the integration of such goods in the object on which the taxable services was rendered precludes a separate transaction of sale. Likewise, it was held that the ST/88574/2014 & ST/87472/2015 4 supply of consumables without charge by the recipient of the service constituted 'additional consideration' to be monetised in accordance with rule 3 of Service Tax (Determination of Value) Rules, 2006.
4. Having heard the rival submissions, of Learned Counsel on behalf of the appellant and Learned Authorised Representative on behalf of Revenue, at length, we formulate the issue for determination as '(a) whether free supply of goods by recipient of service constitutes additional consideration that is mandated by section 67 of Finance Act, 1994; and
(b) whether the 'gross amount charged by the service provider for such service provided' in section 67 of Finance Act, 1994 suffices to overcome the constitutional barrier erected by Article 366 (29A) of Constitution of India read with the two separate, and mutually exclusive, lists in the Seventh Schedule in the Constitution of India.' Before proceeding to resolve the issue in the context of the submissions made and facts pertaining to the rendering of service by the appellant a few preliminaries must be addressed.
5. Learned Counsel draws attention to identical dispute for the ST/88574/2014 & ST/87472/2015 5 period from April 2014 to March 2017 in which amounts that were sought to be recovered by notice dated 3rd May 2018 was, vide order- in-original no. 13/ST/2018/C/NGP-I dated 29th November 2018 of Commissioner of CG ST & CX, Nagpur-I, dropped by taking cognizance of the law settled by the Hon'ble Supreme Court in Commissioner of Service Tax v. Bhayana Builders Pvt Ltd [2018 (10) GSTL 118 (SC)] on the inclusion of value of consumables supplied by the recipient of the service in the assessable value. This should naturally apply to similar proposals for the earlier periods that are now impugned before us. We, therefore, propose to restrict our findings on this issue to the bare minimum.
6. An aspect that was raised before the adjudicating authority and rejected, not by invalidation of the proposition but by distinguishing between liability to pay and actual discharge of obligation coupled with lack of evidence thereof, was the exclusion of the 'goods' component in the transaction with the recipients of the service owing to taxability as 'deemed sale' under List II of the Seventh Schedule in the Constitution of India. Implicit in the manner of rejection is the acknowledgement that the entirety of the transaction could well come within the ambit of Article 366(29A) of the Constitution of India; hence, we have framed the second issue to encompass this aspect and, particularly, in the light of judicial decisions to which our attention was ST/88574/2014 & ST/87472/2015 6 drawn by Learned Counsel. The superfluity of mutual exclusivity, even if overlapping, in jurisdiction to levy tax on commodities was never required to be considered at any time after the Republic was brought into existence and judicial intervention was resorted to only when the material component of an amorphous commercial engagement between two entities was sought to be subjected to tax under List II of the Seventh Schedule in the Constitution of India. The fragility of the legal sustenance for such levy, having been elaborated in The State of Madras v. Gannon Dunkerley & Co [1958 AIR 560] by the Hon'ble Supreme Court, on 'works contracts' and on other transactions which resemble, in substance, transactions by way of sales in various decisions which followed this landmark judgement, taxation on 'deemed sale' at par with the hitherto existing entry reserved for taxation by the federating states of the Union was also sanctified by the Forty Sixth Amendment in 1982.
7. The resolution of the controversy over inclusion of transfer of tangibles, inherent in certain commercial transactions, ostensibly of intangibles, and not covered by the law pertaining to sale that, in the absence of specific authority, lay beyond the pale of taxation on sale of goods did not intrude upon the authority conferred upon the Union to levy tax on the very same goods at the point of removal from the factory of manufacture. However, the storm clouds of conflict could not be kept ST/88574/2014 & ST/87472/2015 7 at bay for too long with the untaxed element of the, ostensibly, intangible transaction bound to attract the ambit of tax on, for want of more apt expression, 'sale' of intangibles.
8. Even with the enactment of levy of tax on services, characterised by being intangible and made manifest only by contractual engagement of provider and recipient, an essential element in some of these ostensibly intangible transactions to the extent of preclusion from tax as 'deemed sale', and, more particularly, upon incorporation of section 65(105)(zzzza) in Finance Act, 1994 for levying tax on 'works contracts service', there was no room for conflict, insofar as the charging provisions of the two statutes were concerned, as judicial pronouncements on valuation of the taxable component by commercial tax authorities of the federating states of the Union restricted the levy to the tangible. However, the administration of section 67 of Finance Act, 1994 coupled with clarifications on some expressions therein, undoubtedly intended to simplify assessment, contained, within it, the deadly virus of conflict. The legislative wisdom of calibrating the measure of levy, and crafted carefully to comply with constitutional compartmentalization that did not envisage concurrent jurisdiction, was thus distorted and it was left to recent judicial interpretation to restore order in the consequential chaos of tax disputes. We refer to the decision of the Hon'ble Supreme Court in Union of India v.
ST/88574/2014 & ST/87472/2015 8 Intercontinental Consultants and Technocrats Pvt Ltd [2018 (10) GSTL 401 (SC)] which not only restricted the taxability to the value of 'such service' but also distinguished the mutual exclusivity of the charging and valuation provisions in other laws for taxing of commodities with the inextricable control of one by the other in Finance Act, 1994.
9. In the present instance, it is not in doubt that goods have been transferred to the recipient of the service; it is the incorporation of the goods within the article that has been subject to the service, and the ramifications thereof, that is. In the context of judicially determined mutuality, the extent to which section 67 of Finance Act, 1994 can be stretched is the crux of resolution. The jurisdictional competence to enforce VAT liability excludes us, as well as the adjudicator, from authority to ascertain the discharge of tax liability on the 'goods' component of the impugned transactions. The adjudicating authority has, thus, erred in presuming to the contrary in the absence of particulars in the invoices. We attribute that to the proceedings before the original authority having been deprived of the judicial wisdom of the Hon'ble Supreme Court in Commissioner of Central Excise, Kerala v. Larsen & Toubro Ltd [2015 (39) STR 913 (SC)].
10. The submissions made on behalf of Revenue appear to proceed on the assumption that there are two types of composite contracts- comprising service element and goods element-which are ST/88574/2014 & ST/87472/2015 9 distinguishable with reference to Explanation in section 65(105)(zzzza) of Finance Act, 1994 as those which are 'works contracts' and others. The conclusion posited therefrom is that the former are privileged to be amenable for vivisection, attended by liability to tax on the service component, and the latter, if in relation to any other taxable service, to be subject to tax liability on the entire value of contract. The foundational error in this defence of the impugned order is the denial of the existence of Article 366(29A) of the Constitution of India in the scheme of taxation. The enumeration of 'deemed sale' therein, with intent to subject the 'goods' element to tax in List II of the Seventh Schedule in the Constitution of India, excludes taxability of the same component of a composite transaction under the powers vested in List I of the Seventh Schedule. The legacy of commodity taxation under Central Excise Act, 1944 cannot serve to contend that overlap of such jurisdiction is tenable under Finance Act, 1994; the former statute taxes 'manufacture' as an event while the latter taxes 'rendering of services' which, being impervious to the senses, is manifested only with the satisfaction of the recipient by the provider and is identifiable as 'sale'. Furthermore, the taxing entry, cited as authority by Learned Authorized Representative, is not 'works contract' but rendering of 'works contracts service' and, for the purposes of such tax, affords restricted meaning to 'works contract' which cannot assume the mantle of comprising the entirety of such contracts. The supreme legislature of ST/88574/2014 & ST/87472/2015 10 the Union deliberately constrained the tax within those transactions conforming to those enumerations without providing any reason to expand therefrom. Therefore, the transaction of 'works contract', with the concomitant exclusion of the 'goods' element from scope of taxation conferred by List I in the Seventh Schedule, cannot be denied existence in relation to other taxing entries in section 65 (105), and the successor definition of 'taxable service' in section 65B, of Finance Act, 1994.
11. The first matter of concern resolved by the Hon'ble Supreme Court in re Larsen & Toubro Ltd was the non-taxability of 'goods' element in any contract that was liable for taxation under section 65(105)(zzzza) of Finance Act, 1994 prior to its incorporation therein with effect from 1st June 2007 even though the activities enumerated therein did exist under other entries in section 65 (105) of Finance Act, 1994 from an earlier date. It was, therefore, held that the entries existing independently till then, and simultaneously thereafter, was limited to taxing of the service simpliciter. The foundation for this distinction is the exclusion of tax by the Union on 'deemed sale' in composite contracts and the legislated facility for vivisection of such composite contracts being available only after incorporation of 'works contract service' in the taxing entries under Finance Act, 1994. Implicitly, the absence of such facility in relation to other services, under the ST/88574/2014 & ST/87472/2015 11 enumeration regime and the negative list of regime, would exclude composite contracts that included such taxable service within it. A perusal of '15. A reading of this judgment, on which counsel for the assessees heavily relied, would go to show that the separation of the value of goods contained in the execution of a works contract will have to be determined by working from the value of the entire works contract and deducting therefrom charges towards labour and services. Such deductions are stated by the Constitution Bench to be eight in number. What is important in particular is the deductions which are to be made under sub- paras (f), (g) and (h). Under each of these paras, a bifurcation has to be made by the charging Section itself so that the cost of establishment of the contractor is bifurcated into what is relatable to supply of labour and services. Similarly, all other expenses have also to be bifurcated insofar as they are relatable to supply of labour and services, and the same goes for the profit that is earned by the contractor. These deductions are ordinarily to be made from the contractor's accounts. However, if it is found that contractors have not maintained proper accounts, or their accounts are found to be not worthy of credence, it is left to the legislature to prescribe a formula on the basis of a fixed percentage of the value of the entire works contract as relatable to the labour and service element of it. This judgment, therefore, clearly and unmistakably holds that unless the splitting of an indivisible works contract is done taking into account the eight heads of deduction, the charge to tax that would be made would otherwise contain, apart from other things, the entire cost of establishment, other expenses, and profit earned by the contractor and would transgress into forbidden territory namely into such portion of such cost, ST/88574/2014 & ST/87472/2015 12 expenses and profit as would be attributable in the works contract to the transfer of property in goods in such contract. This being the case, we feel that the learned counsel for the assessees are on firm ground when they state that the service tax charging section itself must lay down with specificity that the levy of service tax can only be on works contracts, and the measure of tax can only be on that portion of works contracts which contain a service element which is to be derived from the gross amount charged for the works contract less the value of property in goods transferred in the execution of the works contract. This not having been done by the Finance Act, 1994, it is clear that any charge to tax under the five heads in Section 65(105) noticed above would only be of service contracts simpliciter and not composite indivisible works contracts.
xxxx
17. We find that the assessees are correct in their submission that a works contract is a separate species of contract distinct from contracts for services simpliciter recognized by the world of commerce and law as such, and has to be taxed separately as such. In Gannon Dunkerley, 1959 SCR 379, this Court recognized works contracts as a separate species of contract as follows :-
"To avoid misconception, it must be stated that the above conclusion has reference to works contracts, which are entire and indivisible, as the contracts of the respondents have been held by the learned Judges of the Court below to be. The several forms which such kinds of contracts can assume are set out in Hudson on Building Contracts, at p.
165. It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case, there are really two agreements, though there is a single instrument embodying them, and the power of the State to separate the agreement to sell, from the agreement to do work and render service and to impose a tax thereon cannot ST/88574/2014 & ST/87472/2015 13 be questioned, and will stand untouched by the present judgment." (at page 427) xxxxx
26. We have already seen that Rule 2(A) framed pursuant to this power has followed the second Gannon Dunkerley case in segregating the 'service' component of a works contract from the 'goods' component. It begins by working downwards from the gross amount charged for the entire works contract and minusing from it the value of the property in goods transferred in the execution of such works contract. This is done by adopting the value that is adopted for the purpose of payment of VAT. The rule goes on to say that the service component of the works contract is to include the eight elements laid down in the second Gannon Dunkerley case including apportionment of the cost of establishment, other expenses and profit earned by the service provider as is relatable only to supply of labour and services. And, where value is not determined having regard to the aforesaid parameters, (namely, in those cases where the books of account of the contractor are not looked into for any reason) by determining in different works contracts how much shall be the percentage of the total amount charged for the works contract, attributable to the service element in such contracts. It is this scheme and this scheme alone which complies with constitutional requirements in that it bifurcates a composite indivisible works contract and takes care to see that no element attributable to the property in goods transferred pursuant to such contract, enters into computation of service tax.
xxxxx
41. We are afraid that there are several errors in this paragraph. The High Court first correctly holds that in the ST/88574/2014 & ST/87472/2015 14 case of composite works contracts, the service elements should be bifurcated, ascertained and then taxed. The finding that this has, in fact, been done by the Finance Act, 1994 Act is wholly incorrect as it ignores the second Gannon Dunkerley decision of this Court. Further, the finding that Section 67 of the Finance Act, which speaks of "gross amount charged", only speaks of the "gross amount charged" for service provided and not the gross amount of the works contract as a whole from which various deductions have to be made to arrive at the service element in the said contract. We find therefore that this judgment is wholly incorrect in its conclusion that the Finance Act, 1994 contains both the charge and machinery for levy and assessment of service tax on indivisible works contracts.' of the judgement throws sufficient light to guide us on the right path.
12. On behalf of the appellant, it is contended that the rendering of 'management, maintenance or repair service' were composite transactions. The disinclination of the adjudicating authority to exclude the 'goods' element merely because of failure to furnish evidence of discharge of VAT liability on those transactions in 'goods' discounts any challenge to the contention now made. Furthermore, as submitted by Learned Counsel, the decision of the Hon'ble Supreme Court, in Safety Retreading Company (Private) Ltd v. Commissioner of Central Excise [2017-TIOL-28-SC-ST], has held that 'management, maintenance or repair services' are also 'works contracts.' The appellant has been transacting in 'works contracts' and, in terms of the jurisdictional competence, the tax liability is limited to the admitted ST/88574/2014 & ST/87472/2015 15 'service' element therein. There is no dispute that the liability thereof has been discharged. The inclusion of the 'goods' that were liable to tax under the VAT laws of the state concerned in the value of services rendered by the appellant lacks the backing of law and must be set aside.
13. We now turn to the issue of 'consumables' supplied by the recipients to enable the appellants to fulfil their contractual obligation.
In re Bhayana Builders (P) Ltd, the Hon'ble Supreme Court has held that '13. A plain meaning of the expression 'the gross amount charged by the service provider for such service provided or to be provided by him' would lead to the obvious conclusion that the value of goods/material that is provided by the service recipient free of charge is not to be included while arriving at the 'gross amount' simply, because of the reason that no price is charged by the assessee/service provider from the service recipient in respect of such goods/materials. This further gets strengthened from the words 'for such service provided or to be provided' by the service provider/assessee. Again, obviously, in respect of the goods/materials supplied by the service recipient, no service is provided by the assessee/service provider. Explanation 3 to sub-section (1) of Section 67 removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service before, during or after provision of such service, implying thereby that where no amount is charged that has not to be included in respect of such ST/88574/2014 & ST/87472/2015 16 materials/goods which are supplied by the service recipient, naturally, no amount is received by the service provider/assessee. Though, sub-section (4) of Section 67 states that the value shall be determined in such manner as may be prescribed, however, it is subject to the provisions of sub- sections (1), (2) and (3). Moreover, no such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value.
xxxxx
16. In fact, the definition of "gross amount charged" given in Explanation (c) to Section 67 only provides for the modes of the payment or book adjustments by which the consideration can be discharged by the service recipient to the service provider. It does not expand the meaning of the term "gross amount charged" to enable the Department to ignore the contract value or the amount actually charged by the service provider to the service recipient for the service rendered. The fact that it is an inclusive definition and may not be exhaustive also does not lead to the conclusion that the contract value can be ignored and the value of free supply goods can be added over and above the contract value to arrive at the value of taxable services. The value of taxable services cannot be dependent on the value of goods supplied free of cost by the service recipient. The service recipient can use any quality of goods and the value of such goods can vary significantly. Such a value, has no bearing on the value of services provided by the service recipient. Thus, on first principle itself, a value which is not part of the contract between the service provider and the service recipient has no relevance in the determination of the value of taxable services provided by the service ST/88574/2014 & ST/87472/2015 17 provider.
xxxxx
18. In the first instance, no material is produced before us to justify that aforesaid basis of the formula was adopted while issuing the notification. In the absence of any such material, it would be anybody's guess as to what went in the mind of the Central Government in issuing these notifications and prescribing the service tax to be calculated on a value which is equivalent to 33% of the gross amount. Secondly, the language itself demolishes the argument of the Learned Counsel for the Revenue as it says '33% of the gross amount 'charged' from any person by such commercial concern for providing the said taxable service'. According to these notifications, service tax is to be calculated on a value which is 33% of the gross amount that is charged from the service recipient. Obviously, no amount is charged (and it could not be) by the service provider in respect of goods or materials which are supplied by the service recipient. It also makes it clear that valuation of gross amount has a causal connection with the amount that is charged by the service provider as that becomes the element of 'taxable service'. Thirdly, even when the explanation was added vide notification dated March 1, 2005, it only explained that the gross amount charged shall include the value of goods and materials supplied or provided or used by the provider of construction service. Thus, though it took care of the value of goods and materials supplied by the service provider/assessee by including value of such goods and materials for the purpose of arriving at gross amount charged, it did not deal with any eventuality whereby value of goods and material supplied or provided by the service recipient were also to be included in arriving at gross amount 'gross amount charged'.
ST/88574/2014 & ST/87472/2015 18
19. Matter can be looked into from another angle as well. In the case of Commissioner, Central Excise and Customs, Kerala v. M/s. Larsen & Toubro Ltd. - (2016) 1 SCC 170 = 2015 (39) STR 913 (S.C.). This Court was concerned with exemption notifications which were issued in respect of 'taxable services' covered by sub-clause (zzq) of clause (105) read with clause (25b) and sub-clause (zzzh) of clause (105) read with clause (30a) and (91a) of Section 65 of Chapter V of the Act. This Court in the aforesaid judgment in respect of five 'taxable services' [viz. Section 65(105)(g), (zzd), (zzh), (zzq) and (zzzh)] has held as under :
"23. A close look at the Finance Act, 1994 would show that the fixed taxable services referred to in the charging Section 65(105) would refer only to service contracts simpliciter and not to composite works contracts. This is clear from the very language of Section 65(105) which defines 'taxable service' as 'any service provided".
Further, while referring to exemption notifications, it observed:
"42. ...Since the levy itself of service tax has been found to be non-existent, no question of any exemption would arise."
It is clear from the above that the service tax is to be levied in respect of 'taxable services' and for the purpose of arriving at 33% of the gross amount charged, unless value of some goods/materials is specifically included by the Legislature, that cannot be added.'
14. With this exposition, it is very clear that the supply of 'consumables' by the recipient does not constitute 'consideration' to which value was required to be assigned for enhancing the 'gross amount charged' in section 67 of Finance Act, 1994. Neither the ST/88574/2014 & ST/87472/2015 19 circulars of Central Board of Excise & Customs, advising the inclusion of all expenditure incurred for rendering services, nor the expansion of 'consideration' to encompass 'consumables', that does not add to the assets of the provider of service, have sanction of law. The differential tax confirmed in the impugned order cannot be sustained.
15. For the above reasons, we set aside the impugned orders and allow the appeals.
(Order pronounced in the open court on 13/03/2020) (C J Mathew) Member (Technical) (Dr. Suvendu Kumar Pati) Member (Judicial) */as