No direct decision in favour of Revenue for levy of service tax on the service component of a works contract prior to 1-6-2007
There is no” direct decision in favour of the Revenue for levy of service tax on the service component of a works contract prior to 01/06/2007. On the other hand, the judgment of the Hon’ble High Court in Indian National Shipowners ‘Association case is directly against the Revenue and the same is binding on this Bench of the Tribunal.
CASE LAWS DETAILSI
DECIDED BY: CESTAT, WEST ZONAL BENCH MUMBAI (THIRD MEMBER), IN THE CASE OF: CCE v. Indian Oiltanking Ltd., APPEAL NO: Appeal No. ST/275/06, DECIDED ON January 18, 2010
41. The first question before me is whether the Tribunal’s decision in Daelim ’s case is per incuriam as observed by the learned Member (Technical) or is binding on co-ordinate Benches of the Tribunal as held by the learned Vice President. In that case, a turnkey project of construction, erection and installation of a desulphurisation plant was held to be not liable to service tax in the category of “consulting engineers service” as the contract was found to be incapable of being vivisected into service and sale components. The Special Leave Petition filed by the department against the Tribunal’s decision in Daelim’s case was dismissed by the apex Court vide 2004 (170) ELT A-181 (SC). The view taken in Daelim case was consistently followed by co-ordinate Benches of this Tribunal, for instance, Diebold Systems (P) Ltd. vs. Commissioner (supra). Learned counsel for the respondent has submitted that the ratio of the decision in Diebold Systems case stands impliedly approved by the Hon’ble Bombay High Court in the case of Indian National ship owner’s Association vs. Union of India 2009 (14) STR 289 (Bom). In Diebold J Systems case, it was held that, for the levy of service tax in respect of indivisible works contracts prior to 1/6/2007, there had to be statutory authority in the form of specific entry under Section 65 of the Finance Act, 1994. In that case, by relying on rulings of the apex Court, the Tribunal found that, prior to 01/06/2007, there was no taxable event for levy of service tax on an indivisible works contract. It was held that such a works contract which was introduced as a taxable service for the first time w.e.f. 01/06/2007 was not chargeable to service tax under any pre-existing entry under Section 65 of the Finance Act, 1994. A similar view came to be taken by the Hon’ble High Court in the case of Indian National Shipowners ‘ Association (supra), wherein the dispute involved entries (zzzy) and (zzzzj) under Section 65 (105) of the Act. The Hon’ble High Court found that that the entry (zzzy) which covered services provided to any person in relation to mining of mineral, oil or gas was introduced in June, 2007 and the other entry (zzzzj) was introduced later on w.e.f. 16/05/2008. The Hon’ble High Court held that the introduction of a new entry and inclusion of certain services in that entry would pre-suppose that there was no earlier entry covering such services. Accordingly, the Revenue’s bid to levy service tax on the service covered by entry (zzzzj) for the period prior to May, 2008 under the pre-existing entry (zzzy) was foiled. Paragraphs 37 and 38 of the Hon’ble High Court’s judgment are . usefully reproduced hereunder:
“37. Entry (zzzzj) is entirely a new entry. Whereas . entry (zzzy) covers services provided to any person, in : \ relation toimining of mineral, oil or gas, services ‘. covered by entry (zzzzj) can be identified by the presence of two characteristics namely (a) supply of tangible goods including machinery, equipment and appliances for use, (b) there is no transfer of rightt of possession and effective control of such machinery, equipment and appliances. According to the members of the 1st petitioner, they supply offshore support vessels to carry out jobs like anchor handling, towing of vessels, supply to rig or platform, diving support, fire fighting etc. Their marine construction barges support offshore construction, provide accommodation, crane support and stoppage area on main deck or equipment. Their harbour tugs are deployed for piloting big vessels in and out of .he harbour and for husbanding main fleet. They -give vessels on time charter basis to oil and gas producers to carry out offshore exploration and production activities. The right of possession in and effective control of such machinery, equipment and appliances is not parted with. Therefore, those activities clearly fall in entry (zzzzj) and the services rendered by the members of the 1st petitioner have been specifically brought to the levy of Service Tax only upon the insertion of this new entry.
38. If the Department’s contention is accepted that would mean that the activities of the members of the 1st petitioner are covered by entry (zzzy) and entry (zzzzj). Such a result is difficult to comprehend because entry (zzzzj) is not a specie of what is covered by entry (zzzy Introduction of new entry and inclusion: of certain services in that entry would, presuppose that there was no earlier entry covering the said services. Therefore, prior to introduction of entry (zzzzj), the services rendered by the members of the 1st petitioner were not taxable. Creation of new entry is not by-way of amending the earlier entry. It is not a carve out of the earlier entry. Therefore, the services rendered by the members of the 1st petitioner cannot be brought to tax under that entry.”
42. As rightly pointed out by the learned counsel for the respondent, the view taken by this Tribunal in Diebold Systems case came to be approved by the Hon’ble High Court. It goes without saying that the view taken by the Hon’ble High Court is binding on this Bench of the Tribunal.
43. It has been argued by the learned Special Consultant for the Revenue that the Civil Appeals filed by the department against the Tribunal’s decision in two similar cases of M/s. Larsen & Tuubro Limited, wherein the view taken in Daelim case was followed, were admitted by the apex Court and, therefore, the finality and binding character of Daelim (supra) should be considered to be in jeopardy in terms of the Supreme Court’s ruling in Union of India vs. West Coast Paper Mills Ltd. 2005 (164) ELT 175 (SC). On the other hand, it has been pointed out by the learned counsel that the SLP filed by the . department against the Tribunal’s decision in Daejim case was dismissed by the apex Court. This aspect, I note, was: considered by the Tribunal in Diebold Systems case also. The Tribunal, in that case, noted the brief text of the Supreme Court’s order dismissing the SLP, which reads thus:
“We see no reason to interfere. The Special Leave Petition is dismissed’. This order of the Hon’ble Supreme Court is indicates that the merits of the Tribunal’s judgment were examined by the Supreme Court. In this scenario, I am of the opinion that The view taken by this Tribunal in Daelim case and followed consistently in subsequent cases has the stamp of approval of the apex Court and hence will have binding effect. Coupled with this is the fact that the ratio decidendi of Diebold Systems (supra) has been approved by the Hon’ble High Court in the case 01 Indian National Shipowners Association (supra). At the risk of repetition, I observe that the view taken in Daelim case was followed in Diebold Systems, paragraphs 7 to 9 of which are reproduced below for the sake of clarity:
“7. We have given careful consideration to the submissions of both sides. We note that, in the impugned orders, learned Commissioner himself found the works contracts To be indivisible. He, however, took the view that, by virtue of Notification No. f.9/2003-’ ST., dt. 21-8-2003. service tax could be levied on indivisible works contracts for the period of dispute. This view has been assailed by the assessee on .valid ground. Admittedly, indivisible works contracts’ came to be exigible to service tax for the first time w.e.f. 1-6-2007 only. Prior to that date, such contracts could not be vivisected for the purpose of levy of service tax on the service component. The indivisibility of works contracts for a period prior to 1-6-2007 was declared by this Tribunal in Daelim. case, wherein the company had obtained a contract from M/s. Indian Oil Corporation Ltd. for construction a diesel hydro-desulphurizat ion plant. That contract was on turnkey basis, for which IOC paid a lump sum of about Rs. 185 crores to the assessee. The contract involved residual process design, detailed engineering, procurement, supply, construction, fabrication, erection, installation, testing, commissioning and mechanical guarantee. The department, in a SCN, asked the assessee to pay service tax on residual process design and detailed engineering in the category of ‘consulting engineers’ service’. This demand was contested Dy the party. After examining the terms and conditions of the” contract, the Tribunal’ found that assessee’s contract with IOC was a works contracts on turn key basis and not a consultancy contract. Further, it was held that a works contract could not be vivisected for a part of it to be subjected to taxation. In the result, the demand of service tax was set aside. The decision of the Tribunal was taken in appeal to the Supreme Court by the department, but their lordships dismissed the department’s S.L.P. thus: “We see no reason to interfere. The Special Leave Petition is dismissed.” [2007 (5) S.T.R. J99 (S.C.) = 2004 (170) £X:T. A181]. The ratio of the decision in Daelim case was followed by .this Tribunal in a series of cases, some of which cited by counsel, have already been noted by us. We find that the Daelim ratio is applicable to the present case also inasmuch as, in the impugned orders, the Commissioner himself has found the works contracts to be indivisible.
8. Inherent in the decision of the Tribunal in Daelim case is a basic concept of taxation, which is the one recognized and declared by the apex court in the case of Govinci Saran Ganga Saran v. Commissioner of Sales Tax & Others, –  60 STC 1 and reads thus •”
“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed, and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”
It was held more or less to the same effect by the apex court in Mathuram Agraival’s case thus:
” The intention of the legislature in a taxation statute lis to be gathered from the language of the .provisions particularly where the language is plain and unambiguous. In a taxing Act it is not ‘ possible to assume any intention of governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter.”
The very first requisite for levy of service tax from the assessee in respect of the works contracts executed by them during the period of dispute is lacking in the present case i.e. the taxable event. Indivisible works contracts like the ones executed by the assessee for the benefit of banks during the said period were not exigible to service tax during that period. Such events became taxable only w.e.f. 1-6-2007. It is no defence for the Revenue to say that ATMs are also equipments and, therefore, the works undertaken by the assessee for the benefit of banks were subject to service tax as ’service provided to a customer by a commissioning and installation agency in relation to commissioning or installation of plant, machinery or equipment’. This is because ATM-related services were introduced only on 1-5-2006 for the purpose of levy of service tax. Introduction of a new entry for the purpose of levy of tax presupposes that it was not covered by any of the pre-existing entries. In other words, in the ever-widening sphere of service tax, addition of an item to the list of taxable services is just an addition, and not a subtraction from a pre-existing entry. This reality was noted by this Tribunal in the case of Glaxo Smith’dine Pharmaceuticals (supra). In that case, certain service rendered by the company was found to be in the category of “Business Auxiliary Service” as claimed by them and not “Management Consultancy Service” as claimed by the Revenue. ‘Business Auxiliary Service’ was introduced in July 2003 when the other service was already on the statute book. After noting that the ” definition of “Management Consultancy Service”,., remained the same even after Introduction of ‘Business -; Auxiliary Service? as a taxable service, the Tribunal rejected the Revenue’s plea that the service provided by the assessee could still be taxed as “Management Consultancy Service” [for the period prior to July 2003. In the present case, the assessee is also supported .by the decision in Widla GMBH case. That company had transferred technology to another company for manufacture of certain tools and parts thereof and had received consideration therefor during 1993-99. The department sought to levy service tax on the amount received by the assessee from their technical collaborators, in the category of “Consulting Engineers’ Service”. The demand was contested by the assessee by submitting that the technology transfer fell within the ambit of “Scientific and Technical Consultancy Service” which was introduced on 16-7-2001 only. T1- contention was accepted by the Tribunal and it was held that, for the period 1993-99. “Scientific and Technical Consultancy Service” would not be taxable as “Consulting Engineers’ Service”. In other words, a service classifiable as “Scientific and Technical Consultancy Service” was held not to be taxed as “Consulting Engineers’ Service” for a period prior to 16-7-2001.
9. The law of taxation does not accept ambiguity. As held by the apex court in the cases of Govind Saran Ganga Saran (supra), and Mathuram Agrawa/(supra) , a taxing statute must clearly and unambiguously lay down the charging provision specifying the taxable event, the person liable to pay the tax and the rate at which he should pay. The taxing event the instant easels, the exdecution of they projects involving sale of ATMs to banks coupled with the incidental activities j of installation, commissioning etc. These projects were executed by the assessee in terms of the purchase orders placed on them by the banks concerned. The payments for these works were made by the banks against invoices raised by the assessee, wherein the gross value was mentioned without segregation of price of ATM, installation/ commissioning and other charges. ‘The lower authority found these projects to be indivisible. These facts are enough for us to hold that there could be no levy 01? service tax on the above works contracts prior to 1-6-2007. In other words, during the period of dispute, the subject events were not taxable in the absence of the requisite charging provision. Charging provisions are to be found in the statute itself and, where there is none in the statute, they cannot be supplemented by Notifications. Notification No. 19/2003-S.T. relied on by the Revenue can have no operation in respect of any service as long as such service does not find a place in the list of taxable services under Section 65 of the Finance Act. 1994. ATM-related services were introduced for the levy of service tax only w.e.f 1-5-2006 and indivisible works contracts like the ones involved in the present case came to be chargeable to £ service tax only w.e.f. 1-6-2007. Thus the subject matter of this case does not attract any of the taxable services for any period prior to 1-5-2006. Ld. SDR has heavily relied on the apex court’s judgment in Kalyana Mandapam case. That decision was not in respect of indivisible works contracts and the same was in the nature of transaction between a mandap-keeper and his customer. We have not found any comparison between such transaction and the one between the assessee and the banks concerned. Again, the above decision of the apex court is not an authority on the proposition ‘hat service tax ! could be levied in respect of indivisible; works contracts on the strength of a Notification issued under Section 93 of the Finance Act, 1994 in the absence of charging provision in the said Act. It is true that, with the insertion of clause (29A) in Article 366 of the Constitution, sales tax could be levied in respect of indivisible works contracts. But. for the levy of service tax in respect of such contracts prior to 1-6-2007, no statutory authority has been cited by SDR.”
44. The learned Special Consultant for the Revenue has pointed out that the principal bench of this Tribunal took contra view in a similar case and referred the issue to a larger bench. He has also produced a copy of the referral order vide 2008-TIOL-1880- CESTAT-DEL. The referring Bench noted inter alia that Daelim was not correctly decided and the finding that a turnkey works contract could not be vivisected required to be reconsidered. It also noted that the summary rejection of the SLP filed by the department against Daelim could not on construed as affirmation of the judgment under challenge. The bench. noted that the dismissal of the SLP only meant that the Supreme Court decline to interfere with the judgment under challenge. As I have already observed, the Hon’ble Supreme Court while dismissing the SLP noted that there was no reason to interfere with the Tribunal’s decision which would indicate that the SLP was dismissed upon appreciation of the merits of the Tribunal’s decision. Therefore, the correctness of at least one of the reasons stated by the referring Bench in the case of Commissioner of Central Excise vs. BSBK Pvt. Ltd. (2008-TIOL-1880- CESTAT-DEL) for reconsideration of the view taken in Daelim case is not beyond doubt. The referring Bench; further, did not have the benefit of considering the Hon’ble Bombay High Court’s judgment in Indian National Shipowners ‘ Association case. In these circumstances, I think, I can proceed to dispose of the present case without waiting for any larger Bench decision based on 2008-TIOL-l 880-CESTAT-DEL.
45. For the reasons already recorded, I hold that the view taken in Daelim case and consistently followed by co-ordinate Benches in numerous subsequent cases including Diebold Systems (supra) is still binding on co-ordinate Benches.
46. The second question is whether service tax could be levied on the service component of the works contract in this case. The works contract was executed long before 01/06/2007, during which period such contracts were not exigible to service tax. Works contract came to be taxable only w.e.f. 01/06/2007. The 46th Amendment to the Constitution was made with intent to enable the States to levy sale tax on ‘He sale component of a works contract. It had a direct bearing on entry 54 of State List of the VIIth Schedule to the Constitution. It has no such bearing either on Entry 97 (residuary entry) or on Entry 92C (service tax) of the Union List. The 46th Constitutional Amendment did not purport to enable the Central Excise authorities to levy any tax on the service component of a works contract. After considering the judgments of the apex Court cited by both sides, I find that there is no” direct decision in favour of the Revenue for levy of service tax on the service component of a works contract prior to 01/06/2007. On the other hand, the judgment of the Hon’ble High Court in Indian National Shipowners ‘Association case is directly against the Revenue and the same is binding on this Bench of the Tribunal. In the result, the second point of difference is also held against the Revenue.
Courtsey : Taxguru201