DAELIM INDUSTRIAL CO. Vs. CCE

JUDGEMENT

(1.) M /s Indian Oil Corporation Ltd. awarded a contract to M/s Daelim Industrial Co. Ltd. (appellant) for construction of a diesel hydro -desulphurisation plant and utilities / off -site at Gujarat refineries. The purpose of the plant was to treat diesel so as to reduce the sulphur content in diesel from about 0.75 to 0.25 in order to meet the pollution standard stipulated by the Hon'ble Supreme Court of India. The contract was on lump sum turn -key basis. The lump sum price had an India rupee payment of about Rs 184 crores US$ payment of about 2.2 crores. The contract involved "residual process design, detailed engineering, procurement, supply, construction, fabrication, erection, installation, testing commissioning and mechanical guarantee".

(2.) A show -cause notice dated 16.04.2001 was issued by the Additional Commissioner, Central Excise, Vadodara holding that the appellant was liable to pay service tax on residual process design and detailed engineering, "commissioning of plant" applicable to "consulting engineers". The appellant contested the proposal contending that theirs was a construction contract and they have not rendered any engineering consultancy services. They failed. The Additional Commissioner of Central Excise, Vadodra passed his Order -in -original dated 1.3.2001 upholding duty demand of about Rs. 81 lakhs. Certain penalties were also imposed. The matter was taken up in the Appeal before the Commissioner (Appeals), Vadodara with no different results. Learned Commissioner (Appeals) held that engineering consultancy service was involved in regard to residual process design and detailed engineering, commissioning of the plant. He also held that service tax was imposable whether engineering consultancy was rendered directly or indirectly to the client. The present appeal is directed against that order of the Commissioner (Appeals).

(3.) THE contention of the appellant is that their contract was a work contract and design drawing in question were incidental to the execution of the work contract. It is also pointed out that rendering the consultancy services was not involved at all in as much as the drawings were made for their own purpose, for the execution of the work contract. Learned Counsel for the appellant took us through to the various provisions in the contract to show that the contract was a work contract for the construction of these desulphurisation plant. Separate element of works were costed individually as per the contract terms, only for the purpose of facilitating periodic installment payments. Learned Counsel has pointed out that each component of the project involving design, drawing, procurement, supply, fabrication, etc. can not be vivisected and considered as different transactions. Learned Counsel pointed out that a mere perusal of the costs of the various components would show that the dominant idea of the contract is the execution of these desulphurisation plants. He also pointed out that the cost of process design, detail engineering etc. carved out by the Central Excise authorities was less than 7% of the total cost of the contract. Learned Counsel has also taken us to the relevant case law to show that in the case of work contracts, components cannot be taken as separate transactions. He pointed out that in the state of Punjab vs. Associated Hotels India Ltd. (1972) I Supreme Court Cases 472, the Apex Court held that the primary objective of the contract would determine the issue. Learned Counsel pointed out that in the present case, since the primary objective was a construction of desulphurisation plant, it is not amenable to be split into individuals components for levy of service tax. Learned Counsel has also pointed out that in the instant case, Engineers India Ltd was a consultant of IOC and the main design, drawing and other consultancy services were provided by the Engineers India Ltd. And the appellant carried out only the residual process design and detail engineering for the construction of the issue.