As contract purpose construction & nt service, thus no Service Tax, HC

Facts in Brief:

1. These are two appeals filed by the department against the order of the Commissioner (Appeals) dropping the proceedings against the respondents M/s Larsen & Toubro Ltd. in the first case and M/s Fetrofac International Ltd. in the second case. Since the issue involved in both the appeals is common, they are being decided through a common order.

2. In the first case, the respondent M/s Larsen & Toubro Ltd. were awarded a contract for setting up of (1) Solvent - Dewaxing/De-Oiling Uni 9SDU) and (2) Hydrotreater, Amine Treating Unit, Control Room pad Sub-station at Digboi Refinery vide contract No. (1) PROJ/SDU/DR/53 of 1999-2000 and (2) PROJ/HDT/DR/54 of 1999-2000 which includes the work of "Residual Process Design, Detailed Engineering, Procurement, Supply, Construction, Erection, Installation. Testing Commissioning and Mechanical Guarantee of the said Units.

3. It was alleged that in both the case the respondents have deliberately and intentionally not disclosed the material fact of their providing taxable service as consultant engineer to the department. Therefore, show cause notices were issued to them demanding service tax amounting to Rs. 9,68,58,668/- in the first case and Rs. 62,59,435/-in the second case besides proposing penalties under Section 76, 77, 78, 79 ana 81 of Chapter V of Finance Act, 1994. In both the cases the show cause notices were confirmed in which service tax amounting to Rs. 9,68,57,665/- in the first case and Rs. 62,59,435/- in the second case were confirmed and penalties of equivalent amount were imposed on the respondents M/s Larsen & Toubro Ltd. and M/s Petrofac International Ltd. besides imposing personal penalties on the officers of the respondents.

4. Both the above orders were challenged by the respondents before Commissioner (Appeals) who allowed the appeal in both the cases mainly relying on the Tribunal's decision in the case of M/s Daelim Industrial Co. Ltd. v. C.C.E., Vadodara . It is against these two decisions of the Commissioner (Appeals) that the department has come up in appeal.

HC held as under,

5. We find that facts of the present case are squarely covered by the Tribunal decision in the case of Daelim Industrial Co. cited supra and the department's SLP in the case of Daelim Industrial Co. has been dismissed by the Apex Court. Further the decision of the Daelim Industrial has been followed by this Tribunal in the case of M/s L & T Ltd. Its ratio has also been referred to by the Gujarat High Court in the case of Elecon Engineering Co. Ltd. v. Union of India .

6. Further in Ircon International Ltd. v. CCE, Mumbai 2002 (2) STT 264, Tribunal has held that construction contract could not be subjected to service tax as consulting engineering service, either as a whole or in part and further observed that position remains covered by the decision in the case of Daelim Industrial Co. cited supra. Revenue has not been able to distinguish the present contract, from that involved in Daelim case because the contract in the present cases are essentially for construction and not for the services and the services referred to are an integral part of contract.

7. The contract is a work contract on a turnkey basis and not a consultancy contract. It is well settled by series of case laws that a work contract cannot be vivisected and part of it subjected to tax. The decision in the Associated Hotels case does not lend any support to the revenue as a solitary instance cited by the learned S.D.R. in the case of S. Krishna of Andhra Pradesh High Court has been undone by the Supreme Court in the Guntur Tobacco case cited by the appellants. The 46th amendment to the constitution has also not made any difference to the decision of Associated Hotels as it was mainly with respect to sales tax which introduced deeming provision which is not the case before us.

8. The Kerala High court decision in Kerala Colour Lab Association cited supra also does not help revenue as in that case the principal contract was that of service and not of sale of photographic material and therefore it was correctly held that once the taxing event is rendering of service & the entire activity of the assessee answer the description of taxable photography service, it is the service which will be chargeable to service tax &the agreement cannot be considered as that of sale of photographic material. In the present case, the principal object of the contract is that of construction and not of rendering any service and accordingly service tax cannot be levied on service portion of the contract.

9. In view of above, we reject both the appeals and uphold the order of Commissioner (Appeals).

Case Reference - Commissioner Of Central Excise ... vs Larsen And Toubro Ltd.