2009 (1) TMI 443 - AT - Service Tax

Service Tax: Indivisible Works Contract Cannot Be Split

The Tribunal held that an indivisible works contract cannot be vivisected for service tax purposes. The decision in Daelim Industrial Co. Ltd.'s case, ... Work Contract- the assessees are holders of service tax registration for providing three taxable services, viz. (i) storage and warehousing, (ii) port services, and (iii) consulting engineering services, filed a refund claim for ₹ 11,27,498 under the heading “Commissioning and Installation” for the months of September and October 2003 on the ground that lump sum turnkey works contract was entered into by them with M/s. Indian Oil Corporation Ltd., Gujarat Refinery, for constructing storage tank for offsite and utility for LAB project for lump sum contract for entire work of drawing, designing and procurement of materials and construction of storage tank, which could not be split into individual components for levy of service tax. The claim was rejected by the adjudicating authority by order, which was set aside by the Commissioner (Appeals). Hence this appeal by the Revenue. Held that- there is no direct decision in favour of the revenue for levy of service tax on service component of a work contract Prior to 1.6.2007. Thus it is against the revenue. Issues Involved:1. Whether an indivisible works contract can be vivisected and subjected to service tax.2. The applicability and binding nature of the Tribunal's decision in Daelim Industrial Co. Ltd.'s case.3. The impact of the 46th Amendment to the Constitution on the levy of service tax.4. Whether service tax can be levied on the service portion of a works contract prior to 1-6-2007.5. Classification of services under 'Commissioning and Installation' or 'Consulting Engineering'.Issue-wise Detailed Analysis:1. Whether an Indivisible Works Contract Can Be Vivisected and Subjected to Service Tax:The Tribunal consistently held that a lump sum indivisible works contract cannot be vivisected, and part of it cannot be subjected to service tax. This was affirmed in Daelim Industrial Co. Ltd. v. CCE and Larsen & Toubro Ltd. v. CCE. The Tribunal's decision in Daelim was upheld by the Apex Court, emphasizing that a works contract on a turnkey basis cannot be split for service tax purposes. The Tribunal reiterated this principle in subsequent cases, including Ircon International Ltd. v. CCE and Diebold Systems (P.) Ltd. v. CST.2. The Applicability and Binding Nature of the Tribunal's Decision in Daelim Industrial Co. Ltd.'s Case:The Tribunal's decision in Daelim, which was upheld by the Apex Court, was followed in numerous subsequent cases, establishing that an indivisible works contract cannot be vivisected for service tax purposes. The learned Vice-President considered this decision binding on co-ordinate Benches. However, the learned Member (Technical) viewed the decision as per incuriam, arguing it did not consider the Supreme Court's decisions in Builders' Association of India and Associated Cement Companies Ltd.3. The Impact of the 46th Amendment to the Constitution on the Levy of Service Tax:The 46th Amendment to the Constitution introduced clause (29A) in Article 366, enabling States to levy sales tax on the value of goods involved in an indivisible works contract. The learned Vice-President argued that this amendment was relevant only to sales tax and not to service tax. Conversely, the learned Member (Technical) opined that the amendment allowed for the bifurcation of works contracts for both sales tax and service tax purposes.4. Whether Service Tax Can Be Levied on the Service Portion of a Works Contract Prior to 1-6-2007:The Tribunal held that service tax on the service portion of a works contract could only be levied after 1-6-2007, when 'works contract' service was introduced as a taxable category under section 65(105)(zzzza) of the Finance Act, 1994. This view was supported by the Hon'ble Bombay High Court in Indian National Shipowners' Association v. Union of India, which stated that the introduction of a new entry implies that the service was not covered by any pre-existing entry.5. Classification of Services Under 'Commissioning and Installation' or 'Consulting Engineering':The refund claim by the assessees was based on the argument that their contract with IOCL was an indivisible works contract and could not be vivisected for service tax purposes. The original authority rejected the claim, classifying the service under 'Consulting Engineer's service'. The Tribunal, however, upheld that the service provided was under 'Commissioning and Installation' and not 'Consulting Engineering'. The Tribunal noted that subsequent circulars clarified that charges for erection, installation, and commissioning are not covered under 'Consulting Engineering services'.Majority Order:The majority view rejected the revenue's appeal and upheld the impugned order of sanction of refund of service tax paid by the respondents. The Tribunal concluded that service tax could not be levied on an indivisible works contract prior to 1-6-2007, aligning with the consistent decisions in Daelim Industrial Co. Ltd. and subsequent cases.