2010 (5) TMI 46 - AT - Service Tax

Turnkey contracts can be split for taxation: goods and distinct service elements taxable under Finance Act, 1994 and Article 366(29-A)(b)

CESTAT, New Delhi held that turnkey contracts can be vivisected: goods and discernible service elements (e.g., advice, consultancy, technical assistance) ... Vivisection of turnkey contracts - discernible service elements taxable as 'taxable service' - severability under Article 366(29 A)(b) - aspect doctrine / aspects of legislation - determination of value of services in works contracts (Rule 2A) - principle of equivalence in valuation - dominant nature / substance test applicabilityVivisection of turnkey contracts - discernible service elements taxable as 'taxable service' - severability under Article 366(29 A)(b) - determination of value of services in works contracts (Rule 2A) - principle of equivalence in valuation - dominant nature / substance test applicability - Turnkey contracts can be vivisected and discernible service elements such as advice, consultancy or technical assistance can be segregated, classified and taxed as taxable services under the Finance Act, 1994, subject to their being taxable services on the facts of each case. - HELD THAT: - The Tribunal held that Article 366(29 A)(b) of the Constitution, as interpreted by the Apex Court, renders composite and works contracts divisible so that the goods component can be segregated and subjected to sales tax and the residual service component may fall within the field of service taxation. The 'aspect' doctrine permits different legislatures to tax distinct aspects of the same transaction; consequently, severability enacted by the Forty sixth Amendment does not confine the constitutional effect to sales tax alone but enables identification of service elements for levy of service tax. The Tribunal relied on the principle of equivalence and subsequent judicial authority holding that services retain their identity even when provided as part of a composite or turnkey contract. The Court observed that Rule 2A of the Service Tax (Determination of Value) Rules, 2006 gives a statutory method to determine the value of services in works contracts by excluding the value of goods from the gross contract value, thereby providing a practicable and non arbitrary basis for valuation. While the 'dominant nature' or 'substance' test remains relevant to determine the character of a contract in appropriate contexts, that test does not preclude segregation of service elements in turnkey or works contracts where the services are discernible and classifiable under section 65A of the Finance Act, 1994. Circulars addressing classification do not override the constitutional and statutory framework empowering segregation and valuation. The question whether a particular element is a taxable service depends on the facts and classification under the Act and must be determined case by case. [Paras 11, 12]Reference answered that turnkey contracts can be vivisected and their discernible service elements may attract service tax if they qualify as taxable services, with valuation to be determined as provided by law.Final Conclusion: The Larger Bench answered the reference by holding that turnkey contracts may be dissected: goods incorporated can be treated for sales tax under Article 366(29 A)(b) and the remaining, discernible service elements (including advice, consultancy or technical assistance) can be classified, valued (including under Rule 2A) and subjected to service tax under the Finance Act, 1994, subject to factual and classificatory determination in each case. Issues Involved:1. Whether service by way of 'advice, consultancy or technical assistance' in a turnkey contract attracts service tax.2. Whether a turnkey contract can be vivisected to segregate service elements for taxation.Issue-wise Detailed Analysis:1. Service Tax on Advice, Consultancy, or Technical Assistance in Turnkey Contracts:The Tribunal considered whether services such as advice, consultancy, or technical assistance provided under a turnkey contract attract service tax. The Tribunal referred to the decision in Daelim Industrial Co. Ltd. vs. CCE, Vadodara, which held that a turnkey contract could not be vivisected to levy service tax on its parts. However, the Tribunal noted that the referring Bench believed that the divisibility of contracts was not in issue in Daelim's case. The Tribunal also referenced the Supreme Court's decision in Bharat Sanchar Nigam Ltd. (BSNL) vs. Union of India, which discussed the constitutional amendments allowing works contracts to be dissected for sales tax and service tax purposes. The Tribunal concluded that theoretically, service tax could be levied on the service part of a turnkey contract if it qualifies as a taxable service under the Finance Act, 1994.2. Vivisection of Turnkey Contracts:The Tribunal examined whether turnkey contracts could be vivisected to segregate and tax service elements. The Tribunal referred to the 46th Amendment to the Constitution, which allowed works contracts to be divisible for taxation purposes. The Tribunal noted that the Supreme Court in BSNL's case upheld the divisibility of works contracts into sale and service components. The Tribunal also highlighted that the dismissal of the Revenue's appeal against Daelim's case by the Supreme Court did not bar reconsideration of the decision. The Tribunal concluded that the decision in Daelim's case was not correctly decided and required reconsideration. The Tribunal further observed that the Finance Act, 1994, and subsequent rules and circulars provided for the classification and valuation of taxable services in composite or turnkey contracts.Conclusion:The Tribunal concluded that turnkey contracts could be vivisected, and discernible service elements involved therein could be segregated and classified for service tax under the Finance Act, 1994, provided such services are taxable. The Tribunal directed that the respective appeal cases be placed before the concerned Benches for disposal based on this interpretation.