The Hindu Business Line : Service tax case: SC dismisses plea against tribunal order

THE Supreme Court has dismissed the Revenue Department's special leave petition (SLP) against the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) order in the Daelim Industrial Co Ltd case.

In that case, CESTAT had held that in turnkey and works contracts, any segment cannot be "vivisected" from the rest of the contract for levying service tax. It was held that the engineering, procurement and construction (EPC) contract, also referred to as a turnkey contract, is a works contract and not a consultancy contract.

The CESTAT order held that drawings and designs, which are part of the activities under the turnkey contract, could not be segregated from the composite contract for levy of service tax.

Legal experts say that levy of service tax on composite contracts, especially turnkey contracts, is turning out to be a vexed issue for assessees as well as the Revenue Department.

Some of them even claimed that the Supreme Court's move to dismiss the SLP may come in handy to argue that if service tax is not applicable on drawings and designs, which are part of a composite contract, then commissioning, installation and erection activities in any composite contract should also not be subjected to service tax.

The CBEC had in December 2002 taken a position that the work of drawings/designs, erection and commissioning of plants and machineries is in the nature of services provided by a "consulting engineer" and hence taxable under service tax provisions.

However in May 2004, the CBEC changed its stand as regards erection and commissioning activities of a turnkey contract. It held that such activities do not constitute taxable services by a consulting engineer.

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