Tribunal overturns service tax demand on composite contracts pre-2007 citing legal precedent

The Tribunal set aside the Commissioner's order confirming a demand for service tax on various services provided by the appellant, along with penalties and interest. The appellant's argument that service tax could not be levied on composite contracts prior to 01.07.2007 was upheld, citing the Supreme Court's judgment in Larsen and Toubro Ltd. The Tribunal concluded that the demand for service tax on composite contracts lacked legal basis, leading to the allowance of the appeal on 04.10.2016.

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Issues Involved:
1. Demand for service tax on various services provided by the appellant.
2. Applicability of service tax on composite contracts.
3. Authority of law to levy service tax on works contracts prior to 01.07.2007.
4. Penalties and interest imposed under Sections 76, 77, and 78 of the Finance Act, 1994.

Detailed Analysis:

1. Demand for Service Tax on Various Services:
The Commissioner confirmed a demand of Rs. 90,51,101/- along with interest and penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The appellant was alleged to have provided multiple taxable services including Consulting Engineer Service, Erection, Maintenance or Repair Service, Commissioning & Installation Agency Service, and Technical Testing and Analysis Service without paying the requisite service tax. The show-cause notice detailed activities and corresponding service tax amounts, totaling Rs. 98,47,811/-.

2. Applicability of Service Tax on Composite Contracts:
The appellant argued that the contracts were of a composite nature, involving design, procurement, supply, erection, installation, and commissioning of plants, and thus could not be vivisected for service tax purposes. They cited the Supreme Court judgment in CCE & Cus. Kerala V. M/s. Larsen and Toubro Ltd., which held that the service tax could only be levied on works contracts if the law specifically allowed for the separation of the service element from the goods element. The Supreme Court emphasized that the Finance Act, 1994 did not provide the necessary machinery to levy service tax on composite contracts.

3. Authority of Law to Levy Service Tax on Works Contracts Prior to 01.07.2007:
The appellant further contended that prior to the introduction of works contract service on 01.07.2007, there was no legal authority to levy service tax on composite contracts. They referenced the Supreme Court's ruling that the Finance Act, 1994 did not lay down the charge or machinery for such a levy, making any demand for service tax on composite contracts without legal basis.

4. Penalties and Interest:
Given the Supreme Court's judgment, the appellant argued that no service tax was due, and consequently, penalties and interest should not be imposed. They also pointed out specific errors in the demand, such as the inclusion of amounts related to goods supplied to ONGC and incorrect quantification of certain amounts.

Conclusion:
After considering the arguments and the Supreme Court's judgment in Larsen and Toubro Ltd., the Tribunal concluded that the impugned order was not sustainable in law. Therefore, it set aside the order and allowed the appeal, stating that the demand for service tax on composite contracts was without authority of law.

(Order pronounced in open court on 04.10.2016)

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