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ST - Because there was separate supply contract for supply of transmission towers, it cannot be deduced that Service contract is pure labour contract - it is not merely nomenclature and form of contract that should be seen - Service Contract is Works Contract: CESTAT

By TIOL News Service

MUMBAI, JULY 28, 2014: THE appellants are engaged in the manufacture and sale of electricity transmission towers and parts thereof. They enter into contracts with large customers for supply of transmission towers as well as for erection, commissioning and installation of such towers. Thus, they are awarded two types of contracts, one for supply of towers and the other for erection and installation.

The appellant, as far as the first contract is concerned, paid excise duty and discharged the Sales Tax/VAT liability on the supply of goods.

The dispute is regarding the second contract which is called Service Contract. The period of dispute is April 2008 to March 2012. The Works Contract service under Section 65 (105)(zzzza) of the Finance Act, 1994 was introduced w.e.f. 1.6.2007. At the same time the Works Contract (Composition Scheme for Payment of Service Tax) Rules 2007 was notified vide Notification No. 32/2007-ST dt. 22.5.2007. The appellants started paying service tax on the Service contracts under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

Revenue took the view that the appellant actually entered into composite contracts with M/s. Power Grid Corporation of India Ltd. having two separate parts namely, one for supply of transmission towers i.e. Supply contract and the other is the Service contract.

It was held that, as per Rule 2A of Service Tax (Determination of Value) Rules, 2006, the value of Works contract service shall be equivalent to the gross amount charged in the works contract less the value of property in goods transferred, involved in the execution of the works contract. As the appellant had not included the value of goods (i.e. the value of goods involved in the supply contract), which is a condition for eligibility to avail the Composition Scheme, the appellant was not eligible to avail Composition Scheme under which service tax is leviable at 4% of gross value charged in the works contract and hence they were liable to pay service tax at the normal rate of 12.36%.

Revenue's view further is that since the Service contract is of the nature of erection, commissioning or installation, it being a service contract only, the appellant had wrongly classified the service under the category of Works Contract service, only to avail the beneficial rate of service tax of 4% under the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 issued under Notification No. 32/07 dt.22.5.2007.

The appellants were issued 5 SCNs for various periods and the total Service Tax demand comes to approximately Rs.28.66 crores.

The CCE, Nagpur confirmed the demands along with imposition of penalties and interest and, therefore, the appellant is before the CESTAT.

The Bench after considering the submissions extracted the relevant provisions of the FA, 1994 and observed -

Whether the contract is a Works contract?

++ The condition [clause (i) under explanation to Section 65 (105) (zzzza) to be fulfilled for classifying a service under Works contract is that the transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods. Therefore, firstly, there must transfer of property in goods involved and secondly such transfer of property is leviable to tax as sale of goods.

++ There is no denying the fact that in the said Service contract, substantial amount of material has been used which is Cement, Steel, Bolts, Paint etc. It is also a fact that in many Works contracts, which involve making of foundations and fixing of structures thereon material is an essential component of such works. The photographs placed on record by the appellant depicting use of material, especially steel, is illustrative. The appellants have from their records show that almost 31% of the contract value is represented by material value.

++ The Commissioner has highlighted the fact that the materials get consumed in the process of erection and installation and therefore there is no sale of goods. In our view, this is not correct presentation of facts regarding use of material. In most case of Works contract involving structures, important component materials such as Cement and Steel can only be used in the manner depicted in the photographs. That is to say, these materials such as steel also remain present in the structure although they may remain embedded and not visible after the structure is completed. This does not mean that there is no sale of goods/materials. Going by the Revenue's reasoning, no such structure can be said to have arisen as a result of execution of a Works contract. Such reasoning goes against the very definition of Works contract.

++ The records shown by appellants indicate that a significant percentage of the total contract work under the ‘Service Contract' involves material component. Therefore we hold that there is transfer of property in goods involved in the execution of the Service Contract.

++ Coming to the next aspect, whether the transfer of property is leviable to tax as sale of goods, we note that the appellants pay Sales Tax/Vat on the transfer of property in the goods involved in execution of the Service contract. Copies of VAT returns have also been placed on record. Therefore, the second aspect that goods in the Service Contract are leviable to tax as sale of goods is also fulfilled.

++ The goods involved as part of Service Contract are subjected to payment of Sales Tax/VAT. Thus, appellants' case is supported by the Board Circular B1/16/2007-TRU dt. 22.5.2007. Therefore we are of the view that the Service contract entered into by the appellants with Power Grid Corporation of India Ltd. is covered under Works contract category.

Whether the appellants are eligible to the Composition Scheme?

++ The three main elements to be fulfilled for eligibility to Composition Scheme (Rule 3(1) refers) are:

(i) There must be transfer of property in goods involved in the execution of such contract.

(ii) The provider of the service must not have taken CENVAT Credit on the inputs.

(iii) The provider of the service must exercise such option to avail the Composition Scheme.

++ Out of the above conditions, the first has already been held by us to have been fulfilled. The appellant also opted for the Composition Scheme. Lastly, there is no allegation that they have taken CENVAT Credit on the inputs. Therefore there is no reason to deny the option of Composition Scheme to the appellants.

Amendment to Composition Scheme by Notnf.23/2009-ST whether retrospective?

++ It is quite clear that from 7.7.2009, the Composition Scheme was restricted to such Works Contracts where the value of goods used whether supplied under any other contract, is to be included. The change in Rules is not a mere clarification of the earlier Rules. There has been a clear amendment in law from 7.7.2009. The period of dispute in the case of appellant is from April 2008 to March 2012, and Revenue does not dispute that the contract had commenced before 7.7.2009. Therefore, the amended Rules would not apply in the case of appellant in accordance with the proviso to the Explanation in the amended Rules.

++ The appellants have correctly availed the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

In fine, the orders of the Commissioner were set aside and the appeals were allowed.

(See 2014-TIOL-1344-CESTAT-MUM)


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