Divisible turn-key contracts may attract service tax on separately quantified design and engineering services despite mixed supply obligations.

A divisible turn-key contract with separately identified design and engineering charges could be taxed on the segregated consulting engineer service portion, because the contract and invoices clearly quantified that taxable element apart from supplies and execution work. The presence of non-taxable obligations in the same transaction did not make the entire contract indivisible where the taxable service was separately identifiable and enforceable in part. On that basis, the design and engineering component was held exigible to service tax and the demand was restored.

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Issues: Whether the design and engineering charges shown separately under a divisible turn-key contract were exigible to service tax as consulting engineer service.

Analysis: The contract and the invoices showed a distinct break-up of the consideration for design, engineering and related consultancy, separate from the supplies and execution elements. A divisible or severable contract can be enforced in parts, and where the taxable service portion is separately identified and quantified, there is no question of treating the entire contract as indivisible merely because it also includes non-taxable elements. The material on record also showed that design and engineering activities fell within the taxable category for consulting engineer service.

Conclusion: The design and engineering component was taxable and service tax was payable on that portion; the finding of the Commissioner (Appeals) was unsustainable.

Final Conclusion: The demand was restored by accepting the Revenue's case that separately quantified consulting engineering services under a divisible contract could be subjected to service tax.

Ratio Decidendi: Where a contract is expressly divisible and the consideration for design or engineering services is separately identified, service tax may be levied on that segregated taxable service portion notwithstanding the presence of supply or execution obligations in the same transaction.

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