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 ... Commercial or Industrial Construction Service - use primarily for commerce or industry - works contract service - vivisection of composite contract - infrastructure facility and civic amenityCommercial or Industrial Construction Service - use primarily for commerce or industry - infrastructure facility and civic amenity - Whether laying of long distance pipelines for GWSSB during 16-6-2005 to 31-3-2007 fell within 'Commercial or Industrial Construction Service' and was taxable - HELD THAT: - The Tribunal applied the statutory definition of 'Commercial or Industrial Construction Service' and held that a pipeline is taxable under that entry only if it is used, or to be used, primarily for commerce or industry or work intended for commerce or industry. Examining the Gujarat Act establishing GWSSB, the Board's certified functions, the Member Secretary's letter and its financials for 2005-06 (showing that over 90% of revenue derived from supplying water to local bodies and that user charges were heavily subsidised and not sufficient to cover operating costs), the Tribunal concluded that the pipelines were provided as part of a public water-supply scheme - an infrastructure facility and civic amenity supplied in the public interest rather than to facilitate commerce or industry. Reliance was placed on earlier Tribunal decisions treating water supply projects as non-commercial for service-tax purposes. On these facts the pipelines were not laid primarily to facilitate commercial or industrial activity and thus did not fall within the taxable entry. [Paras 6, 7, 8, 9]Demand under 'Commercial or Industrial Construction Service' on laying of the pipelines was not sustainable and was set aside.Works contract service - vivisection of composite contract - Whether the composite contract could be vivisected so that part of the composite 'Build and Operate' contract is taxed as construction service for the period prior to introduction of 'Works Contract Service' - HELD THAT: - The Tribunal found that the contract was composite (a 'Build and Operate' contract including design, procurement, construction, commissioning and operation and maintenance). The Adjudicating Authority had separated out the construction component and demanded tax on that part. The Tribunal held that such vivisection of a composite contract to tax only a portion as construction service was contrary to the Tribunal's earlier ratio that indivisible works contracts should not be dissected for imposing service tax. Given that 'Works Contract Service' was brought into the tax net only w.e.f. 1-6-2007, the attempt to tax part of the composite contract as construction service for the earlier period was unsustainable. [Paras 10]Vivisection of the composite contract to fasten liability on the construction component was impermissible; the demand on that basis was set aside.Final Conclusion: The impugned demand and penalties were set aside and the appeal of M/s Nagarjuna Construction Co. Ltd. was allowed. 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.