Rachna Gupta ORDER
C.L. Mahar, Member (T)
1. The facts of the matter are that the respondent/assessee is registered with the department for various services such as erection, commissioning and installation services; construction services in respect of commercial and industrial buildings and civil structure and work contract service. They are also registered for business support services as well as under GTA services. A show cause notice dated 18th October 2013 came to be issued to the respondent/assessee saying that they have divided their entire work into two parts of work contract service, one for supply of goods (where no service tax has been paid) and second for construction of civil structure on which a service tax @ 4.12% has been paid under the composite work contract service. The above show cause notice has been issued as the department has entertained a view that composite work contract were divided by the respondent/assessee into two parts which was otherwise a composite work contract. It has also been alleged that by dividing the work contract into two parts and paying service tax applicable for one work contract (composition scheme for payment of service tax) an amount of Rs. 21,01,50,386/- has been evaded by the respondent. The other provisions with regard to Section 75, 76, 77(d) and 78 of the Finance Act, 1994 has also invoked. The basic contention of the department has been that since the contracts given to the respondent/assessee by various electricity departments are primarily composite contracts and the service tax @ composite scheme (4.12%) was only available when the value of services alongwith the value of supply of goods is included in the service taxable value of the service. The matter was adjudicated by the Commissioner who vide his order dated 10/06/2015 has set aside the show cause notice and the allegations as raised in the show cause notice have not been upheld by the learned Commissioner. Feeling aggrieved by the above impugned order of the Commissioner, the department is in appeal before us alleging that the order-in-original is not legal and proper and therefore same has been reviewed by Competent Authority under Section 86(2) of the Finance Act, 1994. It has been the contention of the department that the respondent/assessee by splitting the single work contract into separate contracts had evaded payment of service tax and Adjudicating Authority has failed to appreciate the respondent were engaged in business of execution of EPC contracts pertaining to setting up of that electric service station on turkey basis to various state electricity companies.
2. The Adjudicating Authority, as per the department has grossly erred in holding that with regard to Works Contract under dispute in the instant show cause notice, the noticee was discharging their service tax liability as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006 and not as per Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. Whereas, para 2.1 of the order-in-original clearly evidences that noticee was paying service tax @ 4.12% on the Works Contracts for Construction of Civil Structures which is the rate of service tax applicable to an assessee who opts for payment of service tax under Composition Scheme of Works Contract and is not the rate as may be applicable to an assessee paying service tax under Rule 2A of the Service Tax (Determination of Value) Rules, 2006 i.e. full rate of tax, still a contrary view has been taken by the Adjudicating Authority.
3. It is the contention of the Department that the Adjudicating Authority should have appreciated the fact that the Noticee knowingly bifurcated a single Works Contract into two, showing the one as sale of goods and other as provision of service just to reduce the taxable value with an intent to evade payment of service tax on the gross amount received by them, there was no reason to sell the goods to the service recipient which were meant for use by them in the execution of same EPC Contract. It is argued that no prudent business entity would indulge in such an activity of unnecessary sale and subsequent receipt of material except when there was ill intent to evade tax. The purported sale was indeed no sale at all and was just an eyewash to hoodwink the tax department, to detract them from ascertaining the gross service value and above all, with an intent to evade payment of tax.
4. Further, the Adjudicating Authority failed to appreciate that equipments supplied under 'supply of equipment contract' are essential part or construction and commissioning of the power projects. Works Contract service is defined under Section 65(105)(zzzza) of the Act which has an explanation there under. As per clause (ii) sub-clause (e) of the said explanation turnkey projects including engineering, procurement and construction or commissioning (EPC) projects will be classified as Works Contract wherein the transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods. The noticee had well accepted the EPC projects as Works Contracts but had just contrived to split the execution of Works Contract into two parts and ignoring the fact that evidence was writ large against them in as much as the noticee itself was the service provider, they themselves had supplied/sold the material which was to be used by them in the execution of impugned Works Contracts. Therefore, the impugned Works Contracts are well within the framework of Composition Scheme and liable to tax as per the value as prescribed under Rule 3 of the Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, as amended.
5. It has also been contended by the Department that this Tribunal in its final decision in appeal Nos. ST/52612-52614 of 2014 in the case of M/s. Jindal Water Infrastructure Ltd. vs. CCE & ST, Rohtak - MANU/CE/0082/2018 : 2018 - TIOL - 1153 - CESTAT - DEL. has already held that in case of the composite work contract, the value of the goods as well as services need to be added if benefit of reduced rate of service tax under the composite scheme for payment of service tax as per the Rules of 2007 is to be availed by the respondent/assessee.
6. We have also heard learned Advocate appearing for the respondent who has contended that so far as the contracts pertaining to pure sale of goods is concerned, the respondent/assessee has already paid appropriate VAT/CST and therefore the question of payment of the service tax on the same does not arise. It has also been submitted that they have already deposited appropriate service tax on the service portion of the erection, commissioning and installation contracts. It has also been submitted that only in case of North India Power Limited, the assessee has discharged a service tax liability at the reduced rate of 4.12% as per composite scheme and other cases, the rate of service tax has been paid. It has further been contended that it is the choice of the respondent/assessee to opt for work contract composition scheme and department cannot force the assessee to compulsorily pay service tax on its reduced rate by including the value of supply of goods into the value of services for payment of service tax. The learned Advocate has also relied upon of several judgments which are referred as below:-
(i) Gupta Energy Pvt. Ltd. vs. CC & CE, Nagpur - MANU/CM/0292/2014 : 2015 (37) S.T.R. 273 (Tri. - Mumbai);
ii) Nagarjuna Construction Company Ltd. vs. Government of India - MANU/AP/0235/2010 : 2010 (19) S.T.R. 321 (A.P.) as affirmed by Apex court.
7. We have heard both sides and have also perused of the record of the appeal.
8. It is a matter of record that the respondent/assessee were awarded contract on EPC basis by various electricity companies such as North Delhi Power Limited, Dakshin Haryana Bijli Vitran Limited etc. and it can be seen from the contract that all the contracts are composite contract for the supply of goods as well as for erection and commissioning on turnkey basis. It has also been the matter of fact that the respondent/assessee has opted to pay the service tax under Rule 3(i) of Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. We are of the opinion that the composition scheme for payment of the service tax was primarily meant to facilitate the service tax provider that they need not to bother with regard to bifurcation of supply and service element from the composite work contracts rather they were allowed to discharge their service tax liability on the concessional rate. The relevant Rule 3(i) of the Composition Scheme (supra) is reproduced here below:-
"3(1) Notwithstanding anything contained in Section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his serviced tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in Section 66 of the Act, by paying an amount equivalent to (four percent) of the gross amount charged for the works contract.
Explanation - For the purposes of this sub-rule, gross amount charged for the works contract shall be the sum,-
(a) including-
(i) the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and
(ii) the value of all the services that are required to be provided for the execution of the works contract;
(b) excluding-
(i) the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and
(ii) the cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire;
PROVIDED that nothing contained in this Explanation shall apply to a works contract, where the execution under the said contract has commenced or where any payment, except by way of credit or debit to any account, has been made in relation to the said contract on or before the 7th day of July, 2009".
9. From the perusal of the Rule 3(i) as given above, it is clear that for determination of the value under the composition scheme, the value of all goods used in or in relation to execution of the work contract need to be included in the serviceable value even when the goods might have been supplied under any other contract for execution of the composite work contract. It is a matter of record in this case that all the contracts are composite contracts for both supply of goods and services as both the elements are absolute pre-requisite for completion of any turnkey project. It is also of the matter of fact that the respondent/assessee has opted for the benefit of composite work contract service and has availed the benefit of Rule 3(i) of Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 we are therefore of the view that the value of both supply and service need to be added for payment of service tax under composition scheme. We also feel that the matter is no longer res-integra as it has already been decided by this Tribunal in the case of Jindal Water Infrastructure Ltd. (supra). The relevant extract of the order is reproduced below:-
"9. The said coordination agreement read with the supply/erection contracts leads to an apparent conclusion that the intended purpose of both the parties is the supply and erection of raw water piping and pumping system. Both the appellant and the recipient of service belong to O.P. Jindal Group of Companies as recorded in the impugned order. The Original Authority examining the overall scope of the arrangement recorded as below:-
"48. In other words, there is a single Co-ordination Agreement dated 30/08/2007 between the assessee/noticee & M/s. Raj West Power Ltd. in respect of the complete project viz., "Raw Water Piping & Pumping System? which includes supply of material & erection work. Further, there is a set of "Technical Specifications? pertaining to both the contracts which is referred as Section - III to the supply contract and the erection contract. The "Technical Specifications? document is common to both the contracts and it is in the form of a "Contract Document Between RWPL & M/s. Jindal Water Infrastructure Limited for Raw Water Pipe work and Pumping System" duly signed by the representatives of the assessee and M/s. Raj West Power Ltd.
49. I find that the assessee opted to pay service tax on the amounts received by it under the Erection Contract under the Composition Scheme provided under "Works Contract Service?. However, as per the stipulation contained in Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 Service Tax was to be paid on the gross amount charged for the said works contract including the cost of materials used (i.e. supply contract) but the assessee did not pay service tax on the amounts received by it under the supply contract".
10. Similar analysis was made in respect of Sitarganj Project also. We have examined the terms of both the contracts entered into by the appellant for Barmer Project. We have also considered the reliance placed by the appellant on the decision of the Tribunal in Essar Projects (India) Ltd. (supra). In the said case, the Tribunal specifically examined "defects liability" clause as recorded in two separate agreements for supply as well as erection. Noting the distinct nature of defects liability clause in both the agreements, the Tribunal held that these are to be treated as separate contracts. While examining the two contracts now contested in the present appeals, we note except for substitution of the word "contractor" for "supplier" the warranty or defects liability condition mentioned in Clause 34 of both the agreements are identical. It clearly establishes that as the supplier and contractor is one and the same the warranty and defect liability is to be on the appellant without any distinction for supply contract or erection contract. The defect liability clause in labour contract also talks about "defect in material", "bad materials". Materials are supplied in terms of supply contract which also carries same terms. This alongwith the scope of coordination agreement clearly reveals that the scope of composite works contract is clear and should be read together for the purpose of service tax. In fact, perusing both the contracts (supply or erection), we note that the various clauses are verbatim reproduction except for the of words "contractor or supplier" were suitably substituted. On overall examination the facts and circumstances of the case, we are in agreement with the findings recorded by the Original Authority regarding the composite nature of contract executed by the appellant and the valuation method that should be followed for discharging service tax liability.
11. It is relevant to note even while discharging service tax on the erection contract, the appellant chose to pay concessional rate by availing composition scheme for works contract. This is contrary to their basic claim that there is a separate supply contract for materials and a contract for pure service. If the erection contract is only a service contract there is no question of availing composition scheme available to works contract service. In fact, the appellants later switched over to payment of service tax with full rate without composition. This clearly reveals that action of the appellant is with full knowledge of the legal implication of the course of action for discharging service tax by them.
12. The appellants contested the demands on limitation. We have perused the impugned order on this aspect. It is clear from the facts narrated above that the appellant is fully aware of the legal implications of service tax liability on composite works contract. Their act of first paying composition rate on what is claimed to be a service contract and later switching over to full rate of payment without composition clearly reveals the knowledge and deliberate intend of the appellant. We are not convinced with the claim of bonafideness on the part of the appellant in the present appeals. We have no reason to interfere with the findings either on merit or on limitation. Accordingly, we dismiss these appeals".
10. In view of above we hold that the:
(i) impugned order is without any merit and we set aside the same;
(ii) we remand back the matter to the original Adjudicating Authority for purpose to verify the claim of the respondent/assessee in his arguments submitted before this Tribunal that on certain contracts they have paid full rate of service tax rather than concessional rate of service tax under composition scheme;
(iii) as delineated in the preceding paras for the composite contracts the value of both supply and service elements to be taken together service tax purpose under work contract composition scheme;
(iv) thus, in above way the Adjudicating Authority will re-determine the service tax payable by the respondent/assessee.
11. Appeal is accordingly allowed by way of remand.
(Order pronounced in open court on 18/09/2018.)
© Manupatra Information Solutions Pvt. Ltd.