2012 (6) TMI 165 - AT - Service Tax

Tribunal upholds tax classification, penalties imposed; remands for re-quantification and hearing.

The Tribunal classified the services provided by the appellants as 'works contract service,' determining the taxable value by excluding the service tax ... Works contract service (EPC/turnkey projects) - classification of taxable services under Section 65A(2) - site formation and clearance, excavation and earth moving - extended period of limitation under proviso to Section 73(1) - valuation - gross amount charged and cum-tax treatment under Section 67(2) - Works Contract (Composition Scheme) Rules, 2007 - Rule 3(1) - penalties under Sections 76, 77 and 78 and Section 80 reliefWorks contract service (EPC/turnkey projects) - classification of taxable services under Section 65A(2) - site formation and clearance, excavation and earth moving - Whether the services rendered under the EPC/turnkey contracts are classifiable as 'works contract service' under the definition in Section 65(105)(zzzza) of the Finance Act, 1994. - HELD THAT: - The Tribunal examined the contracts' descriptions, the wide scope of activities undertaken (survey, design, procurement, excavation, construction, commissioning, maintenance etc.) and the parties' own characterization of the contracts as EPC/turnkey. The contracts involved transfer of property in goods exigible to VAT and were composite, indivisible lump-sum contracts raising RA bills without itemised break-up. Clause (e) (turnkey/EPC projects) of the Explanation to Section 65(105)(zzzza) therefore appropriately covers the projects executed by the appellants. The Tribunal rejected classification under clause (b) (commercial/industrial construction) because the statutory test in clause (b) requires an end-use primarily for commerce or industry, which is not satisfied here, and rejected classification under clause (97a) (site formation and clearance etc.) because those services attract tax only when provided independently and not as preparatory parts of a comprehensive EPC project. Exclusions listed in the definition of works contract (roads, airports, railways, transport terminals, bridges, tunnels and dams) do not extend to the irrigation canal EPC projects in these cases. Section 65A(2) (preference for the more specific description) was held inapplicable because the EPC/turnkey description under clause (e) is the specific and appropriate classification for the composite contracts. [Paras 10]The services provided under the subject EPC/turnkey contracts are classifiable as 'works contract service' under Section 65(105)(zzzza).Works Contract (Composition Scheme) Rules, 2007 - Rule 3(1) - valuation - gross amount charged and cum-tax treatment under Section 67(2) - Determination of taxable value under the composition scheme - whether gross amount charged under Rule 3(1) should be treated as cum-tax value and whether retention money is deductible. - HELD THAT: - The Rules were made under Section 94; Rule 3(1) provides an option to discharge liability by paying a percentage of the 'gross amount charged'. The Explanation to Rule 3(1) (added w.e.f. 7/7/2009) is inapplicable to contracts/payments made on or before 07/07/2009; the periods in dispute fall prior to that date. Consequently valuation must follow Section 67 and related provisions. The Tribunal held that the gross amount charged may be treated as cum-tax value permitting deduction of the tax element in accordance with Section 67(2). The Tribunal rejected the appellants' claim to deduct retention money because retention was only deferred payment that would ultimately be received on satisfaction of contract terms; hence retention money cannot be excluded from gross amount charged. The Tribunal also observed that the composition scheme bars CENVAT credit on inputs though capital goods and input services are not barred by Rule 3(2). The adjudicating authority is directed to rework valuation and tax accordingly. [Paras 11]Taxable value is to be re-determined in accordance with Section 67 (cum-tax treatment permitted) and Rule 3(1) as applicable; retention monies are not deductible from the gross amount charged; CENVAT on inputs is barred under the composition scheme.Extended period of limitation under proviso to Section 73(1) - Whether the proviso to Section 73(1) (extended period of limitation for wilful misstatement/suppression with intent to evade) is invocable. - HELD THAT: - The Tribunal found that material facts regarding the nature of the EPC projects and the taxable character of the services were not disclosed in returns; registration under WCS and filing of ST-3 returns occurred only when compelled and some returns misdeclared turnover as exempt. The leading partner Ramky had been registered and paying service tax for similar contracts, indicating awareness. The explanations offered by the appellants did not amount to bona fide belief sufficient to negate wilful suppression. On these facts the Tribunal held that the conditions for invoking the proviso to Section 73(1) are satisfied and the extended period of limitation was rightly invoked. [Paras 12]The extended period of limitation under the proviso to Section 73(1) is invocable in these cases.Penalties under Sections 76, 77 and 78 and Section 80 relief - Sustainability and quantification of penalties imposed under Sections 76, 77 and 78 and applicability of Section 80 (reasonable cause) to relieve penalties. - HELD THAT: - The Tribunal held that appellants failed to establish reasonable cause for non-registration, non-filing or mis-declaration and therefore Section 80 (which can negate penalty where reasonable cause is proved) is not attracted. Penalties under Section 77 and the Section 76 penalty in ST/1589/2010 were sustained. However, because taxable value and tax amounts require re-quantification, the Tribunal set aside the penalties imposed under Section 78 for recalculation. Following amendment to Section 78 effective 10/05/2008 (and related proviso precluding separate Section 76 penalty where Section 78 applies), the Tribunal directed the adjudicating authority to re-examine imposition of Section 76 penalties in ST/476/2009 and ST/432/2010 as portions of those periods fall partly beyond 10/05/2008. [Paras 13, 14]Section 77 penalties (and Section 76 penalty in ST/1589/2010) sustained; Section 78 penalties set aside for requantification; Section 76 penalties in ST/476/2009 and ST/432/2010 set aside for fresh decision to the extent applicable; Section 80 relief denied.Final Conclusion: The Tribunal held that the EPC/turnkey contracts executed for the Irrigation and CAD Department are taxable as 'works contract service'; directed re-determination of taxable value (allowing cum-tax treatment but disallowing deduction of retention money), upheld invocation of the extended limitation period, sustained certain penalties while setting aside others for re quantification, and remanded valuation and specified penalty issues to the adjudicating authority after affording the appellants an opportunity of hearing. Issues Involved:1. Classification of services provided by the appellants under 'Works Contract Service' (WCS).2. Determination of taxable value and permissible deductions.3. Invocation of the extended period of limitation.4. Sustainability of penalties imposed under Sections 76, 77, and 78 of the Finance Act, 1994.Detailed Analysis:Issue 1: Classification of Services under WCSThe Tribunal examined the nature of the contracts awarded to the appellants by the Government of Andhra Pradesh, which were described as 'Turnkey/EPC contracts.' The contracts encompassed a wide range of activities, including surveying, investigation, designing, engineering, construction, commissioning, and maintenance. The Tribunal found that these contracts were composite and indivisible, fitting squarely within the definition of 'works contract' under clause (e) of Section 65(105)(zzzza) of the Finance Act, 1994. The contracts involved transfer of property in goods, and VAT was paid on such goods. The Tribunal rejected the appellants' argument that their activities could alternatively be classified under 'commercial or industrial construction' or 'site formation and clearance, excavation and earth moving and demolition,' noting that these services did not involve transfer of property in goods. The Tribunal concluded that the services provided by the appellants were classifiable as 'works contract service' and not under any other heads.Issue 2: Determination of Taxable Value and Permissible DeductionsThe Tribunal noted that the impugned demands of service tax were quantified based on Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The appellants were allowed to treat the gross amount charged as cum-tax value, deducting the service tax element to arrive at the taxable value. However, the Tribunal rejected the appellants' plea for deduction of retention money from the gross amount charged, as the retention money was only a deferred payment and was eventually received by the appellants. The Tribunal also noted that the appellants were not entitled to claim CENVAT credit on inputs used in the execution of the contracts, but could claim credit on capital goods or input services.Issue 3: Invocation of the Extended Period of LimitationThe Tribunal found that the appellants were aware of their service tax liability under WCS, as evidenced by the registration and payment of service tax by the leading partner, Ramky, in respect of similar contracts. The Tribunal rejected the plea of 'bona fide belief' and noted that the appellants had willfully suppressed material facts and contravened the provisions of the Finance Act with intent to evade payment of service tax. The extended period of limitation under the proviso to Section 73(1) was correctly invoked.Issue 4: Sustainability of PenaltiesThe Tribunal did not find any reason to grant the benefit of Section 80 of the Act to the appellants, as there was no reasonable cause for their failures. The penalties imposed under Section 77 were sustained, and the penalties under Section 76 were also sustained in part. However, the penalties under Section 78 were set aside for re-quantification, and the question of imposing Section 76 penalties in certain appeals was remanded for fresh decision.Conclusion:1. The services provided by the appellants are classifiable as 'works contract service.'2. The taxable value should be re-determined by treating the gross amount charged as cum-tax value and excluding the service tax element.3. The extended period of limitation is invocable.4. Penalties under Section 77 are sustained, Section 76 penalties are sustained in part, and Section 78 penalties are set aside for re-quantification.The appeals were disposed of accordingly, with directions for re-quantification of service tax and penalties, and a reasonable opportunity of being heard was to be given to the appellants on the remanded issues.