By TIOL News Service

MUMBAI, AUG 21, 2014: BRIEF facts of the case are that the appellants are engaged in the business of generation of electricity. For setting up power plant they made enquiries with China National Automotive Industry International Corporation and another company SOKEO Power Private Ltd which is a Hyderabad based company and is representative of CNAICO in India. From the correspondence it was evident that the appellant awarded turnkey project for design, engineering, manufacture, testing, supply, transportation, site storage, erection, testing and commissioning of plant and machinery for setting up of the power plant. The appellant,thereafter,made two contracts one with CNAICO and another with SOKEO, the representative of CNAICO, first contract for supply of equipment while the second contract is for erection and commissioning. In respect of first contract no service tax is paid and for the second contract SOKEO has paid service tax under erection and commissioning service.

It is the case of the Revenue that the total work is for design, engineering, manufacture, testing, supply of equipment, transportation, erection, commissioning etc. and is, therefore, a turnkey project and the appellants are liable to pay service tax under the Works Contract on reverse charge basis for the amount paid by them to CNAICO. The demand was raised based upon Composition scheme.

Before the CESTAT the appellant submitted that legal force is only in two agreements one with CNAICO and other with SOKEO and the initial letter of intent was only on expression of interest and has no legal force; that the said contracts are not composite in nature;one contract does not refer to other; separate consideration is given in each of the contracts. Reliance is also placed on the decision in Hindustan Shipyard Ltd 2002-TIOL-619-SC-CT; further submitted that even if it is assumed that the two contracts together forms works contract still the department has issued the notice under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and has asked them to pay 4% duty on the total amount of contract; that the Composition Scheme is an optional scheme and cannot be thrust upon them; in view of Board Circular No. B-1/16/2007-TRU dated 22.5.2007 service tax will be leviable only on the services portion provided in relation to execution of works contract; that even if the two contracts are considered as composite contract then they are required to pay service tax at the normal rate i.e. 10.3% on value of services as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

The Revenue representative reiterated the order of the adjudicating authority and also submitted that charges for erection, testing and commissioning is just Rs.1.75 crores as against Rs.59.75 crores for supply items and thus the service portion is less than 3% of the total cost; that Composition Scheme envisaged service portion of 33% of the total cost as per the industry practice.

The Bench after considering the submissions made by both sides inter-alia distinguished the apex court decision cited by the appellant and observed -

++ The terms and conditions are to be read as a whole and it must be construed keeping in view the intention of parties. Applicability of tax law depends upon the nature of contract but it should not be construed keeping them in view. In the present case the whole issue has therefore to be seen with reference to Letter of intent and thereafter splitting the same into two one with the main party and another with the authorized person in India and therefore in our view the facts are distinguishable and does not support the cause of appellant. Facts in the present case are entirely different as in this case the Letter of intent was one and two contracts with CNAICO and other with its representative in India SOKEO and hence case laws are not applicable.

++ We have no doubt in our mind that the two contracts have to be read together and the two contracts when read together are for the turnkey projects including EPC projects. In our view, the fact that the total project or initial Letter of intent has been split up into two contracts one with CNAICO and other with SOKEO who is the authorized representative of CNAICO and has been doing everything on behalf of CNAICO has to be considered as one single composite contract and this contract would come within the scope of works contract service, viz. turnkey project. We accordingly hold that the services provided by CNAICO is Works Contract service and, therefore, the appellants are liable to pay service tax on reverse charge basis.

++ As far as the appellant's contention that the department cannot force them to go for composition scheme under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, we agree with the appellants' contention. Revenue cannot force a person to go for the Composition Scheme. This is evident from Rule 3 (i) of the Works Contract/Composition Scheme for Payment of Service Tax)Rules, 2007.

++ Clause (i) of sub-rule (1) to Rule 2A of Service Tax (Determination of Value) Rules, 2006 provides that value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. We also note that the goods supplied by CNAICO have been cleared on payment of Customs duty after determining the value of such goods and therefore it should be possible to determine the value of transfer of property in goods involved in the execution of the said works contract and thereafter value of the service portion. The normal rate of service tax would be applicable on the value of service so determined.

Noting that the appellant were filing service tax returns but did not indicate anything about above payments on services, the Bench held that the extended period is invokable as there is suppression of facts.

Holding that the appellants cannot be compelled to opt for the Composition Scheme and the value has to be determined as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006, the Bench remanded the matter.

(See 2014-TIOL-1548-CESTAT-MUM)