Customs, Excise and Gold Tribunal - Bangalore
Air Liquide Engineering India Pvt. Ltd. vs The Commissioner Of Customs And Central ... on 23 October, 2007
Equivalent citations: [2008]12STJ259(CESTAT-BANGALORE), 2008[9]S.T.R.486, [2008]13STT18
ORDER T.K. Jayaraman, Member (T)
1. This appeal has been filed against Order-in-Revision No. 16/2006 Service Tax dated 29.12.2006 passed by the Commissioner of Customs and Central Excise, Service Tax, Hyderabad-II Commissionerate.
2. The appellants M/s. Air Liquide Engineering India Pvt. Ltd. have their office and factory at Hyderabad. They are the manufacturers of air and gas separation plants on turnkey basis. They are also engaged in rendering services as Consulting Engineers. A show cause notice was issued to the appellants by Revenue proposing demand of Service Tax to the tune of Rs. 87,54,485/- alleging that they rendered the services in the capacity of consulting engineers. The adjudicating authority examined the issue and came to the conclusion that the appellants had actually supplied air/gas separation plants to their customers on turnkey basis and relying on the decision of the Tribunal in the Daelim Industrial Co. Ltd. v. CCE , he concluded that the activity of the appellants would not fall under the category of 'Consulting Engineering Service'. Therefore, he dropped major part of the demand and confirmed only an amount of Rs. 1,38,506/-. The Commissioner after going through the Order of the Original Authority took up the same in exercise of the revision powers conferred on him in the Finance Act, 1994. After giving a personal hearing, the Commissioner came to the conclusion that the activities of the appellants would indeed fall under the category of 'Consulting Engineering Service' and therefore, he demanded an amount of Rs. 87,54,485/- for the period 1997-2002 under Section 73 read with Section 68 of the Finance Act, 1994. Further, he demanded appropriate interest under Section 75 of the Finance Act. He imposed penalty of Rs. 100/ per day in terms of Section 76 of the Finance Act. He imposed the equal penalty of Rs. 87,54,485/- in terms of Section 78 of the Finance Act, 1994. The appellants are highly aggrieved over the impugned order.
3. Shri Baalu Radha, Krishna, learned Consultant appeared on behalf of the appellants and Mrs. Sudha Koka and Shri K. Sambi Reddi, learned Departmental representatives appeared for the Revenue.
4. We heard both sides. The learned departmental representatives took us through the impugned order and also Annexure-C to the show cause notice and urged the point that the activities of the appellants would definitely fall under the category of 'Consulting Engineers' in the light of the Board's Circular which details the scopes of the term 'Consulting Engineering Services'. For example, they took us through Annexure-C to the show cause notice wherein the descriptions of the services rendered by the appellants are given. On going through it, we find the details of the various contracts along with the invoices which describe the work undertaken by them. For example, the descriptions are like "system design and engineering", "erection", "testing", "commissioning, performance", etc. The learned departmental representatives pointed out that recently the Tribunal has passed an order in respect of M/s. Transformers & Electricals Kerala Ltd. (TELK) in respect of similar issue and they say that the ratio of the said case would definitely be applicable to the present case. However, they did not produce the copy of the final order referred by them neither discussed in detail the points involved in that case to show that the decision of that case would squarely be applicable to the present case. However, the learned departmental representatives urged the bench that the services rendered by the appellants clearly fall under the category of Consulting Engineering Services' and therefore, they urged the Bench to uphold the Order-in-Revision.
5. On the other hand, the learned Consultant pointed out that the appellants are actually manufacturers of "air separation plants" and "gas separation plants". It was stated that they were not a consulting engineering services company. They are actually manufacturing the various items required for commissioning air separation plant and gas separation plant for various chemical industries. They enter into contract with their customers for supply of these plants on turnkey basis. It was urged that the issue is squarely covered in favour of the appellant in the case of Daelim Indus. Co. v. CCE and also the case of Larsen & Turbo Ltd. v. CCE, Cochin . It was urged that the Daelim case was upheld by the Hon'ble Supreme Court and there was no reason why it should not be followed in the present case. Further, it was urged by the learned Consultant that the show cause notice has invoked the longer period and there is no discussion regarding the reasons for invoking the longer period in the Order-in-Revision. Moreover, in the course of hearing, it was pointed out that works contract came into the Service Tax net only with effect from 2007 and therefore, during the relevant period the works contract were not liable for Service Tax. This ground has also been taken by the learned Consultant during the course of the hearing. As regards, the various invoices which mentioned payment for design, engineering, erection, commissioning etc., it was urged that in a works contract, the contracted amount is for the supply of the entire works and the various payments made are known as the milestone payments. That is only for the proper management of the contract and for ensuring proper fund flow. It does not mean that the amounts mentioned actually indicate the value of the specific services indicated in the invoice.
6. On a very careful consideration of the entire issue, we find that the appellants are actually the manufacturers of gas/air separation plants for chemical industries. In the present case, they have entered into contracts with various firms for the supply of plants on turnkey basis. In fact in the present case, the dispute is in relation to eight contracts entered by the appellants. The following are the eight contracts.
(i) ALEIL Order Ref. No. 1004, Contract No. 3276/501/5007 dt. 21.2.95 relating to IPCL, Bharuch. (Para 5.1.1 of Annexure-A statement of grounds)
(ii) ALIEL Order Ref. No. 1007, Contract No. GAIL/CP/3346 dt.19/6/95 relating to Gas Authority of India Ltd. (GAIL) - (Para 5.2 Annexure-A-Statement of Grounds).
(iii) ALEIL Order Ref. No. 1009, Agreement, dt.4/11/96 relating to M/s. Air Liquide Pipeline Supplies (P) Ltd. (ALPS), New Delhi (Para 5.3 of Annexure-A-statement of grounds).
(iv) ALEIL Order Ref No. 1010, P.O. No. 006.004.08000 1602 dt.31/12/96 and 2530/7 at 1-1-97 relating to M/s. Essar Projects Ltd. (Page 5.3 of Annexure-A-statement of grounds).
(v) ALEIL Order Ref. No. 1012, P.O. No. 006.004.08000.1602 dt.31/12/96 relating to M/s. IPCL, MGCC, (page 5.4 Annexure-A-statement of grounds).
(vi) ALEIL Order Ref. No. 1013, Contract No. 3795/501/5001 dt. 1/2/97 relating to M/s. IPCL, Gandhar (page 5.4 Annexure-A-statement of grounds).
(vii) M/s. ALEIL Order Ref. No. 1016, P.O. No. HCRL/970615/DS/DSC dt.26/2/98 relating to M/s. L&T Ltd. (Page 5.5 Annexure-A-statement of grounds).
(viii) M/s. ALEIL Order Ref. No. 1018 P.O. No. 11582 dt.10.09.98 relating to M/s. Daelim Engineers and Constructors (page, 5.7 Annexure-A-statement of grounds).
In order to supply the plant, the appellants have to undertake detailed design, engineering, etc. It was urged by the appellants that they are not rendering the services of design, engineering, drawing, etc., directly to the customers. In order to supply the plant, they have to undertake these activities which are incidental and they cannot be termed as services rendered to the client in the capacity of the 'Consulting Engineer'. The Original Authority has given detailed reasoning for dropping the demands. The findings recorded in Para 29 and 30 of Order-in-Original is reproduced herein below.
29) It is observed that those above contracts are for design, detailed engineering, procurement, supply, fabrication, transportation, erection, testing and commissioning of air separation plant for Nitrogen. These contracts are of composite contract. They received the entire work order from their clients starting from procurement and supply of materials to undertaking testing, installation and commissioning. The allegation in the show cause notice that the design drawings and detailed engineering's, should equally fall under the category of consulting engineering service, does not stand scrutiny in as much as the drawings, designing, etc., has to be undertaken by the assessee for their own purpose for fulfilling the contractual agreement of manufacture, supply of either air separation plant or nitrogen plant. These activities cannot be received in isolation and these are part of the entire composite contract. In this connection the assessee in their reply referred to Hon'ble CEGAT (CESTAT)'s decisions in a number of cases out of which the following two cases can be referred to.
Daelim Industrial Co. Ltd. v. CCE, Vadodra 2003 (155) ECT 457 (Tri.-Del.);
L & T Ltd. v. CCE, Cochin 2004 (60) RLT 505 (CESTAT-Delhi.)
30) In the above cases the Hon'ble CESTAT held that Service Tax cannot be imposed on work contracts on turnkey basis, since it is not a consultancy contract. In their opinion, a work contract cannot be vivisected and part of it cannot be subjected to tax. In this connection, Board's Circular No. 79/9/2004-ST dated 13/5/04 (file No. 137/38/2003-CS 4), clarifies that charges for erection, installation & commissioning are not covered under the category of consulting engineer services. This clarification has been given in the light of Board's earlier Circular No. 49/11/2002-ST at 18/12/2002 whereby it was clarified that the work of erection and commissioning were taxable under the category of consulting engineer service and tot hat effect the circular dated 18.12.02 was modified. It is further observed that the department had filed an appeal before the Hon'ble Supreme Court against the decision of the CEGAT (now CESTAT) in the case of M/s. Daelim Industrial Co. Ltd. and Hon'ble Supreme Court refused to admit the appeal filed by the department (ELT-Vol. 170 Part 3) on merits.
7. In our view, the issue is squarely covered by the decision of the CEGAT in the case of Daelim case, which has also been upheld by the Supreme Court. Basically in all these eight contracts the appellants have supplied air separation / gas separation plant to their customers. They had also undertaken the erection, installation and commissioning of the plant. It is well settled that erection, commissioning, installation, etc., would not come within the scope of 'Consulting Engineer Services' as clarified by the Board, even though in the initial circular issued by the board, this has been included as 'Consulting Engineering Services'. That apart in the Annexure-C annexed to the show cause notice, we find that the major portion relates to erection of the various items of the plants. In terms of Board's instructions, these activities cannot come within the scope of 'Consulting Engineering Services'. Moreover, erection, commissioning, etc., came under the Service Tax net only with effect from 2003 and in any case they cannot be charged to Service Tax under the category of 'Consulting Engineering Services'.
8. Further, on going through the eight contracts which are under consideration we find that they are actually work contracts on turnkey basis. On this point there is absolutely no doubt. These works contract came into the Service Tax net only with effect from 2007. In such circumstances, for a period prior to 2007 works contract cannot be covered under 'Consulting Engineering Services'. This view has been taken by the Tribunal in the case of L & T Ltd. v. CCE, Vadodara 2007 ITS-1234 CESTAT - Date of Decision: 15.5.2007. Further, this Tribunal in the case of Blue Star Ltd. v. CCE, Hyderabad 2007 (5) STR 353 (Tri.-Bang.) has taken a decision by following the Daelim case that work contract cannot be vivisected and part of it subjected to duty. In the Daelim case, the contention of the appellant was that the contract was a work contract and design and drawing in question were incidental to the execution of the work contract has been accepted by the Tribunal. In the present case also, the drawing, design, etc., which appear to fall within the scope of 'Consulting Engineering Services' have actually been carried out for manufacturing the plant to be supplied to the buyers. In that sense, these activities have not been rendered in the capacity of 'Consulting Engineering Services'. They were not services rendered directly to the clients. The main contract is only for the manufacture of the plant and their supply, erection, etc. In order to manufacture the plant, a design is necessary and the design and drawing carried out for manufacture of the various components of the plants cannot be called as services rendered directly to the client. Because in order to manufacture the plant, these activities have to be carried out and we can only say that these services have been rendered by the appellants to themselves in order to carry out the works contract. The reasoning of the Tribunal in the case of Daelim decision is squarely applicable to the present case also.
9. Moreover, there are no detailed grounds for invocation of longer period. During the relevant period, the department as well as the appellants was very much conscious. The impugned order is not a speaking order. The Commissioner has not given reasons as to why the Daelim case is not applicable. He has made reference to the decision of the Hon'ble Apex Court in the case of BSNL Ltd. v. UOI 2006 (2) STR 161 (SC) to hold that the Service Tax is liable to be paid in the present case. But he has not explained as to how the BSNL case would enable him to demand Service Tax in the present case. There is actually no detailed discussion at all and he has also not properly dealt with the time bar issue. We do not find that there is any reasonable ground for invoking the longer period Even on time bar, the demand is not sustainable. The Order-in-Original has rightly followed the Daelim case.
10. As regards the learned departmental representative's prayer to consider the recent decision of the Tribunal in the TELK case, we find that they had not brought out as to how the TELK case would be applicable to the present case. The facts in those cases are different and the ratio of the TELK case cannot be made applicable. We are of the firm view that this issue is squarely covered by the Daelim case and the original authority has correctly dropped the demand by following the ratio of the above decision. The Order-in-Revision is not legal and proper for the reasons already enumerated. Therefore, we allow that appeal with consequently relief.
(Pronounced in open Court on 23 OCT 2007)