By TIOL News Service

BANGALORE, APR 30, 2015: AS mentioned in Breaking News yesterday, the Larger Bench has decided five key issues relating to levy of service tax on various infrastructure projects undertaken for Government.

The issues identified are:

A) Whether laying of pipelines for lift irrigation systems, transmission and distribution of drinking water or sewerage, undertaken for Government/ Government undertakings should be classified under ECIS as erection, commission or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise; or installation of plumbing, drain laying or other installations for transport of fluids, enumerated in Section 65(105)(zzd) and defined Section 65(39a), during 16.06.2005 to 31.05.2007; or must be classified under CICS, as amounting to construction of pipeline or conduit; and if classifiable under the later provision, whether the activity is not taxable since it is not used or to be used, engaged or to be engaged primarily for industry or commerce;

B) Whether construction of canals for irrigation purposes and laying of pipelines including as part of lift irrigation systems, undertaken for the Government/ Government undertakings is liable to service tax under WCS as turnkey projects, including engineering, procurement and construction or commissioning projects under clause (e) of Explanation (ii) in the definition of WCS or is excluded from the ambit of WCS since it is in respect of a "Dam" and thus stands excluded from WCS, as defined;

C) Whether, turnkey projects, including engineering, procurement and construction or commissioning (EPC) projects specified in clause (e) is merely an enumeration of the mode of execution of taxable services specified in clauses (a) to (d) or is a wholly distinct taxable service and is exigible to service tax as an independent species of works contract service;

D) Whether, even if clause (e) in Explanation (ii) of WCS is considered a distinct and independent service, where construction of canals for irrigation purposes and laying of pipelines either as part of lift irrigation systems or for transport and distribution of water is undertaken for Government/ Government undertakings, the same is more appropriately covered under clause (b) of WCS i.e. construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, by applying principles of classification set out in Section 65A(2)(a) & (b) and thus fall outside the ambit of levy, since the activity is not primarily for the purpose of commerce or industry; or whether a contrary view that clause (e) being an independent entry, activities falling thereunder would be taxable even if the rendition of service thereby or thereunder, was not primarily for non commercial or non industrial purposes; and

E) Where execution of the whole or a part of the work is sub-contracted on back to back basis by the main contractor (which is a joint venture) to sub contractors, in the absence of any transfer of property in goods involved in the execution of such works, from the main contractor to the Government/ Government undertakings, whether levy of service tax in the hands of appellant (main contractor) is valid under WCS, in the light of the judgment in State of A.P. vs. L & T Ltd.

The analysis and conclusion of each of these issues is as under:

Issue A: During 10.09.2004 to 16.06.2005, "construction service" defined in Section 65(30a) excluded service when provided in relation to "long distance pipeline", from the scope of the definition. W.e.f. 16.06.2005 "construction of pipeline of conduit" was included in the definition of CICS, defined in Section 65(25b). Apart from the decisions (in Indian Hume Pipe Co Ltd, A. Sekar vs. CCE, Trichy; Dinesh Chandra Agrawal vs. A. Infracon Pvt. Limited 2011 (21) STR 41 (Tri. Ahm.); in an interim order in Surindra Engineering Co. Limited vs. CC, Mumbai, and in Lalit Constructions vs. CCE, Raigad (Tribunal Decisions) the Madras High Court in Strategic Engineering Pvt. Ltd. vs. Additional Commr. C. Ex. Mumbai) wherein it was consistently ruled that construction of a pipeline for transmission of water or sewerage falls outside the scope of ECIS, it requires to be noticed that construction of pipelines involves associated works such as digging trenches, construction of supporting masonary structures, jointing of pipes; and in cases of construction of pipelines for lift irrigation, pumping / booster stations and other electro-mechanical works as well. Therefore construction of a pipeline does not amount to "other installations for transport of fluids", a clause in Section 65(39a)(ii)(b), but is more appropriately classifiable under CICS, falling within the ambit of Section 65(25b)(b) i.e., "construction of pipeline or conduit"; and that is also the purport of the rulings above.

Considered in the light of the precedents referred to herein above; the definitions of ECIS and CICS; the Board clarification dated 07.01.2010; the Dictionary meanings ascribed to the word "conduit"; and provisions of Section 65A(2)(a) and (b), we conclude that construction of a pipeline / conduit for transmission of water/ sewerage and involving associated works like digging of the earth, supporting masonry structures, refilling the earth, jointing of different lengths of pipes for laying the pipeline/ conduit, construction of pumping stations together with associated machinery and other construction works, including for transmission of water in lift irrigation projects, cannot be classified under ECIS. These services are only classifiable as CICS. Where the pipeline/ conduit laying is executed for Government or Government undertakings as part of irrigation, water supply, or sewerage projects, the works are not exigible to service tax under CICS (prior to 01.06.2007), since these are not primarily for commercial or industrial purposes and are excluded from the scope of the taxable services qua the exclusionary clause definition of CICS, in Section 65(25b) of the Act.

Issues B ,C &D:

Another Division Bench, in Ramky Infrastructure Limited vs. CST, Hyderabad expressed a contrary view to that expressed in Alstom Projects India Ltd. on the aspect whether turnkey/ EPC contracts were chargeable to service tax prior to 01.06.2007. Para 8.4 of Ramky Infrastructure Limited notes Revenue's contention that turnkey /EPC contracts per se were not chargeable to service tax prior to 01.06.2007. Revenue did advert to the decision in Alstom Projects India Limited. In para 10.10, Ramky Infrastructure Limited concludes that transfer of property in goods exigible to sales tax is not involved in rendition of services defined under clauses (25b) and (97a) of Section 65 i.e. CICS and ECIS, whereas such transfer is necessarily involved in execution of works contract. This conclusion is clearly contrary to the decision of the special Bench of CESTAT in the Larsen & Toubro Limited reference (dated 19.03.2015). In para 10.6, Ramky Infrastructure Limited concludes, based on the premise that only where dams were built by an appellant in execution of an EPC contract and along therewith construction of canals etc. is also undertaken, the exclusionary clause in the definition of WCS excluding works contract "in respect of dams" would come into play. This conclusion in Ramky Infrastructure Limited is erroneous. Works contract "in respect of dams" is excluded from the purview of WCS. A true and fair construction of the definition of WCS and the exclusionary clause "works contract in respect of dams", indicates no requirement that works contract executions of structures ancillary or integrated into a dam project should be taken up along with construction of the main dam structure and by the same contractor, to come within the exclusionary clause. This conclusion in Ramky Infrastructure Limited is therefore, with respect, erroneous and is overruled.

From the decision in Indian Hume Pipe Co. Limited and other decisions, it is clear that laying of pipelines/ conduits for transmission of water or for disposal of sewerage falls within the ambit of CICS and not ECIS; and where provided to Government/ Government undertakings and for supply of water for irrigation or consumption or for disposal of sewerage, the activity is non-commercial, non-industrial, is covered by the exclusionary clause in the definition of CICS and is not exigible to service tax. Since a turnkey/ EPC contract would inhere elements of several services, consisting of combination of different services, the service which gives such contract its essential character would be laying of pipelines or conduits. A turnkey/ EPC contract for laying of pipeline/ conduit should therefore logically be classified under clause (b), Explanation (ii) of Section 65(105)(zzzza), on and from 01.06.2007 as well. This is the consequence of applying Section 65A(2)(b) of the Act and this position is clarified in Board Circular No. 123/5/2010-TRU dated 24.05.2010.

EPC/ turnkey projects for construction of dams and canal systems for irrigation, water supply or sewerage disposal, laying of pipelines for transmission of water as in the case of lift irrigation systems or for transmission of sewerage, clearly fall within the ambit (prior to 01.06.2007) of CICS, in view of the decision in Alstom Projects India Limited. A Larger (special) Bench of this Tribunal in the reference in the case of Larsen & Toubro Limited (vide the majority judgment dated 19.03.2015) ruled that a works contract is taxable even prior to 01.06.2007 under appropriate existing taxable services identified by applying the relevant classification guidelines. Laying of pipelines for transmission of water or sewerage does not amount to ECIS but falls within the ambit of CICS, is the principle settled by the Tribunal decisions in Indian Hume Pipe Co. Limited; A. Sekar; Dinesh Chandra Agarwal; Lalit Constructions; Strategic Engineering Pvt. Limited and the interim order in Surindra Engineering Co. Limited. Turnkey/ EPC projects executed for Governments / Government undertakings in respect of construction of dams, canal systems, laying of pipelines for transmission of water for irrigation, human consumption or for disposal of sewerage would be an activity not liable to tax (prior to 01.06.2007) in view of the exclusionary clause in Section 65(25b), defining the scope of CICS, since the activity would not primarily be for industrial or commercial purposes.

Board issued a clarificatory Circular No. 123/5/2010-TRU dated 24.05.2010. In para 2 of the circular the scope of CICS and ECIS were clarified in clauses (i) and (ii). Clause (iii) in para 2 deals with WCS. Clause (iii) sets out the following clarification:

(iii) Works Contract' incorporates the inclusions and exclusions of the aforementioned two taxable services (amongst others) and it is the nature of the contract (i.e. a contract wherein the transfer of property in goods involved is leviable to a tax as sale of goods) rather than the nature of activities undertaken, that distinguishes it from the previously stated taxable services. Thus, even in the case of ‘works contract' if the nature of the activities is such that they are excluded from aforesaid two services then they would generally remain excluded from this taxable service as well.

From this clarification, it follows that since construction of canals is for irrigation, water supply or pipelines/ conduits for lift irrigation, water supply or sewerage disposal, such contracts are classifiable under CICS prior to 01.06.2007 (in view of the several decisions of the Tribunal and of the Madras High Court adverted to earlier herein). The services are however excluded from the levy since these are not primarily for commercial or industrial purposes (in view of the exclusionary clause in the definition of CICS), even when executed under a turnkey/ EPC mode (in view of the decision in Alstom Projects India Limited). We consider the above Board clarification to be consistent with the legislative intention underlying the enactment of WCS as a distinct taxable service, with elements drawn from pre-existing taxable services such as ECIS, CICS and COCS. Revenue has not contended before us that this clarification by the Board is inconsistent with the provisions of the Act and therefore of no legal consequence or force.

We are thus left with the activity of construction of pipelines/ conduits under the turnkey / EPC mode. When the construction is for Government/ Government undertakings and for water supply or sewerage disposal purposes, prior to 01.06.2007 this activity is classifiable under CICS and is excluded from the purview of the definition. Under clause (b) under Explanation (ii) of the definition of WCS, construction of a pipeline or a conduit primarily for the purposes of commerce or industry is an activity falling within the definition of WCS. This provision in the definition of WCS is extracted from the definition of CICS, in pari materia . Construction of pipeline or conduit (otherwise than under a turnkey/EPC mode), when executed for Government/ Government undertakings for transmission of water or sewerage would be outside the ambit of levy of tax, in terms of the definition itself, since this would undisputedly fall within the ambit of sub-clause (b) of WCS. What then could be the legislative intention in not excluding levy on construction of a pipeline or conduit when executed under a turnkey/ EPC mode. Revenue does not explain this incongruity while contending that works contract executed under turnkey/ EPC project mode even in respect of canals, pipelines conduits for Government/ Government undertakings is taxable even if for non commercial, non industrial purposes!

On the aforesaid analyses it is held that construction of canals under a dam for transmission of water or sewerage; or construction of pipelines or conduits for conveyance of water for irrigation, domestic consumption or sewerage disposal even where executed as turnkey/ EPC contracts; (i) would be classifiable under clause (b), Explanation (ii) of Section 65(105) (zzzza); (ii) construction of canals, pipelines or conduits for Government/ Government undertakings for augmentation of irrigation, water supply or sewerage disposal would be for a non-commercial, non-industrial purpose or user and thus excluded in view of the exclusionary clause in clause (b) of WCS definition; and (iii) construction of canals, pipelines or conduits for transmission of water including by lift irrigation would be, when these works are conceived as integrated to a dam project, works contract "in respect of a dam" and thereby excluded from the purview of WCS.

Issue E:

On issue (E), on the basis of the judgment in Larsen and Toubro Ltd. it is held that where under an agreement (whether termed as a works contract, turnkey or EPC project contract), the principal contractor, in terms of the agreement with the employer/ contractee assigns the works to a sub-contractor and the transfer of property in goods involved in the execution of such contract passes from the sub contractor by accretion to or incorporation into the works, the principal contractor cannot be considered as having provided the taxable (works contract) service, enumerated and defined in Section 65 (105)(zzzza) of the Act.

In the light of above analysis, the Larger Bench ruled:

(a) Issue (A): Laying of pipelines/ conduits for lift irrigation systems for transmission of water or for sewerage disposal, undertaken for Government/ Government undertakings and involving associated activities like trenching, soil preparation and filling, supporting masonry work, jointing of pipes, electro-mechanical works or pumping stations and like activity, is classifiable only under Commercial or Industrial Construction Service (CICS) for the period upto 01.06.2007 and not under Erection, Commissioning or Installation Service (ECIS);

(b) Issues (B); (C) and (D):

(i) Construction of canals for irrigation or water supply; construction or laying of pipelines/ conduits for lift irrigation conceived and integrated into a dam project, must be classified as works contract "in respect of dam" and is thus excluded from the scope of "Works Contract Service" defined in Section 65(105)(zzzza) of the Act, in view of the exclusionary clause in the provision;

(ii) Turnkey/ EPC project contracts, enumerated in clause (e), Explanation (ii) in Section 65(105)(zzzza) of the Act is a descriptive and ex abundant cautela drafting methodology. In the light of the decision in Alstom Projects India Ltd., fortified by the Special Bench decision (dated 19.03.2015) in Larsen & Toubro Ltd. reference, a turnkey/ EPC contract is taxable prior to 01.06.2007 as well. On and since 01.06.2007, turnkey/ EPC contracts must be classified on the basis of the essential character of the service provided thereby, with the aid of classification guidelines set out in Section 65A(2) of the Act. Consequently, a turnkey/ EPC contract must be classified under any of the clauses (a) to (d), Explanation (ii), Section 65(105)(zzzza). The bundled bouquet of services provided as turnkey/ EPC contract, classifiable as Commercial or Industrial Construction Service (CICS) prior to 01.06.2007, would be classifiable under clause (b), Explanation (ii), Section 65(105)(zzzza) on and from 01.06.2007 and would not be exigible to service tax if the rendition of service thereby is primarily for non-commercial, non industrial purpose, in view of the exclusionary clause in clause (b) of the definition of WCS.

This is the only possible and harmonious interpretation possible of the several clauses under Explanation (ii) of Section 65 (105)(zzzza), a distinct taxable service defined with constituent elements thereof substantially drawn from elements of pre-existing taxable services like ECIS, CICS or COCS; and other services when bundled to amount to turnkey/ EPC;

(iii) Construction of canals/ pipelines/ conduits to support irrigation, water supply or for sewerage disposal, when provided to Government/ Government undertakings would be for non-commercial, non-industrial purposes, even when executed under turnkey/ EPC contractual mode and would fall within the ambit of clause (b), Explanation (ii) of Section 65(105)(zzzza); and would consequently not be exigible to service tax, in view of the exclusion enacted in clause (b); and

(c) Issue (E): Where under an agreement, whether termed as works contract, turnkey or EPC, the principal contractor, in terms of the agreement with the employer/ contractee, assigns the works to a sub-contractor and the transfer of property in goods involved in the execution of such works passes on accretion to or incorporation into the works on the property belonging to the employer/ contractee, the principal contractor cannot be considered to have provided the taxable (works contract) service enumerated and defined in Section 65(105)(zzzza) of the Act.

(See 2015-TIOL-768-CESTAT-BANG-LB)