Mystery Surrounding Amendment of Circular 116 – Why did CBEC take backdoor route to revise it?
Board issued Circular 116 dated September 15, 2009 to clarify issues surrounding leviability of service tax on construction of canals by Government agencies. Initially a copy of the Circular was released to the public (which is also carried by us) in which paragraph 3 read as follows:
“3. The second issue is about Government taking up construction activity of dams, irrigation projects buildings or infrastructure construction etc. through turnkey or EPC (Engineering Procurement & Construction) mode. The said service is covered under section 65 (105) ( zzzza ) of Finance Act, 1994. The said section itself excludes works contract in respect of dams, tunnels, canals of irrigation projects, road, airports, railways, transport terminals & bridges executed through such turn-key or EPC mode . Hence works contract in respect of above works even if done through turn-key or EPC mode are exempt from payment of service tax.”
Board in its wisdom thought it fit to revise the contents of paragraph 3 of the said circular. But what is surprising is the fact that instead of making an official amendment, a revised Circular was posted on the CBEC website through the backdoor in which paragraph 3 reads as follows:
“3. The second issue is about Government taking up construction activity of dams, buildings or infrastructure construction etc. through EPC (Engineering Procurement & Construction) mode . The said service is covered under section 65 (105) ( zzzza ) of Finance Act, 1994. The said section itself excludes works contract in respect of dams, road, airports, railways, transport terminals, bridges & tunnels executed through EPC mode . Hence works contract in respect of above works even if done through EPC mode are exempt from payment of service tax.”
The object of this circular was to clarify leviability of service tax on construction of canals by Government agencies . In this regard the two categories under which this activity could be classified viz., ‘Commercial or Industrial Construction Service' and ‘Works Contract Service' were sought to be analyzed by the Board and the applicability of service tax on the said activity was supposed to be clarified.
In the original circular, references were made to the Government engaging in construction of irrigation projects through turnkey or EPC mode and while referring to Section 65(105 )( zzzza ) of Finance Act, 1994, it was stated that this clause excludes ‘works contract in respect of dams, tunnels, canals of irrigation projects….' and a conclusion was drawn that the works contract undertaken for these activities through turnkey or EPC mode is exempt from levy of service tax.
However, in the revised circular, references to ‘canals of irrigation projects' and undertaking works contract for them through Turnkey mode were deleted. Even while referring to the provisions of Section 65(105 )( zzzza ) in the revised circular, references to ‘canals of irrigation projects' undertaken through turnkey or EPC mode were deleted.
At this juncture, it is pertinent to note what sub-clause ( zzzza ) of Section 65(105) states. An extract of which is reproduced for ready reference:
“( 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, -
…………….
(e) turnkey projects including engineering, procurement and construction or commissioning ( EPC ) projects;”
In the above sub-clause it is evident that there is no express reference to ‘canals of irrigation projects' but there is reference to turnkey projects which includes EPC projects.
So the initial circular whose object was to clarify on the leviability of service tax on construction of canals by the Government did not conform to the provisions of Section 65(105 )( zzzza ) and this could be the reason why this circular was replaced by the revised circular which deleted any references to ‘canals of irrigation projects', in the process defeating the very object which the Board sought to clarify.
This apart, in the first part of the circular, while clarifying the leviability of service tax under ‘Commercial or Industrial Construction Service', in paragraph 2 it was mentioned as follows (in both the original circular as the revised one):
“2. Thus the essence of the definition is that the “commercial or industrial construction service” is chargeable to service tax if it is used, occupied or engaged either wholly or primarily for the furtherance of commerce or industry. As the canal system built by the Government or under Government projects, is not falling under commercial activity, the canal system built by the Government will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax.”
It is stated that the activity of construction of canals for irrigation projects is chargeable to service tax if such activity is for further of commerce or industry and that canal systems built by the Government or under Government projects are not subject to levy of service tax as they do not come under commercial activity. On the other hand, it is clarified that if such a system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax.
Now it is not understood as to what constitutes a ‘revenue generating measure' and Board has not clarified as to what constitutes a ‘revenue generating measure' and why only activities undertaken by private agencies have to be looked at as whether they constitute a ‘revenue generating measure or not'. Further, in the first instance it was mentioned as canal systems built by Government or under Government projects and later on a reference was made to private agencies. It is common knowledge that all irrigation projects of Government are though undertaken by the Irrigation/Agriculture Department of the respective Governments (State or Centre) , they are actually executed by private agencies only under the actual supervision of the said department. In effect, all activities related to construction of irrigation projects and canal systems are undertaken by private agencies only.
This will lead us to the second part of the clarification in paragraph 2 which speaks of revenue generating measures only to be subject to levy of service tax. As mentioned above this aspect is not clarified in this circular and there is need for the Board to throw more light on this aspect as to what constitutes a ‘revenue generating measure'. Is a private contractor who earns a profit for himself in the process of executing a canal project be classified under this aspect of revenue generating measure or does the Board mean that only those canal projects where a fee or cess is charged by the executing private agency in the concept of pay per use to be regarded as a revenue generating measure. If the latter is true then do we have instances of such projects coming up in the country which are more or less akin to highway projects which are undertaken on a BOOT basis with some revenue share by the private agencies who undertake such BOOT projects.
Board should answer these questions urgently before the field officers go on a fishing spree in the canals built by the private agencies in search of service tax moolah .