Canal, Dam, Pipelines, Works Contract, Sub-Contract - CESTAT LB Decision - A master Jurist at work
AS reported by us yesterday, the three member Larger Bench of the CESTAT headed by the President in the famous irrigation case delivered its judgement on Tuesday. The case involves hundreds of crores in taxes and relates to huge water supply projects of various State Governments - though there is hardly any water in the pipeline is only a minor detail.
The judgement written by the President Justice Raghuram for the Larger Bench (this time it is a unanimous decision) is a classical example of high class jurisprudence.
What is a dam? In the much discussed Ramky Infrastructure Limited - , the Tribunal observed, "These are gigantic RCC structures built across rivers and are not to be confused with the earth dams/barrages/constructed by the appellants as part of some of the EPC projects for irrigation."
In the order under study, the President observed, "From the above meanings of "dam" it is clear that it is a barrier erected for impounding water and serves the primary purpose of retaining water in the reservoir appurtenant thereto, to provide water for irrigation or drinking purposes and for supply to nearby villages /towns, by way of canals, feeder channels etc. Without construction of channels / canals which are inlets/ outlets for conveying water to and from the dam, a dam would be wholly dysfunctional. Construction of channels /canals is integral to a dam project and must therefore be treated as a work "in respect of" a dam and is thus excluded from the levy, in terms of the definition itself."
In respect of vs in relation to: The Larger Bench observed;
The definition of "works contract" in sub-clause (zzzza) excludes works contract in respect of dams. The expression "in respect of" has been interpreted in several Dictionaries and judicial pronouncements as having the widest meaning and being wider in its connotation than the word "in" or "on". Hence, execution of channels/ canals not only amounts to construction of a conduit but is also covered by the exclusion clause in the definition of "works contract", as a works contract - in respect of' dam.
Works contract "in respect of dams" is excluded from the purview of WCS. A true and fair construction of the definition of WCS and the exclusionary clause "works contract in respect of dams", indicates no requirement that works contract executions of structures ancillary or integrated into a dam project should be taken up along with construction of the main dam structure and by the same contractor, to come within the exclusionary clause. This conclusion in Ramky Infrastructure Limited is therefore, with respect, erroneous and is overruled.
The definition of WCS in sub-clause (zzzza) of Section 65(105) of the Act, defines the service as one provided or to be provided "in relation to" the execution of a works contract, excluding works contract "in respect of,...Dams". On its text, the definition of WCS excludes works contract "in respect of" dams.
Includes...You know what this word means ? Obviously, it is not that simple - see what the Bench says,
The word "includes" is generally used in interpretation or definition provisions in order to enlarge the meaning of words or phrases occurring in the body of the provision. When so used these words or phrases ought to be construed as comprehending not only such things as they signify according to the natural import but those things as well which the interpretation clause declares that they shall "include".
However, the word "includes" is susceptible to another construction which is equally compelling. If the context of the Act indicates that it was not employed merely for the purpose of adding to the natural significance of the words or expressions defined, the word "includes" must be interpreted as indicating "mean and include"; and in such a case the word indicates an exhaustive explanation of the meaning of the words and phrases in the provision which, for the purposes of the provision must invariably be attached to those words or phrases. Ordinarily "includes" indicates that what follows this word is comprised or is contained in the whole of the words or phrases preceding and the nature of the included terms would not only partake the character of the whole but may be construed as clarificatory of the whole.
The Five Member Larger Bench Decision: The president graciously referred to and accepted the decision of the Tribunal's Special (5 member) Bench decision in the Larsen & Toubro Limited - that works contract was taxable even before 1.6.2007.He observed,
In view of the special (5 member) Bench decision in the Larsen & Toubro Limited reference, it follows that a works contract is exigibile to service tax even prior to 01.06.2007. In view of Indian Hume Pipe Co. Limited; and Alstom Projects India Limited it follows that a turnkey / EPC contract is exigible to service tax prior to 01.06.2007, under the appropriate taxable service such as ECIC, CICS or COCS. From this position it inexorably follows that clauses (a) to (e) of the definition of WCS in Explanation (ii) thereof are enumerations of taxable services drawn substantially from definitions and integers of existing taxable services such as ECIS, CICS and COCS. From the decision in Indian Hume Pipe Co. Limited and other decisions [referred to in paras 15(i) and (ii) (supra)], it is clear that laying of pipelines/ conduits for transmission of water or for disposal of sewerage falls within the ambit of CICS and not ECIS; and where provided to Government/ Government undertakings and for supply of water for irrigation or consumption or for disposal of sewerage, the activity is non-commercial, non-industrial, is covered by the exclusionary clause in the definition of CICS and is not exigible to service tax. Since a turnkey/ EPC contract would inhere elements of several services, consisting of combination of different services, the service which gives such contract its essential character would be laying of pipelines or conduits. A turnkey/ EPC contract for laying of pipeline/ conduit should therefore logically be classified under clause (b), Explanation (ii) of Section 65(105)(zzzza), on and from 01.06.2007 as well. This is the consequence of applying Section 65A(2)(b) of the Act and this position is clarified in Board Circular No. 123/5/2010-TRU dated 24.05.2010.
Why this incongruity? ‘What then could be the legislative intention in not excluding levy on construction of a pipeline or conduit when executed under a turnkey/ EPC mode?', the Bench asked. Revenue does not explain this incongruity while contending that works contract executed under turnkey/ EPC project mode even in respect of canals, pipelines conduits for Government/ Government undertakings is taxable even if for non commercial, non industrial purposes!
EPC vs Turnkey: The Bench observed that EPC contracts are synonymous and are referred to as turnkey contracts as well. From the guidance provided by the precedents and in view of the fact that in the commercial world and practice, in legal and technical Dictionaries, "EPC contracts" are synonymously known and referred to as "turnkey contracts" as well, it is concluded that in clause (e) under Explanation (ii) of the definition of WCS, turnkey projects and EPC projects are employed to signify similar, not dissimilar transactions, to indicate contracts in which a builder agrees to execute the whole of the enterprise awarded to him and if the agreement so provides from the stage of design and planning till execution and completion of the whole work entrusted; and undertakes wide variety of other responsibilities which may include design, engineering, procurement, construction of the facility, conduct of performance tests and other associated activities pre or post construction.
Service and Transfer of immovable property:. The president's Bench observed, In view of the ruling in Larsen & Toubro Limited, it is clear that even where goods are procured by a contractor and incorporated into a construction whereupon such goods get transformed into immovable property and the property in such goods passes to the employer only thereafter, the bundling of goods and services into the construction of a building / structure would nevertheless amount to a works contract and be leviable to sales tax as such. If there could be no escape from the liability to sales tax on such an activity the question is whether the liability to service tax is excluded in the light of the definition of works contract in Explanation (i) of Section 65 (105)(zzzza). And the answer was ‘NO'.
Shorthand in drafting Law: In drafting the definition of WCS and in structuring the definition the draftsman is seen to have employed a shorthand incorporating the post 46th amendment accretion of legislative powers in Entry 54 of List II, expanding States power to levy sales tax on deemed/ accretion sale of goods as well.
Sub-contracting - who is liable to pay Service Tax? The Larger Bench held: Even where an appellant had entered into a turnkey/ EPC project agreement or other works contract but had sub-contracted the whole or part of the works awarded (under terms of the agreement which authorised such sub-contracting); and the incorporation of goods into the construction/ structures was by the sub-contractor and not by an appellant, there is no rendition of WCS by such appellant, which is taxable under Section 65(105)(zzzza).
we conclude, on the basis of the judgment in Larsen and Toubro Ltd. (SC-2008) that where under an agreement (whether termed as a works contract, turnkey or EPC project contract), the principal contractor, in terms of the agreement with the employer/ contractee assigns the works to a sub-contractor and the transfer of property in goods involved in the execution of such contract passes from the sub contractor by accretion to or incorporation into the works, the principal contractor cannot be considered as having provided the taxable (works contract) service, enumerated and defined in Section 65 (105)(zzzza) of the Act.
The Twist in the Tale
: In view of the special (5 member) Bench decision in the Larsen & Toubro Limited reference, it follows that a works contract is exigibile to service tax even prior to 01.06.2007, under the appropriate taxable service such as ECIC, CICS or COCS. A turnkey/ EPC contract for laying of pipeline/ conduit should therefore logically be classified under clause (b), Explanation (ii) of Section 65(105)(zzzza), on and from 01.06.2007 as well.
Homage to Sr Advocate SR Ashok: It is sad to record that Sr Advocate SR Ashok who argued this case in his inimitable calm, cool and persuasive style is no more. He died on 8th April 2015, just 20 days before the order was pronounced. His soul will certainly be happy.
We bring you this latest order of the Tribunal today. Please see Breaking News.