C.C.E. & S.T.-Surat-i VERSUS L & T Mhps Boilers Private Limited

Customs, Excise & Service Tax Appellate Tribunal West Zonal Bench At Ahmedabad

REGIONAL BENCH- COURT NO.3

Excise Appeal No.11152 of 2019

(Arising out of OIO-SUR-EXCUS-000-COM-028-18-19 dated 07/03/2019 passed by Commissioner ( Appeals ) Commissioner of Central Excise, Customs and Service Tax- SURAT-I)

 

C.C.E. & S.T.-Surat-i

VERSUS

L & T Mhps Boilers Private Limited

 

APPEARANCE:

Shri Ghanasyam Soni, Additional Commissioner (AR) for the Appellant Shri P.K. Sahu, Advocatefor the Respondent

CORAM: HON’BLE MEMBER (JUDICIAL), MR. RAMESH NAIR HON’BLE MEMBER (TECHNICAL), MR. C L MAHAR

Final Order No. A/ 10855 /2023

 

 

 

 

RAMESH NAIR

DATE OF HEARING: 02.03.2023 DATE OF DECISION:10.04.2023

 

 

This appeal is directed against Order-In-Original No. SUR-EXCUS-000- COM-028-18-19 dated 07.03.2019 passed by the Principal Commissioner of GST and Central Excise whereby, the learned Principal Commissioner dropped the proceeding of the show cause notice dated 07.03.2018. In the show cause notice, the case of the department is that the respondent has provided the works contract service under Composition Scheme in terms of Works Contract Service (composition scheme for payment of service tax) Rules, 2007 read with Rule 2A of Service Tax (Determination of Value) Rules, 2006 as provided under Explanation (ii) of Rule 2A of Service Tax (Determination of Value) Rules, 2006. The respondent availed the cenvat credit in respect of input service however, they have not availed the cenvat credit in respect of any inputs used in relation to the said works contract service. The respondent have paid VAT to the state government on a deemed sale value of the goods.

2. The case of thedepartment is that the portion of the value of the product which represent the value of deemed sale of goods which is exempted service accordingly, the common input service used for the entire

 

products is excluded under Works Contract Service shall attract Rule 6(3A) of Cenvat Credit Rules, 2004 which prescribes reversal of proportionate cenvat credit attributed to the exempted service accordingly, the show cause notice proposed demand of proportionate cenvat credit attributed to the value of deemed sale in the execution of works contract service. The adjudicating authority after detailed analysis of the legal provision concluded that the revenue has fallen short of establishing renting of exempted service or non-service activity by the noticee during the relevant period so as to attract the mischief of Rule 6(3) of Cenvat Credit Rules, 2004 and held that the denial of cenvat credit in the instant proceeding is not maintainable. Being aggrieved by the Order-In-Original, the revenue has filed the present appeal.

3. Shri Ghanasyam Soni, learned Additional Commissioner (AR)appearing on behalf of the revenue reiterates the grounds of appeal and submits that there is no dispute that during execution of Works Contract, there is a portion of sale of goods on which the respondent have paid the VAT. This portion of the contract is clearly sale of goods which falls under the exempted service therefore, Rule 6 (3A) of Cenvat Credit Rules, 2004 is clearly applicable according to which the respondent is liable to reverse the proportionate cenvat credit attributed to the exempted service i.e. sale of goods hence, the adjudicating authority is wrong in holding that Rule 6(3) has no application in the present case.
4. Shri P K Sahu, learned counsel appearing on behalf of the respondent reiterates the finding of the order of the adjudicating authority. He submits that the contract is a composite contract and there is no bifurcation of service and sale of goods under the VAT provision. It is only the deemed fictionfor charging the VAT under State VAT Act but there is no physical sale of goods. He submits that the Explanation (ii) of Rule 2A of Service Tax (Determination of Service Rules) 2006 clearly provides that the assessee is eligible to take the cenvat credit in respect of input service, whereas no service tax credit was allowed in respect of inputs. For this reason the deemed sale cannot be treated as exempted service.
   • He further submits that Rule 2A of Service Tax (Determination of Value) Rules, 2006 provides the mechanism for determining value of service portionof execution of Works  The amount is computed by reducing the contract price by the value of the goods transferred. Explanation (ii) to Rule 2A prohibits the assessee from taking cenvat credit of duties or cess

 

paid on input used in or in relation to the Works Contract, this prescription for reduced taxable value has barred taking cenvat credit on inputs. He submits that since Rule 2A of the Valuation Rules is such a special provision as has referred to in Explanation to Rule 3 of Cenvat Credit Rules, the formula prescribed in Rule 6(3A) shall not apply. He further submits that the Works Contract is exposed to multiple taxation including the complexity of deemed sale under article 366 (29A) of Constitution. The government through Rule 2A of the Valuation Rules has provided a rough and rapid method of taxing works contracts where the contractor has to pay sales tax on the value of the goods treating its incorporation in the works as deemed sale. Rule 2A is a self contained code, in this partial exemption is given prescribing of deemed taxable value which is less than the Works Contract Service. Since the taxable value has been worked out considering the denial of cenvat credit on inputs, there is no necessity for proportionate reversal as prescribed in Rule 6(3A). Proportionate reversal apply only when the assesse pays full tax on the entire transaction value and has taken input credit on all inputs and input service.

• He further submits that the show cause notice was issued by Commissioner (Audit) Surat who has no jurisdiction to issue a show cause notice nor has legal authority to assign the adjudication of the noticee to the jurisdictional Commissioner Surat having jurisdiction over the respondent.He also submits that in the present case there is no evidence of any suppression or mis-statement of facts with an intent to evade payment of service tax warranting invocation of proviso to Section 73(1) of the Finance Act, 1994 and imposition of penalty therefore, the demand for the extended period is also not maintainable on limitation. He placed reliance on the following judgments:-
  • UBEngineering  Vs. CCE, 2015 (37) STR 999
  • Interarch Building Products P.Ltd. Vs. CST, 2018 (10) GSTL 330 (Tri.- All)
  • Indure Vs. CTO, (2010) 3 SCC (Civ) 826
  • BSES Vs. Fenner India Ltd.- 2006 (2) SCC 728
  • GEOMILLER &  (P) Ltd. Vs. State of M.P.- 2004 (5) SCC 209
  • SUSHILAGARWAL  COMMISSIONER OF CUSTOM, 2012 (283) ELT

377 (Tri.-Mumbai)

• CANONINDIA  Vs. COMMISSIONER OF CUSTOMS, 2021 (376) ELT 3 (SC)

 

5. We have carefully considered the submissions made by both the sides and perused the records. We find that the show cause notice proposing demand of cenvat credit attributed to the value of deemed sale of goods involved in composite Works Contract service provided by the respondent on the pretext that the said portion of sale of goods is deemed exempted service therefore, the common input service used in service portion as well as sale of the goods would disentitle the cenvat credit of input service to deny proportionate cenvat credit attributed to the sale of goods. We findthat the respondent are not involved in two separate activity of providing Works Contract Service and sale of goods. Respondent have provided a composite Works Contract Service, in the provision for taxation of Works Contract Service under the Finance Act, 1994 a special mechanism was provided by the legislator under Works Contract (composition scheme for payment of service tax) Rules, 2007 and the valuation of the same was provided under Rule 2A of Service Tax (Determination of Value) Rules,  The relevant portion of both the rules are reproduced below:-

Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007

 

In exercise of the powers conferred by sections 93 and 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely :-

 

1. Shorttitle and  – (1) These rules may be called the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

 

(2) They shall come into force with effect from the 1st day of June, 2007.

 

2. – In these rules, unless the context otherwise requires, –

 

• “Act”means the Finance Act, 1994 (32 of 1994);

 

• “section”means the section of the Act;

 

• “works contract service” means services provided in relation to the executionof a works contract referred to in sub-clause (zzzza) of clause

(105) of section 65 of the Act;

 

• words and expressions used in these rules and not defined but defined in the Act shall have the meanings respectively assigned to them in the Act.

 

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 service 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 two per cent. of the gross amount charged for the works contract.

 

Explanation. – For the purposes of this rule, gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.

 

• Theprovider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

 

• The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.

 

 

 

RULE [2A. Determination of value of service portion in the execution of a works contract. — Subject to the provisions of section 67, the value of service portion in the execution of a works contract, referred to in clause (h) of section 66E of the Act, shall be determined in the following manner, namely :-

 

• Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods [or in goods and land or undivided share ofland, as the case may be] transferred in the execution of the said works

 

Explanation. – For the purposes of this clause,-

 

• gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;

 

• valueof works contract service shall include, –

 

• labourcharges for execution of the works;

 

• amountpaid to a sub-contractor for labour and services;

 

• chargesfor planning, designing and architect’s fees;

 

• chargesfor obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

 

• costof consumables such as water, electricity, fuel used in the execution of the works contract;

 

• costof establishment of the contractor relatable to supply of labour and services;

 

• other similar expenses relatable to supply of labourand services; and

 

• profit earnedby the service provider relatable to supply of labour and services;

 

• where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause;

 

• Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely :-

 

• in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent of the total amount charged for the works contract;

 

[Provided that where the amount charged for works contract includes the value of goods as well as land or undivided share of land, the service tax shall be payable on thirty per cent. of the total amount charged for the works contract.]

 

[(B) in case of works contract, not covered under sub-clause (A), including works contract entered into for, –

 

• maintenance or repair or reconditioning or restoration or servicing of any goods; or

 

• maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property,

 

service tax shall be payable on seventy per cent. of the total amount charged for the works contract.]

 

Explanation 1. – For the purposes of this rule,-

 

• “originalworks” means-

 

• allnew constructions;

 

• alltypes of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

 

• erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

 

• “total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services suppliedin or in relation to the execution of the works contract, whether or

 

not supplied under the same contract or any other contract, after deducting-

 

• theamount charged for such goods or services, if any; and

 

• thevalue added tax or sales tax, if any, levied thereon :

 

Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.

 

Explanation 2. – For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.]

 

[(2) Where the value has not been determined under sub-rule (1) and the gross amount charged includes the value of goods as well as land or undivided share of land, the service tax shall be payable on twenty-five per cent. of the gross amount charged for the works contract, subject to the following conditions, namely :—

 

• the CENVAT Credit of duty paid on inputs or capital goods or the CENVAT Credit of service tax on input services, used for providing such taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004;

 

• the service provider has not availed the benefit under the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 12/2003-Service Tax, dated the 20th June, 2003 [G.S.R. 503(E), dated the 20th June, 2003].

 

Explanation. – For the purposes of this sub-rule, the gross amount charged shall include the value of goods and materials supplied or provided or used for providing the taxable service by the service provider

 

From the plain reading of Works Contract Rules, 2007, it is clear that it is one single service i.e. Works Contract Service which is defined under special clause (zzzza) of Clause (105) of Section 65 of the Finance Act, 1994 according to which the assesse has option if they opt for this scheme, they are liable to pay the concessional rate of service tax which is equivalent to 2% (upto 28.02.2008)/4% (with effect from 01.03.2008). As per this provision, the assesse is required to pay the service tax of 2%/4% on the entire value of works contract which includes the use of goods for providing Works Contract Service also therefore, it is only one service i.e. Works Contract Service on which the concessional rate of service tax is provided. The Works Contact Service cannot be vivisected between service portion and the goods.

 

5.1 As regard the valuation for the purpose of payment of VAT, it is a deemed fiction which does not represent the exact value of the goods moreover, when there is a composite contract between service provider and service recipient, the service recipient is not concerned with the proportion of the material used in the works contract whereas, he is only concerned with the overall project to be executed as per the terms and conditions of the contract between the service provider and the recipient. There is no separate activity of sale of goods involved, it is only for the purpose of VAT portion of the total value of the project under Works Contract as determined as deemed sale of goods. In fact, no separate sale of goods is involved, no separate invoice of goods is made therefore, infact no sale of goods is involved in the execution of the overall project under Works Contract Service. This is simpliciter case of a particular service on which there is a concessional rate of service tax is prescribed subject to certain conditions. If the department’s contention is accepted then in every exemption notification where the concessional rate is provided in that case, the differential value attributed to the exempted portion of the tax rate will be treated as exempted and Rule 6(3A) can be made applicable which is not the law exists. Rule 6(3A) is applicable only in such cases where one particular activity either service as a whole or sale of goods as whole is involved apart from independent taxable service/dutiable goods. Here, there are no two activities i.e. exemption service as well as taxable service which involve therefore, in the present case Rule 6(3A) cannot be made applicable. It is also pertinent to note that the legislator keeping carefully in view that the concession is provided keeping in mind that the goods portion should not be taxed does not allow the cenvat credit in respect of inputs in terms of Explanation (ii) to Rule 2A of Service Tax (Determination of Value) Rules, 2006. It is also pertinent that under the Works Contract service, the legislators consciously keeping in mind the deemed sale of goods portion of the whole contract, explicitly provides for allowing the cenvat credit on input service. For this reason also the said cenvat credit on input service cannot be varied or denied by way of application of Rule 6 (3A) of Cenvat Credit Rules, 2004. The learned Commissioner in the adjudication order after analysis of the legal provision gave the following finding for dropping proceeding of the show cause notice.

3. I have considered the records of case and defence submissions at length. It is undisputed that M/s L&T-MHPS is an EPC contractor executing the erection of boilers meant for thermal power plants andsuch activity of erection of boilers qualified as ‘works contract service

 

during the relevant period. It is narrated in the show cause notice that M/s L&T- MHPS was providing ‘works contract’ service and paying service tax after deducting from gross charges the value of property in goods transferred to its customers in terms of rule 2A(i) of the Valuation Rules. Reference is made to section 66E(h) of the Act which provided that “service portion in the execution of a works contract” will constitute “declared service”. The show cause alleges that ‘supply of goods’ as part of the works contract constituted an activity that was either not a “service” or was an “exempted service”, accordingly M/s L&T-MHPS was required to follow the provisions of rule 6 of the Credit Rules and failed to discharge liability under rule 6(3) of the Credit Rules and for violation of the said provisions the cenvat credit availed on common input services was not admissible. In other words, the dispute is whether.- (i) M/s L&T- MHPS provided “exempted service” and (ii) availed cenvat credit on common input services that were used for “taxable” as well as “exempted service. The act of ‘transfer of property in goods’ as part of “works contract is sought to be held as an activity that was either not a taxable “service” or was an “exempted service”. The noticee has canvassed that, its works contract can be vivisected into three parts i.e.

(i) off shore supply (imported goods & material), (ii) on shore supply (domestic goods and material) and (iii) services; the transfer of title in goods entailed VAT liability; service tax was paid on works contract service by excluding the value of goods as per rule 2A(i) of the Valuation Rules; it did not engage in trading of goods as supply of goods & material was integral to the works contract; it did not provide any exempted services to attract the bar of rule 6 of the Credit Rules; the input services were in relation to the taxable works contract service; value of input services was included in the service portion of the contract that was subjected to service tax; the value of such input services was not included in the value of goods/material subjected to VAT. The scope of works, as demonstrated through sample contracts, involved supply, erection, testing and commissioning of supercritical steam generators with associated auxiliaries for mega power projects on EPC Turnkey basis. This comprised supply of offshore goods (imported), supply of on- shore goods (domestic), services relating to erection and civil works. The scope of work also includes complete design, engineering. manufacture, supply, transportation to site, installation/ erection, testing, commissioning. trial operation, conduct of performance guarantee tests, operational acceptance and final taking over, mandatory spares including start up and commissioning spares, including type tests, associated structural & architectural works, customs clearance, stores management, etc. I find that the noticee has rendered ‘works contract’ service and as part of execution of such works contract, ‘property in goods & materials’ have been transferred to service receivers as the same is treated as “deemed sale” under the law and attracts VAT. The show cause notice is treating the activity of deemed supply of goods and material in the course of execution of works contract as akin to trading of goods i.e. an activity not amounting to service or amounting to ‘exempted service’. The demand is based on plank that input services were commonly used for taxable and exempted services and such a situation attracted the provisions of rule 6(3) of the Credit Rules that was not complied with by the noticee. On examination of the material available on records, I find that the legal position is very clear that ‘transfer of property in goods’ as part of “works contract” activity is treated as “deemed sale” i.e. by a

 

fiction created in law. It is well settled law that such fiction in law has a limited purpose as defined in the relevant statute. The fact of deduction of value of goods & material from the gross value of works contract & charge of VAT on such value as the same is considered as “deemed sale” ipso facto would not lead to the conclusion that noticee undertook activity of supply of goods and material. The scope of works, as demonstrated through sample contracts, involved designing, supply, erection, testing and commissioning of supercritical steam generators with associated auxiliaries for mega power projects on EPC Turnkey basis. It is demonstrated through documentary evidence ie contracts that supply of goods and material is intrinsic part of the ‘works contract undertaken by the noticee. The method of valuation, i.e. exclusion of value of goods subjected to VAT by treating the same as “deemed sale”, cannot change classification of the service rendered by the noticee. The deeming provisions have limited scope as enunciated in the law and may not be permitted to travel beyond the given scope. I find that the issue of valuation is incompliance with the applicable rules and laws. The material presented by the notice; e.g NTPC contract dated 07.10.2014 for Tanda Thermal Power Project, L& T contract dated 22.10.2014 for Shri Singaji TPP Khandwa & L& T contract dated 22.10.2014 for STPP Khargone and the relevant bills raised by the noticee; demonstrate that charges for GTA services for transport of goods have been included in the service portion of the agreement and accordingly included in taxable value subjected to service tax. Similarly, cost of IPR services have been included in the taxable values. The activity of “works contract” inherently includes ‘transfer of property in goods’ on account of the legal fiction of “deemed sale”. The activity of “works contract” is unambiguously specified as a taxable activity. There is no dispute about payment of service tax on “works contract” service. The law is well settled that determination of “taxable value’ and determination of ‘taxable activity’ operate in distinct terrains. In the given facts and circumstances, I find and hold that revenue has fallen short of establishing rendering of “exempted services” or non-service activity by the noticee during the relevant period so as to attract the mischief of rule 6(3) of the Credit Rules. On consideration of all relevant facts, material available on records and relevant statutory provisions, I hold that the impugned denial of cenvat credit in the instant proceedings is not maintainable. The questions of charge of interest and penalty are rendered redundant in such a situation. The instant proceedings, initiated vide show cause F.No. V(a)/ST/31/Commr/Srt- Audit/17-18 dated 07.03.2018, are hereby dropped and vacated.

4. This order is issued without prejudice to any other action that may be taken against the noticee under the Finance Act. 1994 and the rules framed there under or under any other law for the time being in force in

 

6. As per our above discussion, we are of the clear view that the order does not suffer from any infirmity. Hence, the same is liable to be sustained accordingly, we uphold the impugned order and dismiss the revenue’s

(Pronounced in the open court on 10.04.2023 )

 

(RAMESH NAIR) MEMBER (JUDICIAL)

 

 

 

 

Mehul

(C L MAHAR) MEMBER (TECHNICAL)