M/s. Larsen & Toubro Limited vs Commissioner Of GST & Central Excise

P. Dinesha, Member (J)

Facts that emerge from the impugned order in original are that the appellant is a public limited company rendering a number of services including that of erection, commissioning or installation services. It is the case of the revenue that it was gathered from its intelligence that the appellant had wrongly availed the benefit of abatement under Notification No. 1/2006 dated 01.03.2006 and upon further verification of their ST-3 returns, they appear to have noticed various discrepancies as depicted under paragraph 2.0 of the Order in Original (‘OIO’ for short). There, reference is made to four work orders and the job description has also been mentioned, against each of the work order.

It appears that subsequently, statement of various employees of the assessee company were recorded and consequently, a show cause notice dated 23.04.2012 was issued proposing to demand service tax for the period October 2006 to September 2011 by extending the period of limitation within the meaning of Section 73 (1) of the Finance Act, 1994, along with applicable interest under Section 75 ibid, and of penalty under Sections 76, 77 and 78 ibid.

It appears from the record that the assessee /appellant filed its detailed reply to the above show cause notice issued to it, thereby explaining the scope of various contracts and the role of the appellant and there-in. It appears from paragraph 3.0 of the Order in Original that the appellant claimed that the scope of contract included supply of goods involved in the execution of contracts and that it involved transfer of property in those goods as well, which amounted to deemed sale. In this regard, they appear to have enclosed supporting evidences in the form of copies of TDS certificates issued by the contractor, i.e., NPCIL, under section 13 of the TNVAT Act, 2006.

It was claimed by the assessee that their claim for the benefit of Notification No. 1/2006 supra was in order. It was also contended by them that the show cause notice as issued to was barred by limitation within the meaning of Section 73 (1) since the turnover stood duly reported in their ST-3 returns filed, wherein they had exercised their option of abatement right from the commencement of the contracts in question, from 2004 onwards.

The original authority appears to have considered the claims of the appellant during adjudication; at 6.3 of the OIO, relevant portion of one of the contracts has been reproduced and specifically at clause 3.1, it is clearly mentioned that the rates quoted were for the work including material cost, other than those materials supplied by the contractor. Further, at paragraph 6.4 of the OIO, the original authority categorically records that all the other three contracts entered into with NPCIL were almost identical, from where it was clear to him that supply materials was also involved and the assessee had charged NPCIL for the material supplied as well as for the labour work and hence, the authority has drawn a conclusion that the contracts in question were not a pure labour contract.

The original authority refers to the scope of contracts at para 7.5, mentioned as the contract profile wherein he has opined that contracts M2, M4 and M5 were mainly for erection of pipelines, handling, transporting, pre-fabricating, welding and testing.

With regard to the other contract E1, which was for erection, commissioning of all electrical system equipments and supply of electrical equipment, only 25% of the contract was held to be composite in nature, while 75% was for Service. Thereafter, reference is made to Notification No. 1/2006 and it was observed by the authority that as per the said Notification, erection, commissioning or installation agency could avail exemption of 67% of the service tax, but the liability to pay service tax on 33% of the gross amount would be there. The authority then records the conditions for availing the exemption under the said Notification and thereafter, he compares the case of the assessee with the requirements of Notification supra and then holds that contracts M2 M4 and M5 were purely service contracts where the dominant nature of contract related to services; in respect of contract E1, it was held that the assessee had supplied some electrical equipment system in addition to providing erection service and hence, only 25% of this contract was composite in nature. It was thus concluded by the authority that the assessee had not fulfilled the description of ‘taxable service’ under the above Notification, to be eligible to avail the benefit of the same, but however, holds that the assessee was eligible for abatement in the respect of the value of electrical equipment systems supplied by it. Finally, after distinguishing the judicial precedents, vide OIO confirms the demands that were proposed in the SCN.

It is against the said OIO that the present appeal has been filed before this Forum.

We have heard Shri Raghavan Ramabadran, Ld. Advocate for the appellant and Shri M. Ambe, Deputy Commissioner and Shri Harendra Singh Pal, Ld. Asst. Commissioner, for the Respondent revenue. We have perused the documents placed on record and we have also gone through the decisions / orders relied upon during the course of arguments.

After hearing the rival contentions, we find that the only issue that arises for our consideration is, “whether the contracts entered into were in the nature of works contracts, and if so, whether they are divisible in nature?”

Impugned order reveals that all the work orders/contracts involved supply of materials, though it has been concluded therein that the same was very much to a lesser extent.

Works contract service was brought within the tax net w.e.f. 01.06.2007 with the insertion of Section 6 5 (105) (zzzza) to the Finance Act, 1994. The statute does not qualify the liability to tax or otherwise, on any conditions, in the case of composite contracts like the extent of supply portion or the service portion, which according to us is like attempting to vivisect/dissect the understanding of the parties to the contract, which is not permissible. This has been held so by the Apex court in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India 2006 (2) S.T.R.161 (SC). In the case on hand, the Ld. original authority has precisely done that and has upheld the tax demand on the appellant. The appellant’s contention as to them paying applicable VAT on the sale portion duly supported by documentary evidence seems to have been overlooked by the adjudicating authority. When the said evidences are considered, the same not only proves that the case of the appellant involved composite & indivisible contracts, but also establishes the fact that the sale involved in the transfer of goods/materials had suffered State tax.

Looked from this perspective, we are of the view that since the period involved in this appeal is from October 2006 to September 2011 which is prior to 01.07.2012 which is the date of insertion of explanation to Section 65B, the composite contracts involved in the present appeal were not amenable to service tax, as per the law laid down by the Apex court in the case of CCE Vs. Larsen & Toubro Ltd., reported in 2015 (8) TMI 749 [SC]. We find that the dictum in the above decision has been consistently followed by all the CESTAT benches, in the orders relied upon by the appellant during the course arguments before us.

In view of the above discussion, we are of the view that the demand in the present appeal is clearly unsustainable and consequently, we set aside the impugned order and allow the appeal with consequential benefits if any, as per law.