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Service Tax v. Turbotech Precision Engineering Pvt. Ltd.
Factual and Procedural Background
The revenue appealed against the CESTAT's order (Order-in-Appeal No. 59/2004-ST; Final Order No. 1068/06 dated 15.6.2006) which had allowed the assessee's appeal. The Department alleged that the respondent-assessee (a company registered under the Finance Act, 1994) provided services including design development, design review, installation and commissioning and technology transfer in relation to oil-free compressor systems and thereby fell within the scope of "Consulting Engineer" service under section 65(13) of the Finance Act. A show-cause notice dated 10.10.2002 demanded service tax of Rs. 23,58,008/- plus interest and penalty. The Deputy Commissioner (Service Tax Division) and the Commissioner (Appeals), Bangalore, rejected the assessee's contention that section 65(13) did not apply; the assessee appealed to the CESTAT, which held that the assessee was not liable for service tax, interest or penalty and allowed the appeal. The revenue challenged that CESTAT decision before this Court by raising substantial questions of law.
Legal Issues Presented
- Whether the CESTAT was legal and correct in setting aside the impugned OLA No. 59/2004 dated 14.6.2004 with consequential relief, when the activities undertaken by the respondent came within the ambit of "Consulting Engineer" service, and service tax was levied on design development only.
- Whether the CESTAT was legal and correct in holding that the contracts entered into by the respondents were "works contracts", and hence not leviable to service tax.
- Whether the ratio of decisions relied on by CESTAT applies to the facts of the present case.
Arguments of the Parties
Revenue's Position
- The Department asserted that the respondent rendered services such as design development, design review, installation and commissioning and technology transfer for oil-free compressor systems and therefore fell within the scope of "Consulting Engineer" service under section 65(13) of the Finance Act.
- The Department issued a show-cause notice demanding service tax, interest and penalty for the relevant period and maintained the demand through lower orders which were adverse to the assessee.
Assessee's Position
- The assessee contended that section 65(13) (the definition of "consulting engineer" as it stood during the relevant period) did not apply to the assessee-company and therefore it was not liable to pay service tax.
- The assessee maintained that the payments/contracts during the relevant period could not be taxed as works contracts for the purposes of service tax because the statutory provisions relied upon by the revenue came into effect only later.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CEA 12/2007 on 1 April 2010 | That prior to the Amendment Act 2006, companies were not included under the definition of "consulting engineer" in section 65(13). | The Court relied on this decision to conclude that, for the relevant assessment period, the assessee-company could not be classified as a "consulting engineer" and therefore could not be subjected to service tax under section 65(13). |
Court's Reasoning and Analysis
The Court framed the dispute as two central questions: (1) whether the services rendered by the assessee during the relevant period fell within the definition of "consulting engineer" as per section 65(13) of the Finance Act as it then stood, and (2) whether the contracts executed by the assessee constituted "works contracts" liable to service tax.
On the first question, the Court compared the definition of "consulting engineer" as it existed prior to the 2006 amendment (section 65(13)) and the amended definition introduced by the Finance Act, 2006 (section 65(31) as renumbered). The Court observed that, from a combined reading, services rendered by companies were not included under the pre-2006 definition. The Court expressly relied on its prior decision in CEA 12/2007 (dated 1 April 2010) which held that companies were not covered by the definition of "consulting engineer" before the 2006 amendment. Applying that principle to the facts, the Court concluded that the assessee-company's services during the relevant period could not be classified as "consulting engineer" services and thus could not be taxed under section 65(13).
On the second question, the Court examined the definition of "works contract" as provided in section 65(105)(zzzza) (including its Explanation and sub-clauses such as (a) and (e)). The Court noted that the provision relied upon by the revenue to treat the assessee's contracts as works contracts came into force with effect from 1.6.2007. Since the contracts in the present case related to the period 1997–2001, the Court concluded that the revenue could not validly demand service tax, interest or penalty for that period under the works-contract provisions that took effect only from 1.6.2007.
Having answered both questions in favour of the assessee (that the assessee was not a "consulting engineer" under the pre-2006 definition and that the works-contract provisions relied on were not in force for the relevant period), the Court held that the substantial questions of law framed in the appeal must be answered against the revenue and in favour of the assessee.
Holding and Implications
Holding: The Court answered the substantial questions of law against the revenue and in favour of the assessee and dismissed the appeal.
Implications: As a direct effect of this decision, the revenue cannot demand the service tax, interest or penalty that it sought to recover from the assessee for the relevant period on the bases contended in its show-cause notice (classification as "consulting engineer" under pre-2006 section 65(13), or as a works contract under the provisions that came into force from 1.6.2007). The opinion does not discuss broader legal implications beyond the parties; accordingly, the decision's immediate consequence is the relief to the assessee on the facts and statutory time-frame considered, and the Court did not announce any novel binding principle beyond its application to these facts.
1. The revenue has come up in this appeal being aggrieved by the order of the CESTAT in Order-in-Appeal No. 59/2004-ST in Final Order No. 1068/06 dt. 15.6.2006 raising the following substantial questions of law:
a) Whether, the CESTAT was legal and correct in setting aside the impugned OLA No. 59/2004 dt. 14.6.2004 with consequential relief, when the activities undertaken by the respondent came squarely within the ambit of “Consulting Engineer” service, and service tax was levied on design development only.
b) Whether, the CESTAT was legal and correct in holding that the contracts entered into by the respondents were “works Contracts”, and hence not leviable to service tax.
c) Whether, ratio of decisions relied on by CESTAT applies to the facts of the present case.
2. The facts leading to this case are as hereunder: The respondent-assessee is registered under the provisions of Finance Act 1994. The Department holding that the respondent-assessee is rendering services like, design development, design review, installation and commissioning and technology transfer for study and design of oil free compressor systems, brought the respondent - Company within the scope of “Consulting Engineer” service as per section 65(13) of the Finance Act Accordingly, a show cause notice was issued on 10.10.2002 calling upon the respondent-assessee why a service tax of Rs. 23,58,008/- shall not be demanded from it apart from levying interest and penalty under different provisions of the Act. The respondent contended that they ore not liable to pay the service tax as Section 65(13) of the Act is not applicable to the respondent-assessee. However, the contention of the assessee was rejected by the Deputy Commissioner of Central Excise (Service Tax Division), Bangalore. Being aggrieved by the same, the assessee filed an appeal before the Commissioner of Central Excise (Appeals), Bangalore, which appeal also came to be rejected. Aggrieved by the concurrent findings, a second appeal was preferred before the CESTAT. CESTAT considering the different provisions of law of the Finance Act, came to be conclusion that the assessee is not liable to pay either service tax or the interest or the penalty levied by the revenue. Accordingly, the appeal of the assessee came to be allowed by the Tribunal.
3. Being aggrieved by the same, the present appeal is filed raising the aforesaid substantial questions of law.
4. We have heard the learned counsel for the parties.
5. The main crux of the matter in this case is whether on the date of relevant assessment period the service rendered by the assessee has to be classified under the definition section 65(13), as ‘Consulting Engineer’ and whether the assessee can be brought into tax considering the work executed by the assessee as a Works Contract’.
6. If these two questions are answered in favour of the revenue and against the assessee, the substantial questions of law framed in this appeal are to be answered in favour of the revenue and against the assessee. If the case of the assessee does not fall under section 65(13) of the Act and if the Works contract executed by the assessee during relevant assessment period, cannot be taxed under the Finance Act, then the substantial questions of law framed are to be answered against the revenue and in favour of the assessee.
7. During relevant period, the definition of Consulting Engineer defined under section 65(13) reads as hereunder.
“consulting engineer” means any professionally qualified engineer or an engineering firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering.
Subsequently the definition of Consulting Engineer has been amended under the Finance Act 2006 which has come into effect from 1st May 2006, the definition of which reads as hereunder:
65(31) “consulting engineer” means any professionally qualified engineer of any body corporate or any other firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to any person in one or more disciplines of engineering.
8. From the combined reading of the definition of Consulting engineer prior to 2006 and after 2006, it is clear to the Court that the service rendered by the Company had not been included under the definition of consulting engineer prior to 2006 as it was stood under section 65(13). As a matter of fact, this Court has decided the said point in CEA 12/2007 on 1 April 2010 stating that prior to the Amendment Act 2006, the Companies were not included under the definition of consulting engineer. When we have taken such a view, considering the relevant assessment year in the present case we have to hold that the service rendered by the assesses - Company during relevant period cannot be brought under the category of consulting engineer. If the service rendered by the assessee cannot be considered as a consulting engineer, the question of calling upon the assessee to pay the service tax under the Finance Act, brought the assessee under the word consulting engineer does not arise at all. Therefore, the said point has to be answered against the revenue and in favour of the assessee.
9. So far as the execution of the works contract is concerned, the works contract is defined under section 65(105)(zzzza) which reads as tinder:
(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.
Explanation.- For the purposes of this sub-clause, ‘works contract’ means a contract wherein, -
(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and
(iii) such contract is for the purposes of carrying out,-
(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a pipline or conduit, primarily for the purposes dof commerce or industry; or
(c) construction of a new residential complex or a part thereof; or
(d) completion and finishing services, repair, aleration, renovation or restoration of, or similar services, in relation to (b) and (c); or
(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.
10. This section has come Into force with effect from 1.6.2007, After considering the contract entered into between the assesses and its employer, the case of the assessee falls under section 65(105)(zzzza) Explanation (a) and (e). Even though the assessee's case falls under the definition of Works contract, but the revenue has no power to call upon the assessee to pay service tax, interest and penalty therein, since the provisions of law has come into force with effect from 1.6.2007,
11. In the present case, contract is for the period between 1997 to 2001. Therefore, the said question is also required to be answered in favour of the assessee and against the revenue.
12. In view of our findings on these points, we have to answer the substantial questions of law framed against the revenue and in favour of the assessee.
13. Accordingly, the appeal is dismissed.
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