TaxTMI 
TaxTMI 
2010 (5) TMI 46
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.... of "advice, consultancy or technical assistance" in the case of turnkey contract will attract service tax will have to be determined on the facts of the case". The moot question was "whether turnkey contract can be vivisected?". It may be stated that the Tribunal in Daelim Industrial Co.Ltd. vs. CCE, Vadodara - 2003 (155) ELT 457 (T) held as under: "Thus, a perusal of the clauses of the contract leaves no doubt that the appellant contract with lOC was a work contract on turnkey basis and not a consultancy contract, it is well settled that a work contract cannot be vivisected and part of it subjected to tax. The impugned orders have proceeded to do precisely that. Therefore, they are required to be set aside" [emphasis supplied}. To come to the above conclusion, the Bench deciding Daelim's case (supra) had noticed the decision of Apex Court in State of Punjab vs. Associated Hotels India Ltd ., (1972) 1 Supreme Court Cases 472 1.1. The referring Bench was of the view that in the case before it, the divisibility of contract was not in issue - either in law or even on facts. Conceptuall....
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....th the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. (BSNL) vs. Union of India , (2006) 3 Supreme Court Cases 1. After referring to different sub-clauses of Clause (29-A) inserted in Article 366 of the Constitution of India by the 46th amendment, a three Judge Bench of the Apex Court in BSNL's case held: "41. Sub-clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Sub-clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley and which the Court had he/~ was not a sale. The effect in law of a transfer of property in the goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley was directly overcome. Sub-clause (c) deals with hire purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under sub-clause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, contrary to A. ....
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....or the documents in both cases. 45. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley' case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366 (29A), unless the transaction in truth represents two distinct and separate contacts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even If the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is "the substance of the contract". We will, for the want of a better phrase, call this the dominant nature test. [emphasis supplied] 1.4. The referring Bench further o....
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.... execution of Turnkey contract does not bring any difference under law to tax the service components involved therein if the service involved therein is "taxable service". "Taxable services" involved in Turnkey projects make the project executable for which such services have value and taxable. Failure to tax the service elements so involved shall defeat the intent and spirit of law when service contracts simple and plain are taxed under the provisions of Finance Act, 1994. 2.1. Learned JCDR submitted that plea to keep away Turnkey contracts from the ambit of Finance Act, 1994 is not tenable because after 46th Constitutional amendment to the Constitution, every contract whether indivisible, composite or Turnkey involving goods and services are made divisible and States are empowered to tax the value of goods involved in such contracts, leaving service components involved therein for taxation by Government of India under the provisions of Finance Act, 1994. Thus fields of taxation are well defined by Constitution. Accordingly contracts plain and simple and Turnkey contract involving service elements are brought in par for levy of service tax without discrimination under Finance A....
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....atters are:- (A) What are ""goods" in telecommunication for the purpose of Article 366 (29-A) (d)? (B) Is there any transfer of any right to use any goods by providing access or telephone connection by the telephone - service provider to a subscriber? (C) Is the nature of the transaction involved in providing telephone connection a composite contract of service and sale? If so, is it possible for the States to tax the sale element? (D) If the providing of a telephone connection involves sale is such sale an Interstate one? (E) Would the "aspect theory" be applicable to the transaction enabling to States to levy sales tax on the same transaction in respect of which the Union Government levies service tax? All the 5 questions were answered by Hon'ble Court in Para 85 of the judgment as under: "85. For the reasons aforesaid, we answer the questions formulated by us earlier in the following manner: (A). Goods do not include electromagnetic waves or radio frequencies for the purpose of Article 366 (29-A)(d). The goods in telecom....
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....re they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in the composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for "attracting different nature of levy. The judgment in Imagic Creative Pvt Ltd was delivered by the Apex Court on 9.1.2008. The principles laid down in that judgment was not before the Division Bench while Daelim's case reported in 2003 (153) ELT 457 (T) was decided on 5.6.2003. 2.7. According to Revenue, the development in law of service tax has been rapidly made and the incidence of tax has been made applicable to even Turnkey contracts. A contract by whatever name called if involves service element, such element is liable to tax. In the judgment of Hon'ble Supreme Court in the case of BSNL vs. Union of India -2006 (2) STR-2006 (2) STR 161 (SC), in Para 42 it has been held that the works contract involved a kind of service and sale at the same time. In such case, splitting of the service and supply has been constitutionally permitted. In Para 43 of the judgment, it has been held that if there is an instrument of con....
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....rring to the Black's Law Dictionary, the term "divisible contract" whose synonym is "severable contract" is defined as under: "Service contract - A contract that includes two or more promises each of which can be enforced separately, so that failure to perform one of the promises does not necessarily put the promisor in breach of the entire contract. Also termed divisible contract; severable contract." 6.4 It is also noted that the services such as pre-designed services/project report, basis design engineering and detailed design engineering all covered under the category of "taxable service" rendered by the consulting engineers vide Commissioner of Central Excise, New Delhi Trade Notice No.54-CE (Service Tax)/97, dated 4.7.1997. It has also been clarified in the said trade notice that in the case the services are rendered to the prime consultant, the levy of service tax does not fall on the sub-consultant. Further, the intention to include the "designing and drawing work" as services in turnkey project is also evident from CBEC Circular dated 18.12.2002. 6.5. The turnkey project contract entered into by the resp....
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....NL case-2006 (9) STR 161 (SC). Where there is no separate agreement relating to labour and work involved in the execution of work and erection of building and for sale of material used in the building such contract is composite one. In Para 42 of the judgment, it has been explained that splitting of works contract is permitted if such contract falls under Clauses (b) and (g) of Clause 29A of Article 366 of the Constitution. There are several types of contracts like composite contract, multiple contracts and turnkey contract and independent contract. A turnkey contract is a contract which is indivisible and cannot be vivisected to determine the service tax liability since there is no intention of the parties in such contract to merely supply goods or to provide service but a combination of both is done to perform the contract as a whole without being performed in piecemeal and there is no permissibility of dissection of such contract under the Constitutional provisions. 3.2. It was submitted on behalf of interveners that with effect from 1.6.2007, clause (zzzza) was introduced in Section 65 (105) of the Finance Act, 1994 to tax value of services involved in works contracts. Ac....
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....osite works contract to tax service portion thereof. 3.4. Sri Sahu, learned Counsel for interveners further submitted that the back ground of Forty-sixth Constitutional amendment was suggestion of Law Commission as has been noticed by Apex Court in Para 39 of BSNL's Judgment (supra). Definition of sale was amended in Article 366 of the Constitution. But no suggestion of Law Commission was for bringing services into tax net by amendment of definition of the term "sale" in Article 366 of the Constitution as per Law Commission's suggestion. Accordingly Daelim's case holds the field to exclude services involved in works contract from the ambit of service tax. He invited attention to Para 103 of the BSNL's judgment to submit that the Statement of Objects and Reasons of Forty-Sixth Constitutional amendment does not even speak of taxing service by division of Turnkey works contract. But such contracts may be divisible to tax the goods involved therein under Sales Tax law of the States. Similarly relying on Para 105 of the Judgment, Sri Sahu submitted that fiction of law in Article 366 (29-A) of the Constitution is application to sale of goods only but not applicable to ....
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....e ratio laid down in Puri (PC) CIT - (1985) 151 ITYR 584 (Del). 3.7. Sri Sahu, placing Circular No. 334/4/2006 - TRU dated 28.2.2006 further submitted that Board has clarified that when a composite service, even if it consists of more than one service, should be treated as a single service based on the main or principal service and accordingly classified. Therefore it is impracticable to classify various services involved in Turnkey contract. Accordingly predominant test does not bring services of Turnkey contract into tax net. Another Circular No. 334/1/2006 - TRU dated 29.2.2006 issued by Board clarified by para 3.2 states for the purpose of classification of a service covering number of separate services, a view has to be taken as to whether an individual service is merely a component of the overall supply or is itself a distinct and independent supply i.e, whether the component is merely ancillary to the principal supply or the component can be considered as separate taxable service in its own right. A service, which does not constitute for a customer an aim in itself but a means of better enjoying the principal supply ancillary to the principal supply. Similarly, it was arg....
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....ying tax on services. The legal backup was further provided by the introduction of Article 268A in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also introduced in the Union List for the levy of service tax. 5.1 Hon'ble Supreme Court while deciding the case of All India Federation of Tax Practicing 2007 (7) STR 625 (SC) stated the reasons of imposition of service tax. According to the Hon'ble Court, service tax is an indirect tax levied on certain services provided by certain categories of persons including companies, association, firms, body of individuals etc. Economics hold the view that there is no distinction between the consumption of goods and consumption of services as both satisfy the human needs. The word "goods" has to be understood in contradistinction to the word "services", It is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business or commerce. Service tax is on val....
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....arliament and State Legislatures are assigned different fields of legislation by that Article and empowered to make law within their competence on the subject relating to the Entry appearing the respective list. Levy of Service tax which was imposed by Parliament in terms Article 246 under its residuary powers under Entry 97 of List I of Seventh Schedule was more clearly brought under Entry 92C of the said List under that Schedule by constitution (Eighty-eight) Amendment Act, 2003 in accordance with Article 268A of the Constitution incorporated by the said Amendment Act. It is observed by the Hon'ble Supreme Court in Ujagar Prints (II) Vs. Union of India AIR 1989 SC 516 : (1989) 3 SCC 488: (1989) 179 ITR 317: (1,989) 74 STC 401 in paragraph 23 as under :- "Entries in legislative lists, it may be recalled, are not sources of legislative power, but are merely topics or fields of legislation and must receive a Liberal construction inspired by a broad and generous spirit and not in a narrow or pedantic sense. The expression with respect to article 246 brings in the doctrine of pith and substance in the understanding of the exertion of the legislative power and....
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....India provided those are "taxable services" as defined by law. In Federation of Hotel and Restaurant Association of India V. Union of India [1989] 178 ITR 97; 74 STC 102 (SC); [1989) 3 SCC 634 elaborating the theory of "aspects legislation", Hon'ble Supreme Court observed (pages 115 to 118 of 178 ITR) that: "In Lefroy's Canada's Federal System, the learned author, referring to the 'aspects of legislation' under sections 91 and 92 of the Canadian Constitution, i.e., the British North America Act, 1867, observes that one of the most interesting and important principles which have been evolved by judicial decisions in connection with the distribution of legislative power is that subjects which in one aspect and for one purpose fall within the power of a particular Legislature may in another aspect and for another purpose, fall within another legislative power. Learned author says ' ...that by "aspect" must be understood the aspect or point of view of the legislator in legislating the object, purpose, and scope of the legislation that the word is used subjectively of the legislator, rather than objectively of the matter legislated upon'....
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....ng up a 'matter' bring it within a class of subjects .. .. ' (emphasis supplied) 7. Article 366 lays down the definition of certain expressions. Unless the context otherwise requires, the expressions defined in that article have the meanings respectively assigned to them in that Article. Clause (29-A) of Article 366 defines the expression: 'tax on the sale or purchase of goods'. Sub-clause (b) appearing under this clause, deals with the tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Accordingly such transfer shall be deemed to be a sale of those goods by the person making the transfer, and a purchase of those goods by the person to whom such transfer is made. Such a provision in Constitution was made to overcome the effect of the decision of Apex Court in the case of State of Madras V, Gannon Dunkerley & Co (Madras) Ltd . (1998) 9 STC 353: (1959) SCR 379, Parliament amended Article 366 by introducing sub-clause (b) of clause (29- A). However, even after the decision of Apex Court in the State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd . (1958) 9 STC 353; (1959)SCR 379 it w....
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....e contractor for providing labour and other services from the value of works contract. The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execution of the works,(ii) amount paid to a sub-contractor for labour and services, (iii) charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract, (iv) charges for planning, designing and architect's fees, and (v) cost of consumables used in the execution of the works contract, (vi) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, (vii) other similar expenses related to supply of labour and services, and (viii) profit earned by the contractor to the extent it is relatable to supply of labour and services. 7.3 It was held by Apex Court in Gannon Dunkerley's case 1988 STC 204 (SC) that to deal with cases where the contractor does not maintain proper accounts or the account books produced by him are not found worthy of credence by the assessing authority the legislature may prescribe a formula for deduction of cost of labour and services on the ba....
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....mnant part of such contract is attributable to the service element leaving scope for levy of service tax on such element subject to the provisions of Chapter V of Finance Act, 1994. 7.5 Aforesaid principles of law laid down in Gannon & Dunkerley's case (1992) 88 STC 204 was incorporated into Rule 2A of Service Tax (Determination of Value) Rules, 2006 to precisely value service elements involved in contracts involving goods and services and such Rule came into force w.e.f. 1.6.2007. The said Rule reads as under and demonstrates that law has prescribed measure of levy of service tax be determinable without any arbitrariness. "2A. Determination of value of services involved in the execution of a works contract: - (i) Subject to the provisions of Section 67, the value of taxable service in relation to services involved in the execution of a works contract (hereinafter referred to as works contract service), referred in sub-clause (zzzza) of clause (105) of section 65 of the Act, shall be determined by the service provider in the following manner:- (i) Value of works contract service determined shall be equivalent to the gross amount ch....
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....luding value of goods from the gross value of such contracts. Accordingly, service elements involved in execution of such contract provide measure of levy under the provisions of Finance Act, 1994 following principles of equivalence irrespective of nature of works contract whether turnkey, indivisible or composite since divisible contract does not pose much difficulties to determine measure of levy. Decision of Tribunal in Daellm's case did not take into, account Apex court ruling in Gannor Dunkerley's case reported in (1993)88 STC 204 & Larsen & Toubro reported in (2000) 117 STC 41 (PAT) nor there was advantage to go through the land mark decision of service tax made by Apex Court in All India Federation of Tax Practitioners - 2007 (7) STR 625 (SC). 8. The term service generally means service of any description which is made available to potential user and includes the provision of facilities. Such term has variety of meanings. It may mean any benefit or any act resulting in promoting or serving interest of the recipient. It may be contractual, professional, public, domestic, legal, and statutory etc. How it should be understood and what it means depends in the context ....
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.... to find out object of the Act and to seek reasonable result but not to be interpreted in a manner to defeat its spirit. That is to be read so as to render justice and construction which leads to confusion must be avoided. [See: Corporation Bank vs Saraswati Abharansala 2009 (233) ELT 0003 (S.C)]. It was held by Hon'ble Supreme Court in R.K. Garg v. Union of India [1981 (4) SCC 675]: (SCC pp. 690-91, para 8) that Laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It is well-known that the one and the only proper test in interpreting a section in a taxing statute would be that the question is not at what transaction the section is according to some alleged general purpose aimed, but what transaction its language according to its natural meaning fairly and squarely hits. [See St. Aubyn (LM) and Others' v. Attorney General (No. 2), (1951) 2 All ER 473, p. 485]. 10. Submissions of Intervener and Respondent that turnkey contracts cannot be vivisected does not find legal support and entire submission that severability of turnkey contract by 46th Constitutional amendment has only p....