Custom, Excise & Service Tax Tribunal
Service Tax-Ii, Kolkata vs Fgk Thermal Pvt Ltd on 24 February, 2025
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
EASTERN ZONAL BENCH : KOLKATA
REGIONAL BENCH - COURT NO. 1
Service Tax Appeal No. 77009 of 2016
(Arising out of Order-in-Original No. 48/COMMR/ST-II/KOL/2016-17 dated
28.07.2016 passed by the Commissioner of Service Tax-II, Kendriya Utpad Shulk
Bhawan, 180, Shantipally, Rajdanga Main Road, Kolkata - 700 107)
Commissioner of Service Tax : Appellant
Service Tax-II Commissionerate,
Kendriya Utpad Shulk Bhawan,
180, Shantipally, Rajdanga Main Road, Kolkata - 700 107
VERSUS
M/s. FGK Thermal Private Limited : Respondent
38L, Maharaja Tagore Road, 1st Floor,
Kolkata - 700 031
APPEARANCE:
Shri Prasenjit Das, Authorized Representative for the Appellant-Revenue
None for the Respondent
CORAM:
HON'BLE SHRI ASHOK JINDAL, MEMBER (JUDICIAL)
HON'BLE SHRI K. ANPAZHAKAN, MEMBER (TECHNICAL)
FINAL ORDER NO. 75627 / 2025
DATE OF HEARING / DECISION: 24.02.2025
ORDER:[PER SHRI ASHOK JINDAL] The Revenue is in appeal against the impugned order.
2. The facts of the case are that the respondent is a private limited company having Service Tax Registration under the categories of 'erection, commissioning and installation service', 'manpower recruitment and supply agency service', 'security / detective agency service', 'legal consultancy service' and 'transportation of goods by road service'. The Revenue alleged that the respondent had failed to discharge their Service Tax liability against works contract services amounting to Rs.80,44,332/- (inclusive of cesses) during the impugned period.
Page 2 of 13Appeal No.: ST/77009/2016-DB
3. Scrutiny of various records of the respondent was conducted and statements were also recorded. On the basis of the above, it was alleged that for the period from 2009-10 to 2013-14, the respondent was engaged in undertaking 'turnkey contracts involving both supply and erection jobs' for different clients in relation to supply, erection, commissioning and installation of tunnel kilns / furnaces. The respondent were issued separate work orders against the same project, one for the 'supply' part and the other for associated services using those supplies, which were classifiable as works contract services. It was alleged in the Show Cause Notice that the respondent had not paid appropriate Service Tax on the services rendered by them.
3.1. At the time of adjudication, the ld. adjudicating authority examined the purchase orders and was of the opinion that the purchase orders for supply of materials and that for provision of service should be read in unison for the reason that they are reciprocally dependent on each other for successful completion of the projects. He held that in each case, transfer of title of property in goods is involved in the execution of such contracts and therefore, the service rendered should be classified under 'works contract service'. The ld. adjudicating authority has computed the demand by excluding the value of free supply of materials during the impugned period and has accordingly, dropped the Service Tax demand of Rs.74,57,930/-.
4. Against the said order, the Revenue is before us.
5. None appeared on behalf of the respondent.
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6. Heard the Ld. Authorized Representative of the Revenue and perused the records.
7. We observe that there were two separate contracts - one for supply of machinery and another for execution of services for installation of the machinery in their premises. Thus, we are of the view that the contract for supply and the contract for service are two distinct contracts and the two cannot be clubbed together. This view has been held by the Tribunal in the case of M/s. TRF Ltd. & ors. V. Commissioner of C.G.S.T. & C.X., Jamshedpur [2024 (5) TMI 463 - CESTAT, Kolkata] wherein the facts of the case were as under: -
"2. The facts of the case are that the main appellant M/s. TRF Limited is manufacturer of machinery and machinery parts and also undertaking works contracts for large projects involving service and sale of goods as works contracts. 2.1 Under the sale contract, the property in the goods were transferred to APCPL and DVC at the time of handing over the goods to the transporters and thereafter, those goods were handed over to the appellant free of cost by APCPL and DVC for providing services with respect to those goods, which also included transfer of property in certain other goods used by the appellant while rendering services under Contract II qualifying this contract as a "works contract".
2.2 As per the terms of agreement, the appellant was required to execute two separate contracts, i.e. Contract I & Contract II.
2.3 The execution of two separate Contracts for sale of goods and provisions of services along with supply of goods, was the condition put forth by the service recipient APCPL and DVC as mentioned in the Instruction to bidders and in General Conditions in the Contract and not the choice exercised by the appellant.
2.4 Since the Contract II involved provisions of services along with supply of goods, the appellant considered this contract as works contract and opted to pay the service tax on Contract II under Rule 3 of Page 4 of 13 Appeal No.: ST/77009/2016-DB Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 as "Composition Scheme". Accordingly, the appellant paid the service tax on the gross value of the consideration under Contract II at the time of composition rate of tax prescribed under the Composition Scheme.
2.5 Against these two Contracts, various show cause notices were issued to the appellant demanding service tax from the appellant alleging that even if the appellant has entered into two separate contracts for sale of goods/supply and works contract services, the value of goods sold under Contract I would be required to be included in the gross amount charged under Contract II for the purposes of payment of service tax under the Composition Scheme. The notices also invoke extended period of limitation.
2.6 The matter was adjudicated and the demand of service tax was confirmed on gross value of Contract I & Contract II i.e. sale of goods/supply and works contract services and demanded the service tax thereon along with interest and penalties on all the three appellants were imposed.
2.7 The period involved in these appeals is June 2013 to March 2016. Aggrieved from the said order, the appellants are before us."
and this Tribunal observed as under: -
"6. Heard the parties. Considering the fact that the issue involved in the matters have been examined by this Tribunal in appellant's own case for the earlier period, wherein this Tribunal observed as under: -
"6. We find that the facts are not in dispute. The agreements were entered by the appellant and the service recipient prior to 07.07.2009 i.e. 19.02.2008 and 04.12.2008 and it is not in dispute that the appellant started execution of works prior to 07.07.2009 and raised invoices and also received payments thereof. In that circumstances, the CBEC Circular No.150/1/2012-ST dated 08.02.2012 is relevant to decide the present issue. For Page 5 of 13 Appeal No.: ST/77009/2016-DB better appreciation of law, the said Circular is extracted below :
"Meaning of expression 'gross amount' as per Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 -- Regarding Circular No. 150/1/2012-S.T., dated 8-2- 2012 F.No. 354/236/2010-TRU Government of India Ministry of Finance (Department of Revenue) Central Board of Excise & Customs, New Delhi Subject : Meaning of the expression 'gross amount' appearing in Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, as it stood prior to 7th day of July 2009 - Regarding.
Reference has been received from a field formation seeking clarification as to whether 'gross amount', for the purpose of payment of service tax under the Works Contract Composition Scheme, included the value of free of cost supplies, for the period prior to 7- 7-2009.
2. The issue has been examined. The meaning of the expression 'gross amount' appearing in Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, is qualified by the Explanation inserted in the said Rule with effect from 7-7-2009. Since the Explanation inserted in Rule 3(1) with effect from 7-7-2009 is clarificatory and prospective in nature, inclusion of value of free-of-cost supplies of goods and services in or in relation to the execution of Works Contract [mentioned in the Explanation to Rule 3(1)(a)(i) and (ii)] in the 'gross amount' for the purpose of payment of service tax on works contract under the composition scheme, is a legal requirement, only with effect from 7-7-2009 when the Explanation became a part of Rule 3(1).
3. The explanation appended to Rule 3(1) with effect from 7-72009, categorically says in the proviso that "...nothing contained in this Explanation shall apply to a works contract Page 6 of 13 Appeal No.: ST/77009/2016-DB where the execution under the said contract has commenced or where any payment, except by way of credit or debit to any account, has been made in relation to the said contract on or before the 7th day of July, 2009." Where execution of works contract has commenced prior to 7-7-2009 or where any payment (except payment through credit or debit) has been made towards a works contract prior to 7-7-2009, then in those cases 'gross amount' for the purpose of payment of service tax does not include the value of free of cost supplies.
4. The above clarification may be communicated to the field formations and service tax assessees through Trade Notice/Public Notice. Hindi version to follow."
As per the said Circular, the explanation has been appended to Rule 3 (1) of the Composition Scheme, which clearly shows that the contract entered prior to 07.07.2009, the value of cost of free supply will not be includible to determine the gross amount for the purposes of payment of service tax.
7. The same view has been taken by this Tribunal in the case of Essar Projects (India) Limited (supra), wherein this Tribunal has observed as under :
"9.1 It is clear from the above Circular issued by C.B.E. & C. that where execution of works contract has commenced prior to 7-7-2009, in those cases gross amount, for the purpose of payment of Service Tax, will not include the free of cost supply by the service recipient. In this regard, appellant has argued that as per clause 15.4 of the Supply Contract, reproduced below, full rights/title/ownership in respect of each item of the Balance of Plant stand transferred to the owner on delivery by the supplier at the site :- "15.4 - The full right, title, ownership and interest and all risks (except for those specifically retained by the Supplier in accordance with the terms of this Contract) in each item of the Balance of Plant shall be transferred to the Owner upon Page 7 of 13 Appeal No.: ST/77009/2016-DB Delivery by the Supplier of that item of the Balance of Plant at the Site and upon endorsement of the documents required under Article 15.1."
9.2 In view of the above clause of the supply contract, the findings of the adjudicating authority that ownership of the Balance of Plant and items stands transferred only at the time of completion of work, is not correct. In the case of imported equipments as well as the Balance of Plant equipment, the ownership/title lies with the service recipient when the same are received at site. Accordingly, it has to be held that after receipt of balance equipment, the title/ownership of the same is transferred to the service recipient. Accordingly, adjudicating authority cannot go beyond the C.B.E. & C. Circular No. 150/1/2012-S.T., dated 8-2-2012 wherein it has been clarified that for the works contract executed before 7-7-2009, free of cost supplies are not required to be added to the gross amount, for the purpose of payment of Service Tax. There is no evidence on record to convey that both, the supply contract and the construction contract were artificially bifurcated after introduction of explanation to Rule 3(1) of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.
10. The Hon'ble Supreme Court in the case of UOI v. Mahindra and Mahindra Limited [1995 (76) E.L.T. 481 has held as follows :- (S.C.)] in Para 5 "5. The main thrust of the arguments of the learned Solicitor General before us was that the price for the sale of CKD packs by the foreign collaborator to the respondents is not the true price. In other words, the price fixed or mentioned in the invoices was not the sole consideration for the sale of CKD packs, for the various reasons stated by the Assistant Collector in his order. According to the learned Solicitor General, the price mentioned in the invoices was (or should have been) determined by taking into consideration the lumpsum of 15 million French Francs (nearly three crores of Rupees) paid by the Page 8 of 13 Appeal No.: ST/77009/2016-DB respondents to the foreign collaborator under the agreement. It is on this basis Section 14(1)(a) was excluded and resort to Section 14(1)(b) of the Customs Act was sought to be justified by the revenue. In appreciating the above plea we have to bear in mind certain basic principles. The bargain between the respondents and the foreign collaborator is evidenced by written agreements, (dated 6- 11-1979 & 6-31980). There is no material nor was it suggested that the dealings between the parties are not at arm's length. No evidence is available to show that the payment of royalty to the collaborator induced any extra commercial obligation for the price of CKD packs, parts and components. Ordinarily the Court should proceed on the basis that the apparent tenor of the agreements reflect the real state of affairs. It is, no doubt, open to the revenue to allege and prove that the apparent is not the real and that the price for the sale of the CKD packs is not the true price, and the price was determined by reckoning or taking into consideration the lumpsum payment made under the collaboration agreement in the sum of 15 million French Francs. The short question is whether the revenue has succeeded in showing that the apparent is not the real and that the price shown in the invoices does not reflect the true sale price and so Section 14(1)(b) of the Act was properly invoked."
11. In view of the law laid down by the Hon'ble Supreme Court, a contract has to be interpreted in a manner from the apparent tenor of the agreement and apparently it has to be accepted as the real state of affairs.
12. The judgment of ITAT relied upon by the Revenue is not applicability to the facts of this case because the Income Tax law is applied in altogether in a different sphere of taxation whereas, the Service Tax liability and determined of value under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, constitute an altogether a different area of operation. Based on the above observations, it is concluded that both the contracts dated 24-8-2007 for Supply of Page 9 of 13 Appeal No.: ST/77009/2016-DB equipments and Construction of works has to be treated as distinct and separate contracts and value of supply contract cannot be added to the value of the construction contract for the purpose of Service Tax liability.
13. In view of the above, appeal filed by the appellant is allowed and cross-objection filed by the Revenue is rejected."
8. Further, in the case of Tata Projects Limited (supra), this Tribunal has again examined this issue and observed as under :
"7. We have considered the arguments on both sides and perused the records. There is no dispute on the facts of the case that the appellant had entered into three agreements with M/s APPDCL as per the LOI issued by them, of which two are supply contracts and one is a contract for services which also included supply of some material. He also had an umbrella agreement combining these three agreements. It is not also in dispute that in addition to the supply, the appellant had discharged VAT/CST as the case may be in respect of the supply contracts. The only question remains to be answered is whether the value of this onshore and offshore supplies by the appellants need to be included in the value of services rendered by them under the works contract scheme. It is not in dispute that the material in question was supplied by the appellant with respect to this particular contract and after the supply was completed, the goods which were supplied were given by APPDCL back to appellant for execution of the contract. A plain reading of CBEC circular D.O.F. No. 334/13/2009-TRU, dated 06.07.2009 explains that such values became includible in the value of the works contract as per the amendment made vide notification NO. 23/2009-ST, dt. 07.07.2009. By inserting an explanation, it was also clarified by CBEC themselves that the inclusion of the values would not apply to such contracts where either the execution of works contract has already started or any payment (whether in part or in full) has been made on or before 07.07.2009. In this particular case, the payments in respect of all the three Page 10 of 13 Appeal No.: ST/77009/2016-DB contracts were made prior to 07.07.2009. Needless to say that there is no separate payment under the umbrella contract because it was only a combination of the other three contracts. This issue was agitated by the appellant before the adjudicating authority who, however, did not agree with this contention on the following words:
" 7.1. The issue required to be decided in these proceedings is whether the contracts dated 12.08.2009 with service recipients, commenced before and payments received before 7.7.2009 can be considered as separate contracts or as one contract. It has been argued by the appellant that both the contracts are independent and cannot be considered as one for the purpose of determining taxable value of the service provided. It was further argued that even if two contracts are treated as one, still appellant's case will not be covered under the Explanation added with effect from 7.7.2009 in Rule 3(1) of the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007. In view of the findings above and nature of EPC works contract service and the existence of only one contract No. for all the supply and the service contracts, the scope of supply/work being the same i.e. "basic and detailed design, engineering, procurement, manufacture, assembly, pre assembly, inspection, tests at contractors and/or his sub vendors' works, shock painting, packing, transportation to site, freight and insurance of balance of plant systems and equipment package for 2 x 800 W thermal power plant"; that the assessee is responsible for installation of the whole facility under the EPC contract by using the Off-shore supply and Onshore supply procured by the assessee themselves, and therefore, the contracts have to be considered as one. In this regard, it is observed that both, supply contract and service contract have no separate defects liability clauses and the total price of the Contract, price variation being for the total price of the contract, and the Liquidated Damages applicable for the entire and complete Design, Engineering, Page 11 of 13 Appeal No.: ST/77009/2016-DB Procurement, manufacture supply, erection, testing, commissioning, initial operation, reliability operation and performance guarantee tests on EPC basis for Balance of Plant (BOP) systems and equipment for 2 x 800 MW supercritical coal fired Thermal Power Plant, the contracts have to be considered as one."
8. In other words, the adjudicating authority held that the three contracts in question are essentially part of the same contract and they were signed on 12.08.2009, hence the explanation w.e.f. 07.07.2009 to Rule 3 of the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 is not relevant. On a plain reading of the contracts in question, we do not find it so. There are indeed three different contracts and for which three different payments were to be made and were made. The umbrella agreement only combines all these three agreements so as to give a complete perspective of the scope of the contract. In fact, there is no payment whatsoever under the umbrella agreement. Further, the advances in respect of the three contracts were received prior to 07.07.2009 and hence the amended provisions do not apply. In view of the above, we find that the value of the material supplied under off-shore and onshore contracts cannot be included in the value of the works contract service as the advance payment in respect of all the three contracts are received prior to 07.07.2009.
9. We also find that this case is identical to the case of ESSAR Projects (India) Limited (supra) in which a similar view has been taken. In view of the above, we find that the demand of service tax and interest and imposition of penalties in the impugned order are not sustainable and the impugned order is liable to be set aside and we do so.
10. The appeal is allowed and the impugned order is set aside."
9. As it is evident that all the contracts were entered by the appellants with the service recipient prior to 07.07.2009 and the invoice has been issued and the payment was also Page 12 of 13 Appeal No.: ST/77009/2016-DB received. In that circumstances, in terms of CBEC Circular No.150/1/2012-ST dated 08.02.2012, the value of supply of goods contract, which were executed by the appellant and the same were given to the appellants for execution of Contract II, were the contract value, in that circumstances, the value of goods in Contract I cannot be included for determination of gross value for payment of service tax. Therefore, the appellant is correctly discharged their service tax liability on gross value of works contract i.e. Contract II.
10. In view of the above observations, we set aside the impugned demand. Consequently, we waive the penalties imposed on all the appellants.
11. In the result, we set aside the impugned order and allow the appeals with consequential relief, if any."
7. As the issue has already been decided in favour of the appellant, therefore, following the analogy of the said order, we hold that the demand against the appellant is not sustainable as the appellant has already discharged their Service Tax liability on gross value of works contract i.e. Contract II and value of Contract I is not to be included in the assessable value of taxable service provided by the appellant.
8. In view of this, we set aside the impugned order. Consequently, no penalty is imposable on the appellant. Accordingly, penalty imposed on all the appellants are also set aside.
In the result, we allow the appeals with consequential relief, if any."
7.1. Therefore, we find that the issue has already been decided by the Tribunal in the case of M/s. TRF Ltd. (supra), wherein it has been held that the value of contract for supply of machinery is not to be included in the value of services for execution of the contract.
Page 13 of 13Appeal No.: ST/77009/2016-DB 7.2. In these circumstances, we hold that the value of machinery supplied by the service recipient is not includable in the value of taxable services provided by the respondent. In these circumstances, if the same is reduced, no Service Tax is payable by the respondent.
8. In view of the above, we do not find any infirmity in the impugned order and accordingly, the same is upheld.
9. In the result, the appeal filed by the Revenue is dismissed.
(Operative part of the order was pronounced in open court) Sd/-
(ASHOK JINDAL) MEMBER (JUDICIAL) Sd/-
(K. ANPAZHAKAN) MEMBER (TECHNICAL) Sdd