C & AG reports availment of Exemption violating prescribed conditions of Notification No. 1/2006-ST
M/s Tata Projects Ltd., in Hyderabad II Commissionerate had entered into two types of contracts with M/s Power Grid Corporation of India Ltd., M/s BHEL, M/s GAIL and several State Power Generation Corporations.
In the first set of contracts involving erection of transmission line towers in civil foundations, the assessee (M/s TPL) supplied towers, tower extensions, bolts and nuts/accessories against separate supply orders and paid service tax on 33 per cent value of the contracts representing labour charges and cost of construction material like cement, sand etc., used in foundations of erection work.
In the second set of contracts, involving supply of material as well as execution of projects on turn key basis, the assessee billed the customers for the total amount including the cost of equipment as well as labour charges and availed abatement of 67 per cent under the aforesaid notification.
C & AG states that the exemption availed by the assessee in both the cases was not correct as the assessee had availed of CENVAT Credit of service tax on several input services. Moreover, in the first set of contracts, the assessee also derived the benefit of exclusion of the cost of the material viz., towers and tower parts for the purpose of service tax by bifurcation of contracts into supply contracts and erection works and reckoning only the latter for payment of tax.
During the period from March 2006 to March 2007, the assessee availed of abatement on a turnover of Rs. 107.67 crore (being 67 per cent of the contract value of Rs. 160.70 crore on erection works and turn key projects) on which exemption of service tax of Rs. 13.14 crore availed of was incorrect.
Further, in the case of turn key construction contracts, the department stated in September 2008/March 2009 that the assessee had utilised credit only on certain common input services in its head office but not on any service which was project specific and the assessee had reversed pro-rata credit of Rs. 2.34 lakh along with interest of Rs 0.46 lakh attributable to such input services utilised in turnkey projects valued at Rs. 167.81 crore. It further stated that since the assessee had already foregone the input service credit, the abatement availed of on turn key projects was in accordance with the provisions of the exemption notification and also in line with the Supreme Court's decision in the case of M/s Chandrapur Magnet Wires (P) Ltd 2002-TIOL-41-SC-CX.
C & AG stated that the reply of the department was not tenable as the reversal of pro-rata credit in lieu of the payment of service tax on 100 per cent value of contracts is not covered by the CENVAT credit rules or the relevant notification. Further, the Supreme Court's decision quoted by the department is not relevant since non-availing of input service credit itself is a requisite condition for availing of exemption in the present case whereas Supreme Court decision was in the context of availing of MODVAT credit on fully exempted goods covered by an unconditional exemption.
No further reply of the Ministry was received by C & AG as on January 2010.
Now what further reply would the Ministry give if C & AG is not ready to honour the Supreme Court judgment on the subject matter? For once the department took shelter under a Supreme Court judgment and is at the receiving end of the C & AG for doing so.
Ironically, in Chapter II of Report No. 12 of 2009-10 (Indirect Taxes – Central Excise) at Para No. 2.2.1, C & AG on another occasion has relied on Supreme Court judgment in the case of Bombay Dyeing & Mfg. Co. Ltd. wherein it was held that if CENVAT Credit is reversed before utilisation, it would amount to not taking of credit.
Even if C & AG holds that Apex Court judgment in Chandrapur Magnet Wires cannot be made applicable to the facts of this case, the judgment in the case of Bombay Dyeing & Mfg. Co. Ltd may still apply. But again C & AG could disregard this judgment as well on the ground that it was delivered in the context of inputs and not input services because they have developed a habit of picking and choosing judgments that suits their cause. Can we call it a case of selective amnesia?
Also there are innumerable CESTAT judgments wherein it was held that turn key projects are not at all liable to service tax prior to June 1, 2007. Notable among them being M/s L & T LTD Vs CCE, VADODARA – II 2007-TIOL-744-CESTAT-AHM.
When C & AG has utter disregard for an Apex Court judgment, why would they care for orders from CESTAT on taxability of turnkey projects during the relevant period.