2022 (12) TMI 11 - AT - Service Tax

Manufacturing activities not subject to service tax if considered sale of goods

The Tribunal held that the respondents, engaged in manufacturing textile machinery, did not owe service tax as the entire transaction value was considered ... Sale of goods - incidental services - erection, installation and commissioning service - works contract service - composite contract / lump-sum contract - no bifurcation of value where entire value has suffered excise/customs duty - substance and intention of the contractSale of goods - incidental services - erection, installation and commissioning service - no bifurcation of value where entire value has suffered excise/customs duty - substance and intention of the contract - Whether service tax is payable on erection, installation and commissioning where the supplier manufactured and sold machinery for a lump-sum price that already suffered central excise duty and no separate charge for services was shown - HELD THAT: - The Tribunal found that the respondent manufactured textile machinery and supplied it to buyers under lump-sum contracts which included erection, installation and commissioning without any separate bifurcation of value. The entire contract value was treated as sale and had been subjected to central excise duty. Reliance was placed on consistent Tribunal and High Court decisions holding that where activities of erection/installation are incidental to the manufacture and delivery of excisable goods and the whole invoice/contract value has suffered excise/customs duty, those incidental activities cannot be separately subjected to service tax. The Tribunal applied the well-settled test that substance and intention of the contract determine whether the transaction is a sale or a works contract and, on the facts, concluded the predominant object was transfer of finished goods. In these circumstances there is no separate service value to tax, and the show-cause demands based on erection/installation services were rightly dropped. [Paras 4, 5]Demand of service tax on erection, installation and commissioning is not sustainable where the entire value was the sale price of machinery and has suffered excise duty; the impugned order is upheld in favor of the respondent and the revenue's appeals are dismissed.Final Conclusion: Where a manufacturer-supplier charges a lump-sum price for machinery (including erection/installation/commissioning), treats the whole amount as sale and pays excise/customs duty on that total value, incidental erection/installation services will not attract separate service tax; accordingly the revenue's appeal is dismissed. Issues Involved:1. Classification of service post 01.06.2007.2. Applicability of service tax on composite activities involving manufacturing, erection, installation, and commissioning.3. Bifurcation of value between sale of goods and services.4. Legality of altering service classification at the appellate stage.Issue-Wise Detailed Analysis:1. Classification of Service Post 01.06.2007:The revenue contended that post 01.06.2007, the supply of goods along with erection, installation, and commissioning should be classified under Works Contract Service, making it liable for service tax. The adjudicating authority had previously dropped the demand for this period, leading to the current appeal by the revenue.2. Applicability of Service Tax on Composite Activities:The respondents argued that their activities, including manufacturing, packing, transporting, delivering, erecting, and installing textile machinery, were part of a composite sale. They had paid excise duty on the total sale value, which included erection, installation, and commissioning. The respondents cited several judgments to support that no separate service tax should be levied on these activities as they were incidental to the sale of goods.3. Bifurcation of Value Between Sale of Goods and Services:The respondents maintained that there was no divisible portion of service in the entire supply of machinery. The contract did not bifurcate the value towards sale and services, and the entire activity was treated as a sale of goods, on which excise duty was paid. They argued that the entire value should be taken as the sale value, with no separate service value involved.4. Legality of Altering Service Classification at the Appellate Stage:The respondents contended that the demand in the show cause notice was raised under erection, installation, and commissioning service, whereas the department was now seeking confirmation under Works Contract Service. They argued that the classification of service proposed in the show cause notices could not be altered or changed at the appellate stage.Tribunal's Findings:Composite Nature of Activity:The Tribunal found that the respondents were engaged in manufacturing textile machinery and supplied the goods along with erection, commissioning, and installation at the buyer's site. The total value was towards the sale of goods, with no bifurcation between sale and service. Consequently, no service tax could be demanded once the entire value was towards the sale and had suffered central excise duty.Precedent Judgments:The Tribunal cited several precedents, including M/s. Alidhara Texspin Engineers and M/s. Allengers Medical Systems Ltd., which consistently held that when the entire contract value is taken as the assessable value for excise duty, no separate service tax is liable. The Tribunal emphasized that the incidental processes of erection, installation, and commissioning were part of the manufacturing activity and thus not subject to service tax.Non-Alteration of Service Classification:The Tribunal noted that the show cause notices had proposed the demand under erection, installation, and commissioning service. Since the service tax was not payable on these activities in the given facts, the Tribunal did not address the issue of whether the service should be classified under Works Contract Service.Conclusion:The Tribunal concluded that the respondents were not liable to pay service tax on the given transactions, as the entire value had suffered excise duty. The revenue's appeal was dismissed, and the adjudicating authority's order was upheld.Pronouncement:The judgment was pronounced in the open court on 28.11.2022, dismissing the appeals filed by the revenue.