[Order per : C.N.B. Nair, Member (T)]. - M/s. Indian Oil Corporation Ltd. awarded a contract to M/s. Daelim Industrial Co. Ltd. (appellant) for construction of a diesel hydro-desulphurisation plant and utilities/off-site at Gujarat Refineries. The purpose of the plant was to treat diesel so as to reduce the sulphur content in diesel from about 0.75 to 0.25 in order to meet the pollution standard stipulated by the Hon’ble Supreme Court of India. The contract was on lump sum turnkey basis. The lump sum price had an Indian rupee payment of about Rs. 184 crores US $ payment of about 2.2 crores. The contract involved “residual process design, detailed engineering, procurement, supply, construction, fabrication, erection, installation, testing commissioning and mechanical guarantee”.
2. A show cause notice dated 16-4-2001 was issued by the Additional Commissioner of Central Excise, Vadodara holding that the appellant was liable to pay service tax on residual process design and detailed engineering, “commissioning of plant” applicable to “consulting engineers”. The appellant contested the proposal contending that theirs was a construction contract and they have not rendered any engineering consultancy services. They failed. The Additional Commissioner of Central Excise, Vadodara passed his Order-in-Original dated 1-3-2001 upholding duty demand of about Rs. 81 lakhs. Certain penalties were also imposed. The matter was taken up in the Appeal before the Commissioner (Appeals), Vadodara with no different results. Learned Commissioner (Appeals) held that engineering consultancy service was involved in regard to residual process design and detailed engineering, commissioning of the plant. He also held that service tax was imposable whether engineering consultancy was rendered directly or indirectly to the client. The present appeal is directed against that order of the Commissioner (Appeals).
3. We have perused the records and have greatly been assisted by the learned Counsel, Shri P.K. Sahu appearing for the appellant and the learned SDR, Shri S.M. Tata appearing for Revenue.
4. The contention of the appellant is that their contract was a work contract and design drawing in question were incidental to the execution of the work contract. It is also pointed out that rendering the consultancy services was not involved at all inasmuch as the drawings were made for their own purpose, for the execution of the work contract. Learned Counsel for the appellant took us through to the various provisions in the contract to show that the contract was a work contract for the construction of desulphurisation plant. Separate element of works were costed individually as per the contract terms, only for the purpose of facilitating periodic installment payments. Learned Counsel has pointed out that each component of the project involving design, drawing, procurement, supply, fabrication, etc. cannot be vivisected and considered as different transactions. Learned Counsel pointed out that a mere perusal of the costs of the various components would show that the dominant idea of the contract is the execution of desulphurisation plant. He also pointed out that the cost of process design, detailed engineering etc. carved out by the Central Excise Authorities was less than 7% of the total cost of the contract. Learned Counsel has also taken us to the relevant case law to show that in the case of work contracts, components cannot be taken as separately transactions. He pointed out that in the State of Punjab v. Associated Hotels India Ltd. (1972) 1 Supreme Court Cases 472, the Apex Court held that the primary objective of the contract would determine the issue. Learned Counsel pointed out that in the present case, since the primary objective of the contract was a construction of desulphurisation plant, it is not amenable to be split into individual components for levy of service tax. Learned Counsel has also pointed out that in the instant case, Engineers India Ltd. was the consultant of IOC and the main design, drawing and other consultancy services were provided by the Engineers India Ltd. and the appellant carried out only the residual process design and detailed engineering for the construction of the issue.
5. The issue raised in the present appeal is whether there is consulting engineer services involved in the appellants contract with IOC. “Consulting engineer” has been defined as under for the purpose of service tax :
“’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.”
A perusal of the various clauses of the contract between IOC and the appellant makes it clear that the project was for construction, erection and installation of desulphurisation plant. Clause 2.21 of the letter dated February 2, 1998 reads as under :
“Based on your offer, the Contract Value works out to fix lump sum of US $ 22,270,000 (US Dollar Twenty Two Million Two Hundred Seventy Thousand only) plus INR Rs. 1,836,800,000 (Rupees One Billion Eight Hundred Thirty Six Million Eight Hundred Thousand only) on the basis of Lump sum price(s) included in Price Schedule annexed and considering rate of exchange as 1 US $ = Rs. 38.84 for FE component quoted by you for performing all works covered under this contract on turnkey basis. The price schedule includes the break up of Lump sum prices.”
The price was the lump sum one and Clause 2.2 of the letter dated 2-2-98 of IOC makes it clear that “Contractor shall furnish further break up of lump sum prices for review and approval of owner/Engineer-in-charge. The break-up of prices so approved shall be treated as the billing schedule which shall be used for release for progressive payments. Notwithstanding the amount shown in the Billing schedule under the various heads, the total payments to the contractor for performance of this contract shall be limited to lump sum price mentioned in the price schedule”. Clause 7 of the same letter states that “Engineers India Ltd. are our consultants for the project and their Resident Construction Manager at Gujarat Refinery project site shall be the Engineer-in-charge for the subject work” and that the appellant has to contact for further instructions regarding the execution of the work. It was stated in the instruction to bidders also that the Engineers India Ltd. is the consultant of the owner. Clause 2.3 which relates to plant design reads as under :
“The contractor shall within the scope of his work prepare detailed working and other plan, drawings and designs required for or in connection with the performance of the work or selection, procurement or making of any supply and these plans/drawings shall be got approved from the owner before the contractor commences with the performance of the relative work or with making the relative supply.”
Clause 5.2.5.0 relating to the completion of work reads as under :
“The contractor shall be deemed to have successfully Commissioned the plant contracted for when the following conditions are satisfied :-
(i) The DHDS and U&O and all its components/facilities have been successfully tested after installation at site individually and as a whole and Final Test Certificate shall have been issued in respect thereof.
(ii) The DHDS and U&O successfully commissioned by continuous and stabilized operation upto full capacity for a period of not less than 7 (seven) days.
(iii) The Engineer-in-charge shall have issued a Final Testing and Commissioning Certificate as elsewhere herein envisaged”.
Clause 10 which relates to drawings by the appellant reads as under :
“10.1 The drawings accompanying the bidding document are indicative of scope of work and issued for bidding purpose only. These drawings indicate the general scheme as well as a layout to enable the bidder to make an offer in line with the requirement of the owner. Final Construction shall be carried out as per the drawings prepared by the contractor reviewed by EIL/Owner during the course of execution. The schedule of submission of various drawings and documents is given in the bidding document.
10.2 The design criteria, specifications and other engineering requirement and information required for designing the system are included in the bidding document. Contractors prepare basic and detailed engineering drawings and other supporting documents as required for completion of work. The contractor shall also be responsible for generating such additional information as may be required to perform the engineering, purchase, fabrication, transportation, installation, testing, pre-commissioning and other commissioning related activities.
10.3 The drawing/documents submitted by the contractor shall be reviewed by EIL/Owner. During such review, certain modifications may be suggested in the drawings/documents, as long as the modifications suggested by the EIL/Owner, are due to requirement of efficient operation of the plant without alteration in basic parameter given in the bidding document and the modifications are in accordance with standard engineering practice, these shall be carried out by the contractor without any extra cost to the owner irrespective of the fact whether these are specified in the bidding document or not or have not been indicated by the contractor in the data/drawings furnished along with his bid.
10.4 EIL/Owner may review and offer comments/suggestion on the layout, structurals schemes, designs and/or drawing prepared by the contractor and the later shall adhere to sub-comments/suggestions and revise/re-do these drawings accordingly and incorporate the same in the construction without any extra cost to the owner maintaining the original time schedule. However, reviewing of design/drawings is not obligatory on the part of EIL/Owner and complete correctness/soundness of the design/drawings shall be sole responsibility of the contractor irrespective of the fact whether the same has been reviewed by the EIL/Owner or not. Further, review of design and drawings as above shall not absolve the contractor of any of his obligations under the contract. Any defect observed during commissioning and/or operating the plant shall be rectified by the contractor by carrying out all necessary modification or re-construction without any extra cost to the owner.”
6. Thus, a perusal of the clauses of the contract leaves no doubt that the appellant contract with IOC was a work contract on turnkey basis and not a consultancy contract. It is well settled that a work contract cannot be vivisected and part of it subjected to tax. The impugned orders have proceeded to do precisely that. Therefore, they are required to be set aside.
7. In view of what has been stated above, the impugned orders are set aside and the appeal is allowed. The amount so far paid by the appellants to the department shall be returned without any delay.