Water supply projects - Need for Sec 11C exemption
EPC (Engineering, Procurement and Construction) and Turnkey - these two are now most dreaded words among many civil contractors undertaking works for Government. They are fully engaged in trying to know as to what constitutes an EPC contract and a Turnkey contract and whether they are one and the same or they are different and if so, what is the difference etc. The purpose is not for improving any technical skills in execution of the project, but to know if some Show Cause Notices are waiting for them demanding service tax. The determining factor whether service tax is applicable on works undertaken for water supply projects undertaken / irrigation works contracted by Government depends on whether the contracts are executed as EPC or Turnkey projects, according to the Department and this view already has the support of a Tribunal judgement.
Prior to 01.06.2007, though at some places, demand notices were issued for payment of service tax on the activities of laying of pipelines for drinking water supply projects undertaken by classifying the service under "Commercial or Industrial Construction Service / Erection, Commissioning or Installation Service", these demands were successfully contested by the assessees with favourable judgements in case of Indian Hume Pipes and Nagarjuna Construction Company Ltd 2010-TIOL-789-CESTAT-BANG. It was held that drinking water supply projects run by Gujarat Water Supply and Sewerage Board are not leviable to service tax either under Commercial or Industrial Construction service or under Works Contract Service.
The essence of the definition of "Commercial or Industrial Construction" service is that the projects like Drinking water supply and other irrigation works undertaken by the Government cannot be treated as primarily for the purpose of commerce or industry as also clarified by the CBEC in Circular No 116/10/2009 -ST., Dated: September 15, 2009.
However, a new line of argument has emerged for the cases post 01.06.2007, with the advent of "Works Contract" service. Ingenious departmental officers have started a new interpretation that the above works, like Drinking water supply etc undertaken as EPC/Turnkey contracts are leviable to service tax as they are covered under sub-clause (e) of the Explanation given under Section 65(105)(zzzza) of the Finance Act, 1994. According to them, these contracts, if executed as EPC/Turnkey contracts, cannot be classified under sub-clause (b), i.e., Commercial or Industrial Construction Service, to enjoy the exclusion, by virtue of being "non-commercial" in nature. If they are classified under sub-clause (e) as EPC/Turnkey projects, even if they are for non-commercial purpose, service tax will be applicable.
But, is this the real intention of the legislature? If we see the position from 01.07.2012, all the above works like laying of pipelines for water supply etc are exempted under Notification No 25/2012 ST dated 20th June 2012 and upto 01.06.2007, the demand was held to be not sustainable owning to these projects being non-commercial in nature. However, the problem remains for the period from 01.06.2007 to 30.06.2012.
In case of , the Tribunal has rejected the appeals of the assessees by holding that the services undertaken under Trunkey/EPC contracts are squarely covered by clause (e) of Explanation to; Section 65(105)(zzzza) of the Finance Act, 1994 and cannot be classified under clause (b) of the Explanation.
However, it could not have been a conscious decision of the legislature to tax these works like laying of pipelines for drinking water etc, as can be seen from the position prior to 01.06.2007 and past 01.07.2012 and the liability in between these two dates was only due to fortuitous circumstances.
Fortunately, for canals, Notification No.41/2009-ST Dated 23.10.2009 provided exemption in execution of a works contract in respect of canals, other than those primarily used for the purposes of commerce or industry, from the whole of service tax. The same is also exempted in Negative services arena i.e. with effect from 01.07.2012 onwards. However, during the intervening period i.e. 01.06.2007 and 22.10.2009 , there was no exemption for ‘Canals'.
Hence, a Section 11C notification in respect of contracts undertaken for Drinking Water supply project and Canals would put to rest the uncertainty surrounding these projects.