Works Contract Service-Water Pipeline to MIDC

[Sumeet Tholle]

Dear All,

One of my client providing Service of laying down of water pipeline along with material (i.e. works contract service)  to Maharashtra Industrial Development Corporation (MIDC).

Onwards 01/07/2012, being MIDC is Governmental Authority, now it is exempt. But department demanding Service Tax prior to 01/07/2012.

Is there any case law, Circular etc. ?

Request you to guide.

Thanks.

CA Sumeet Tholle

 

[YAGAY andSUN]

This appended Case Law may be helpful to you.

Commercial or Industrial Construction Service - Laying of pipelines for water supply projects run by Gujarat Water Supply and Sewerage Board, not leviable to tax: CESTAT

AHMEDABAD, FEB 15, 2011: THE appellant entered into a contract with M/s Gujarat Water Supply & Sewerage Board ( GWSSB ) for the work of design, build, operate contract for distribution of water under Mehsana District Water Supply Scheme. In the impugned order, it has been held that the work executed by the appellant is classifiable as "commercial or industrial construction service" and liable to Service Tax w.e.f . 16.6.05. On this ground, demand for Service Tax of Rs.1,33,10,476 /- has been confirmed with interest as applicable and penalty to the extent of 200 percent of Service Tax has been imposed under Section 78 of Finance Act, 1994 and further penalty has also been imposed under Section 76 of Finance Act, 1994.

The issue before the Tribunal is whether by purchasing water at one rate and selling at higher rates, the pipeline constructed can be said to be used or to be used primarily for commerce or industry so that the activity undertaken by L&T for GWSSB becomes liable to Service Tax.

The Advocate on behalf of the appellant relied upon the decision of the Tribunal in the case of M/s Nagarjuna Construction Co. Ltd. Vs. CCE = (2010 (5) TMI 232 - CESTAT, BANGALORE)wherein the Tribunal had considered the very same issue. In that case also, the pipeline was laid for GWSSB . The Tribunal took a view that laying of pipeline for GWSSB for supply of water is not taxable because the pipeline was laid under the contract was not for commerce or industry. The Tribunal, in that case, categorically rejected the argument that GWSSB was engaged in commercial activity because it was purchasing water at one price and selling at higher price to others.

The SDR , on the other hand, submitted that the decision of the Tribunal in the case of M/s Nagarjuna Construction Co. Ltd. was rendered, relying upon the Tribunal's decision in the case of M/s Indian Hume Pipe Co. Ltd., reported in-(2008 (7) TMI 71 - CESTAT, CHENNAI). It was submitted that the observation of the Tribunal that water supply project being infrastructure facility and civic amenity provided by State in public interest, not an activity of commerce or industry was only Obiter dicta. In that case, the Tribunal was dealing with the scope of levy on "erection, commissioning or installation" service and the Tribunal had clearly come to the conclusion that the service provided in that case was not covered by any of the three expressions used in the service and therefore the observation about water supply project had no relevance to the issue to be decided.

The second submission made by the SDR in this regard was that the decision in the case of M/s Nagarjuna Construction Co. Ltd cannot be applied as the Tribunal had not considered the meaning of "commerce" in detail. It was submitted that for deciding the issue, the meaning of the word "commerce" was sine-qua-non. From the plain reading of the definition of the service, it is apparent that any service receiver irrespective of its status or definition or composition, if utilizing the pipeline for "commerce" or "industry" will render the service provider liable for Service Tax.

First of all, Tribunal found the claim of the learned SDR that the Tribunal did not consider the meaning of "commerce" while rendering the decision in the case of M/s Nagarjuna Construction Co. Ltd case, is not correct. The Tribunal did consider whether the activity was "commerce" or not. The Tribunal took a view that since the Revenue was less than 1/3rd of the cost incurred, the pipeline was not laid to facilitate any commercial activity. In Paragraph 8.1, it was held that laying of pipeline was not industrial activity.

 Since the Tribunal had considered and held that the pipeline was not used or to be used primarily for commerce or industry, and the Tribunal had also considered the meaning of "commerce" or "industry", the bench observed, ''we would be bound by Co-ordinate Bench decision and judicial discipline requires that we follow the same'' .

Whether GWSSB can be categorized as an industry or not, is not relevant at all. In fact, the SDR himself has submitted that the definition of the services does not talk about the status or the definition of the service receiver. Any service receiver irrespective of its status or definition or composition, if utilizing the pipeline for commerce or industry, will render the provider liable to Service Tax. Therefore, strictly speaking, by Revenue's own submissions, the status of GWSSB is not relevant. Nevertheless, this issue as to whether the GWSSB can be considered as a commercial organization, was discussed in detail in M/s Nagarjuna Construction Co. Ltd case and this bench agreed with the views taken in that case.

The next question that is to be answered is whether the pipeline can be said to have been used or used primarily for commerce or industry. The only point that has been stressed by the Revenue is that the GWSSB is buying water at the rate of Re.1 /- per ltr and selling at Rs.2 /- per ltr to Rs. 15/- per ltr . The definition uses words "used for commerce" or "primarily used for commerce". This would mean that. Revenue is required to show that the purpose of construction of pipelines is for "commerce" or "primarily for commerce". "Commerce" would mean buying and selling not necessarily for profit according to Revenue. But, the question here is the purpose of buying water by GWSSB was for selling or not. Obviously, the purpose of buying water and bringing it from Narmada Dam was not for selling it, but for supplying it to needy people. In this case, buying and selling is incidental. The purpose is supply of water to the needy citizens of the State. The term used "for commerce" would mean that only purpose would be buying and selling, which is definitely not the case here. The term used "primarily for commerce" would mean that primary purpose should be buying and selling and the other purposes also may be served incidentally. In this case, purchase and sale of water are incidental and the main purpose is supply of water to needy citizens of the State.

In view of the above discussion, the Bench did not find any reason to disagree with the views already taken by the Coordinate Bench of this Tribunal in case of M/s Nagarjuna Construction Co. Ltd. Accordingly, the impugned order cannot be sustained and is set aside.

In view of the fact that the appeal is allowed on merit, there is no need to discuss the applicability of extended period and the question of imposition of penalty also does not arise. For the same reason, other grounds canvassed - the service is Works Contract and therefore was not liable to Service Tax earlier, is also not required to be considered. In view of the above discussion, we do not consider it necessary to consider other issues raised or decisions cited.

In the result, appeal is allowed with consequential relief.

[Sumeet Tholle]

Sir,

Thanks a lot.

Sumeet Tholle

 

 

AI Summary

Taxability of infrastructure services: pipeline construction for public water supply not treated as commerce, so not taxable. Laying of water pipelines for a governmental water-supply board is not taxable where the pipeline is not primarily used for commerce or industry because the main purpose is supplying water to citizens and any purchase/sale is incidental; therefore such construction services fall outside service tax liability and related extended-period demands and penalties are not sustainable.