Thursday, May 12, 2011

Service Tax – Construction falling under Works Contract Service Taxable prior to 1.6.2007 – Prima facie case in favour of Revenue – Pre-deposit ordere

By TIOL News Service:

BANGALORE, MAY 11, 2011: THIS is an application for waiver from the requirement of pre-deposit of-

(a) Total Service Tax demand of Rs. 1,18,06,878/- confirmed against the appellant u/s 73(1) of the Finance Act, 1994 along with interest on it at the applicable rate u/s 75 ibid; and

(b) Penalties of Rs. 1,18,06,898/- u/s 78 and of Rs. 5,000/- u/s 77 of the Finance Act, 1994, imposed on the appellant vide Order-in-Original No.2/2010-ST (Commr.) dated 30.04.2010 passed by the Commissioner of Central Excise, Hyderabad-IV and also for stay on recovery thereof till the disposal of the appeal.

The allegation against the appellant is that though the "Commercial or Industrial construction service", "Construction of complex service" and “Works contract service" were taxable u/s 65(105)(zzq), 65(105)(zzzh) and 65(105)(zzzza) respectively of the Finance Act, 1994 w.e.f. 10/9/04, 16/6/05 and 1/6/07 respectively and the appellant during the period from 10/9/2004 to 31/3/2008 had provided these services to various customers including - Central Public Works Department; Andhra Pradesh Tourism Development Corporation Ltd; Bharat Sanchar Nigam Ltd; Hindustan Aeronautics Ltd; M/s. Covalent Laboratories Ltd; M/s. Trident Life Sciences Ltd; M/s. Aurobindo Pharma Ltd. Etc, they had neither obtained service tax registration nor did they pay any service tax on their services.

The Counsel for the appellant, pleaded that since the services of 'commercial or industrial construction' and transfer of property in goods on which Sales Tax/VAT had been paid, such services were not covered by Section 65(105)(zzq) and 65(105)(zzzh) respectively and hence the same were not taxable till 31/5/2007; that prior to 1/6/07, no service tax could be charged on any service or services provided in the course of execution of a works contract; that these services became taxable as 'works contract service' u/s 65(105)(zzzza) w.e.f. 1/6/07; that it is settled legal position that introduction of a new entry for the purpose of levy of tax pre-supposes that it was not covered by any of the pre-existing entries.

Tribunal, in the case of Diebold Systems (P) Ltd. Vs. CST, Chennai; reported in 2008-TIOL-489-CESTAT-MAD has held that the activity of supply of machinery, installation and commissioning of Automatic Teller Machines (ATMs) on turnkey contract basis was not taxable during the period prior to 1/6/07; that same view has been taken by the Tribunal in cases of Air Liquide Engineering India P. Ltd. Vs. CC&CE, Hyderabad-II reported in 2007-TIOL-2144-CESTAT-BANG and URC Construction (P) Ltd Vs. Commissioner of Central Excise, Salem reported in 2009-TIOL-596-CESTAT-MAD.

The Jt.CDR, opposing the appellant's plea for waiver, reiterated the findings of the Commissioner in the impugned order and pleaded that Tribunal, in the case of Sunil Hi-tech Engineers Ltd. Vs. Commissioner of Central Excise, reported in 2009-TIOL-1867-CESTAT-MUM, has held that introduction of 'Works Contract Service' u/s 65(105) (zzzza) w.e.f. 1.6.2007 does not make the construction service non-taxable earlier, that Central Board of Excise & Customs vide Circular No. 354/141/2010-TRU dated 24.8.2010 has clarified that the services like construction and erection, commissioning or installation provided prior to 1.6.07 would be taxable; that while the services provided by the appellant w.e.f. 1.6.07 may be taxable as 'Works contract services', during the period prior to 1.6.07, the same services were taxable as 'commercial or industrial construction services' and 'residential complex construction services' and that the appellant, therefore, does not have a prima facie case.

The Tribunal observed,

From a comparison of the service contracts covered by the definition of 'Works Contract' as given in Explanation to Section 65(105)(zzzza), with the contracts for various services as mentioned in the definition of "erection, commissioning or installation service"; "commercial or industrial construction service"; and "construction of complex service", it will be seen that the services mentioned in clause (ii)(a) to (ii)(d) of the definition of 'Works Contract', as given in explanation to Section 65(105)(zzzza) are also of the Explanation to Section 65 (105)(zzzza), such turnkey contracts being for installation and commissioning or construction, would be covered by the definition of erection, installation or commissioning service or "commercial or industrial construction service” or "construction of complex service". There is nothing in any provision of the Finance Act, 1994 from which it can be inferred that the taxable services, as defined in various clauses of Section 65 (105), have to be pure services not involving the use or supply of any goods or that such services would not be taxable if the same involve use or supply of any goods or materials. In fact, from various exemption notifications issued under Section 93(1) of the Finance Act, 1994 in respect of 'erection, installation or commissioning service', 'commercial or industrial construction service' or 'construction of complex service' which provide exemption by way of abatement from the gross amounts charged for the service which includes the value of the goods used/supplied in the course of providing the service, it is clear that the intention of the Legislature was always to treat the gross amount charged for these services including the value of the goods used as the measure of the tax.

Tribunal in the case of Sunil Hi-Tech Engineers Ltd. Vs. CCE, Nagpur has held thus:-

5. We have given careful consideration to the submissions. Insofar as the service rendered by the appellant to NTPC during the period from 10-9-2004 to 31-3-2006 is concerned, we find that it is not in dispute that such service was covered by the definition of "construction service" upto 15-6-2005 and then by the definition of "commercial or industrial construction service" from 16-6-2005 to 31-3-2006. They were also registered with the Department in these categories during the respective periods. They were paying service tax, during the said periods, on the labour component of the works. The demand of service tax now is on the cost of materials used in rendering the service. According to the assessee, on this value, sale tax was paid, which fact is said to be evidenced by the relevant assessment orders. By invoking the doctrine of "works contract", the assessee has claimed, through counsel, that nothing remains to be paid as service tax on any part of the taxable value. It is said that service tax was paid on the service component and sale tax on the sale component. This argument of the assessee may be good for the period from 1-6-2007 when the "works contract" concept made its way into the domain of service tax for the first time. Prior to 1-6-2007, the assessee was rendering a service which squarely fell within the ambit of "construction service" upto 15-6-2005 and "commercial or industrial construction services" thereafter upto 31-3-2006. The assessee has never disputed this fact. We are not impressed with their present attempt to escape tax liability for the period upto 31-3-2006 on the strength of a doctrine which was introduced on 1-6-2007 with prospective effect. In this view of the matter, we find that the decisions cited by the ld. counsel are of no aid to the appellant.

The judgments of the Tribunal in the cases of M/s. Diebold Systems (P) Ltd. Vs. Commissioner of Service Tax, Chennai (supra); Air Liquide Engineering India P. Ltd. Vs. Commissioner of Customs and Central Excise, Hyderabad-II (supra) and URC Construction (P). Ltd. Vs. Commissioner of Central Excise, Salem cited by the appellant are based on the tribunal judgment in the case of Daelim Industrial Co. Ltd. Vs.CCE, Vadodara - 2003-TlOL-110-CESTAT-DEL wherein it was held that an indivisible works contract cannot be vivisected for the purpose of charging service tax on its service component. Though the Government's SLP to Hon'ble Supreme Court against the judgment of Daelim Industrial Co. Ltd. Vs. CC, Vadodara has been dismissed, the dismissal being summary dismissal without recording any reason, the same does not lay down any law and is not a binding precedent. The Tribunal's judgment in the case of Daelim Industrial Co Ltd (supra) has been overruled by the Larger Bench of the Tribunal in the case of CCE, Raipur Vs. BSBK referred in 2010-TlOL-646-CESTAT-DEL-LB.

So, Tribunal was of the prima facie view that there is merit in the department's contention that the services provided by the appellant were taxable even during the period prior to 1.6.2007 on which admittedly, no Service Tax has been paid as such. The appellant therefore cannot be said to have established a prima facie case in their favour and therefore, this is not a case for total waiver.

As held by the Hon'ble Supreme Court in the case of Benara Valves Ltd. Vs. CCE reported in 2006-TIOL-156-SC-CX; Indo Nissan Oxo Chemicals Industries Ltd. reported in 2007-TIOL-225-SC-CX, the question of waiver from the requirement of pre-deposit has to be decided on the basis of twin considerations of undue hardship and interests of the revenue.

Taking into consideration the interest of the Revenue and also the factor of financial hardship pleaded by the appellant, Tribunal directed the appellant to deposit an amount of Rs. 60,00,000/- (Rupees sixty lakhs only) within a period of eight weeks from the date of this order. This amount would be in addition to the amount of Rs.18,46,970/- already paid by them.


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