2010 (5) TMI 232 - AT - Service Tax

Laying long-distance water pipelines under a composite contract not taxable as commercial or industrial construction services

CESTAT, BANGALORE - AT held that laying long-distance water pipelines under a composite contract did not constitute commercial or industrial construction ... Taxability of long distance pipelines for water supply - Works Contract Service - composite contract​​​​​​​ - liability under 'Commercial or Industrial Construction Services' as it had executed laying of long distance pipelines in the state of Gujarat under a contract awarded to them by M/s. Gujarat Water Supply and Sewerage Board (GWSSB or the Board) - HELD THAT:- From the figures of revenue of the Board for the year 2005-06, we find that above 90% of its revenue came from sale of water to local bodies rural population. The revenue was less than 1/3rd of the cost incurred to maintain water supply by the Board. The Board is run by substantial amounts released by the State Government as grant every year. These facts show that the pipelines in question were not laid to facilitate any commercial or industrial activity. We find that in the decision of the Tribunal in Indian Hume Pipe Co. Ltd. v. CCE, [2008 (7) TMI 71 - CESTAT, CHENNAI], which dealt with taxability of long distance pipeline laid by the appellant therein under the entry 'erection, commissioning or installation' of the Act. The appellants had argued before the Adjudicating Authority that the impugned activity was 'works contract service' which was brought under tax net after the material period. The Commissioner found that the work was undertaken on 'Build and Operate Contract' which included design, procurement and supply, construction, commissioning and operation and maintenance and therefore, fell outside the scope of 'Works Contract on turnkey basis'. We find that the Commissioner accepted that the contract involved was a composite contract. While demanding tax on construction service being part of the composite contract, the Adjudicating Authority had vivisected the composite contract and found part of it liable to service tax. Issues Involved:1. Whether the activities of laying long-distance pipelines by NCCL for GWSSB fall under 'Commercial or Industrial Construction Services'.2. Whether GWSSB qualifies as a commercial organization.3. The applicability of service tax on 'Works Contract Service' for the period before it was introduced.4. Whether the composite contract can be vivisected for the purpose of levying service tax.Issue-wise Detailed Analysis:1. Activities of Laying Long-Distance Pipelines:The primary issue was whether the activities of NCCL in laying pipelines for GWSSB could be classified under 'Commercial or Industrial Construction Services' as per Section 65(25b) of the Finance Act, 1994. The Tribunal noted that for a service to be taxable under this category, the construction must be used primarily for commerce or industry. The Tribunal found that GWSSB's main function was to supply drinking water to rural and urban communities without profit motive, which did not align with the definition of 'commerce or industry'.2. GWSSB as a Commercial Organization:NCCL argued that GWSSB was not a commercial organization, as it was created by the Government of Gujarat to implement drinking water supply and sanitation policies. The Tribunal examined the functions of GWSSB, which included preparing and executing water supply schemes and providing services to local bodies and private institutions. The Tribunal found that GWSSB's activities were primarily for public welfare and not for profit, as evidenced by the financial records showing substantial government grants and nominal charges for water supply. Therefore, GWSSB was not engaged in commercial activities.3. Applicability of Service Tax on 'Works Contract Service':NCCL contended that the activities should be classified under 'Works Contract Service', which was introduced on 1-6-2007, and thus not taxable for the period in question (16-6-2005 to 31-3-2007). The Tribunal referred to previous decisions, including Diebold Systems (P) Ltd. v. CCE and Glaxo Smithkline Pharmaceuticals Ltd. v. CCE, which held that services specifically covered under a new taxable category could not be taxed under a different category for an earlier period. The Tribunal agreed that the impugned activity was a composite contract and should be classified under 'Works Contract Service', which was not taxable during the material period.4. Vivisection of Composite Contract:The Commissioner had vivisected the composite contract and levied service tax on the construction service component. The Tribunal found this approach contrary to the decision in Diebold Systems (P) Ltd. v. CCE, which held that an indivisible works contract could not be split and taxed under different service categories. The Tribunal concluded that the demand for service tax on the construction service component of the composite contract was not justified.Conclusion:The Tribunal set aside the impugned order, concluding that the activities of NCCL did not fall under 'Commercial or Industrial Construction Services' as GWSSB was not a commercial organization. Additionally, the Tribunal held that the impugned activity should be classified under 'Works Contract Service', which was not taxable during the material period. The appeal filed by NCCL was allowed, and the demand for service tax and penalties was quashed.