Erection, Commissioning and Installation Services & Service Tax in India: A Critical Analysis

Erection, Commissioning and Installation Services & Service Tax in India: A Critical Analysis

Introduction

Erection, commissioning and installation (ECI) services constitute a crucial segment of India’s infrastructure and industrial growth. Their tax treatment under the Finance Act, 1994 has, however, witnessed persistent controversy, particularly before 1 June 2007 when “works contract service” (WCS) was introduced as a distinct taxable category. This article critically examines the evolution of service-tax liability on ECI services, analyses the Supreme Court’s landmark ruling in Commissioner, Central Excise & Customs, Kerala v. Larsen & Toubro Ltd.[1] (L&T) and evaluates subsequent jurisprudence and administrative circulars.

Legislative Framework

Statutory Provisions Prior to 1 June 2003

Service tax was originally levied via section 66 of the Finance Act, 1994. ECI services were not expressly covered until Notification No. 12/2003-ST introduced section 65(105)(zzd) with effect from 1 July 2003, defining taxable service as “any service provided to any person by a commissioning and installation agency in relation to erection, commissioning or installation”.

Definitions Introduced in 2004

On 10 September 2004, clause (39a) was inserted in section 65 to define “erection, commissioning or installation” with an exhaustive list of illustrative activities (plant, machinery, electrical devices, HVAC, etc.).[2]

Introduction of Works Contract Service (1 June 2007)

Section 65(105)(zzzza) created a separate taxable category for composite contracts involving transfer of property in goods. Rule 2A of the Service Tax (Determination of Value) Rules, 2006 and the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 supplied valuation machinery.

Judicial Trajectory

Pre-2007 Conflicts

  • Kerala State Electronics Development Corporation[3]: CESTAT held erection/commissioning charges were not part of excisable “transaction value” of machinery, emphasising their separate treatment under service tax.
  • Nagarjuna Construction Co. (AP HC 2010)[4]: Struck down CBEC Circular No. 98/1/2008-ST to the extent it suggested vivisection of composite contracts into ECI, CCC or complex construction services prior to 2007.
  • Vanguard Rolling Shutters[5]: CESTAT underscored that for classification as WCS under section 65(105)(zzzza) there must be transfer of property in goods leviable to VAT, reinforcing the dichotomy between pure-service ECI and composite contracts.

The Supreme Court’s Decisive Intervention: L&T

The Supreme Court, relying heavily on Gannon Dunkerley (1959) and the 46th Constitutional Amendment, held that:

  • The Finance Act, 1994, prior to 1 June 2007, contained neither charging nor machinery provisions enabling levy of service tax on indivisible works contracts.[1]
  • Composite/indivisible contracts could not be vivisected into notional service and goods components in the absence of statutory mechanism.[6]
  • Consequently, demand of service tax under the heads ECI, commercial construction or consulting engineer for such contracts was unconstitutional.

Post-L&T Developments

  • Sheth & Sura Engineering (Bom HC 2017)[7]: Set aside CESTAT’s reliance on pre-L&T larger-bench ruling; confirmed that works contracts could not be taxed by splitting into ECI components before 1 June 2007.
  • Ajay Machine Tools (CESTAT 2017)[8]: Allowed appeal where abatements assumed material transfer; held composite contracts taxable only from 1 June 2007 pursuant to L&T.
  • Mega Power Transmission (CESTAT 2019)[9]: Affirmed liability of pure-service ECI provider registered since 2005; distinguished composite WCS from stand-alone ECI projects.
  • Indian Telephone Industries (CESTAT 2018)[10]: Applying TRU Circular 123/5/2010, held trenching and cable-laying outside ECI scope; demand set aside.

Key Doctrinal Issues

1. Charge-Machinery Nexus

Following Mathuram Agrawal v. State of M.P. (1999), a taxing statute must prescribe both incidence and computation. L&T extends this to service tax: without Section 67 and Rule 2A-type machinery, levy fails.

2. Characterisation of Contracts

The test is whether the contract is pure service (labour-dominant ECI) or composite. Evidence of VAT payment, separate supply contracts, and billing patterns are determinative.[5]

3. Constitutional Demarcation

Article 246 read with Lists I & II forbids overlapping fiscal powers. By taxing the entire value of composite works under ECI, the Centre would trench upon States’ power to tax sale of goods (Entry 54, List II), a mischief remedied by the 2007 amendment.

4. Circulars versus Statute

CBEC circulars (e.g., 96/7/2007-ST; 98/1/2008-ST) are advisory; if contrary to statutory interpretation by courts, they yield. Multiple benches (e.g., Nagarjuna Construction, Peekayam Engineers[11]) have disregarded circulars inconsistent with L&T.

Sector-Specific Illustrations

Transmission Lines & Power Projects

In Mega Power Transmission, the tribunal upheld tax liability where the assessee collected service tax under ECI but failed to file returns, demonstrating that self-assessment binds even pre-2007 if contract is service-centric.

Water Supply & Civil Infrastructure

Surindra Engineering[12] and Mackintosh Burn[13] recognise that laying pipelines or border fencing for non-commercial governmental purposes is not “commercial or industrial construction”; neither is it ECI where the dominant objective is public utility.

Manufacturing Sector Installation

Silvasa v. Alidhra Textool[14] reiterates that where sale price of machinery includes installation but central excise duty is paid on composite value without segregation, subsequent attempt to extract service tax under ECI is impermissible prior to 2007.

Practical Implications

  • Assessment Strategy: Assessees must segregate contracts, document material transfer, and, where composite, opt for WCS (now subsumed under GST).
  • Refunds & Litigation: Amounts paid under protest for pre-2007 periods are refundable, subject to limitation, as seen in Service Tax 2149/2012[15].
  • GST Era Relevance: Section 7(1A) of the CGST Act and Schedule II continue the principle established in L&T: works contracts relating to immovable property are treated as supply of services.

Conclusion

The jurisprudence on ECI services underscores a fundamental lesson in fiscal federalism: legislative clarity is indispensable to valid taxation. The Supreme Court’s verdict in L&T curtailed administrative overreach and preserved the constitutional balance between union and state taxing powers. While post-2007 amendments and the advent of GST have largely resolved the charge-machinery lacuna, historical disputes continue to surface in appellate fora. Practitioners must therefore scrutinise contractual architecture, statutory timelines, and judicial guidance to evaluate tax exposure accurately.

Footnotes

  1. Commissioner, Central Excise & Customs, Kerala v. Larsen & Toubro Ltd., (2016) 1 SCC 170.
  2. Finance (No. 2) Act, 2004, s. 85; Finance Act, 1994, s. 65(39a).
  3. Kerala State Electronics Development Corporation v. CCE, 2007 (139) ELT 170 (CESTAT).
  4. Nagarjuna Construction Co. Ltd. v. Union of India, 2010 SCC OnLine AP 402.
  5. Vanguard Rolling Shutters v. CST, 2014 (35) STR 113 (CESTAT).
  6. Builders’ Assn. of India v. Union of India, (1989) 2 SCC 645; Kone Elevator (P) Ltd. v. State of T.N. (2014) 7 SCC 1.
  7. Sheth & Sura Engineering Pvt. Ltd. v. Union of India, 2017 SCC OnLine Bom 8998.
  8. Ajay Machine Tools v. CCE, 2017 (52) STR 65 (CESTAT).
  9. Mega Power Transmission Ltd. v. CCE, 2019 (28) GSTL 113 (CESTAT).
  10. Indian Telephone Industries Ltd. v. CGST & CE, 2018 SCC OnLine CESTAT 434.
  11. Peekayam Engineers v. CCE, Nagpur, 2017 (52) STR 289 (CESTAT).
  12. CCE, Mumbai v. Surindra Engineering Co. Ltd., 2014 (34) STR 610 (CESTAT).
  13. Mackintosh Burn Ltd. v. CCE, 2015 (39) STR 1120 (CESTAT).
  14. Silvasa v. Alidhra Textool Engineers Pvt. Ltd., 2022 (60) GSTL 201 (CESTAT).
  15. CESTAT Final Order in Service Tax 2149 of 2012 (2017).