Document Fragment View

Matching Fragments

4. The case of the respondent is that in a case of turn-key works contract, service tax is not payable as the contract can not be vivisected and the services relating to design and engineering forms a minor portion of the total work. The case of the Revenue on the other hand is that works contract in respect of turnkey projects can be dissected on the basis of supply of goods, materials the property in which passes on in some form or the other on the one hand and the services rendered on the other hand. In other words, the contract can be divided into sale contract and service contract in accord with the 46th amendment in the Constitution of India. In the grounds of appeal, reference is made to the CBECs Circular No. 49/11/2002-ST dated 18.12.2002 holding that in the case of turnkey project, a lot of preparatory work is required to be done, such as, soil testing, survey, planning, designing, drawing etc. before the civil construction work can commence. The design and drawing proposed by the construction company i.e the contractor is subject to approval of the plan and any modification suggested by the client has to be incorporated in the design. This portion of the work falls in the realm of consulting engineer service and hence taxable.

5. It may be stated here that the divisibility of contract is not in issue  either in law or even on facts. Conceptually, after view the 46th Amendment in serving clause (29-A) in Article 366 of the Constitution, a works contract can be dissected for the purpose of levy of sales tax and service tax. As a matter of fact, in the present case, various works to be done by the respondent have been specified and separately valued in the contract document itself. The case of the respondent, however, is that, what is divisible is the value of the contract i.e price for different kinds of work; the contract as such is one single contract involving handing over of the plant in running condition to the principal, after completing various works including designing and engineering, civil works, steel structures, erection, testing and commissioning of the plant etc. The divisibility of the contract  valued work wise  therefore, cannot be a relevant consideration for holding that the service part of the contract relating to consulting engineer or design engineer, should be dissected from rest of the contract and on value thereof, service tax levied. The respondent relies on the dominant nature test for determining the type of the contract.

8. We are, prima facie, of the view that the decision in Daelim (supra) is not in accord with the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. (BSNL) vs Union of India, (2006) 3 Supreme Court Cases 1. After referring to different sub-clauses of Clause (29-A) inserted in Article 366 of the Constitution of India by the 46th amendment, a three Judge Bench of the Apex Court held :

41. Sub-clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Sub-clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley was directly overcome. Sub-clause (c) deals with hire purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under sub-clause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, contrary to A.V. Meiyappans decision a lease of a negative print of a picture would be a sale. Sub-clause (e) covers cases which in law may not have amounted to sale because the member of an incorporated association would have in a sense begun both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales. Sub-clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab v. M/s. Associated Hotels of India Ltd. (supra). That decision has by this clause been effectively legislatively invalidated.

9. The decision in Associated Hotels India Ltd. (supra) was held to be effectively legislatively invalidated (by the 46th amendment), and the dominant nature test or substance test was held to be applicable only in cases not falling under any of the clauses of Article 366(29-A). It would thus follow that the dominant nature test cannot be applied in the case of works contract falling under clause (b) of Article 366(29-A), and therefore it cannot be pressed into service for treating turn-key works contract on different footing. If works contract can be split into sale contract and service contract, a different treatment may not be given to the so-called turnkey contract simply because the contract is on a turnkey basis  although basically a works contract. We are prima facie of the view that Daelim was not correctly decided and the finding that the turnkey works contract cannot be vivisected requires reconsideration. We are conscious of the fact that the decision in Daelim was challenged by the Revenue in the Supreme Court, but the appeal was dismissed vide order dated 02.08.2004 reported in 2004 (165) ELT A181. It is well settled that summary rejection of the SLP or appeal cannot be construed as affirmation of the judgment (under challenge) on merits; it only means that the Supreme Court declined to interfere with the judgment. The dismissal of the appeal, therefore, will not operate as a bar to reconsideration of the decision by the Tribunal.