COMMISSIONER OF CENTRAL EXCISE Vs. INDIAN OILTANKING LTD.

JUDGEMENT

(1.) M /s. Indian Oiltanking Ltd. (hereinafter referred to as the assessees), who are holders of service tax registration for providing three taxable services, viz. (i) storage and warehousing, (ii) port services and (iii) consulting engineering services, filed a refund claim for Rs. 11,27,498/ - under the heading "Commissioning and Installation" for the months of September and October 2003 on the ground that lump sum turnkey works contract was entered into by them with M/s. Indian Oil Corporation Ltd., Gujarat Refinery, for constructing storage tank for offsite and utility for LAB project for lump sum contract for entire work of drawing, designing and procurement of materials and construction of storage tank, which could not be split into individual components for levy of service tax. They placed reliance upon Tribunal's decision in Daelim Industrial Co. v. CCE : 2003 (155) ELT 457 to support their claim that a lump sum turnkey works contract cannot be vivisected and part of it subjected to tax, which decision was upheld by the apex court, and the Tribunal's decision in Larsen & Toubro Ltd. v. CCE, 2004 (60) RLT 505. On scrutiny of the refund claim, it was noticed from the letter of acceptance issued by the assessees to their clients that prices for three different categories had been quoted - (i) lump sum price for detailed engineering inclusive of service tax; (ii) lump sum price for supply portion, and (iii) lump sum price for service (construction and erection) portion. It was clear from the above bifurcation that the exact price for the services of construction and erection was worked out by the assessees. Since the value of services had been separately shown in the acceptance letter, show cause notice dated 31.1.2005 was issued to the assessees, proposing rejection of the refund claim on the ground that the question of vivisection of the contract does not arise and that the service tax paid was proper and legal. The assessees replied to the notice, contending that the breakup of prices so approved is to be treated as billing schedules which would be used for release of progressive payments and only for the purpose of facilitating periodic installment payments; that the lump sum price for detailed engineering is around 3% of the total contract value; that Jacob H & G are the consultants to IOC for providing main drawing and other consultancy services and that they (assessees) only carried out the residual process design and detailed engineering for the construction of storage tank. The claim was rejected by the adjudicating authority vide order dated 11.11.2005, which was set aside by the Commissioner (Appeals). Hence this appeal by the Revenue.

(2.) WE have heard both sides.

(3.) THE crux of the argument of the Revenue is that subsequent to the decision of the apex court in Builder's Association of India v. UOI : (1989) 2 SCC 645, which considered the 46 amendment to the Constitution and came to the conclusion that State Governments could levy sales tax on the value of the goods involved in an indivisible works contract by the legal fiction created by the 46 amendment, i.e. by the inclusion of Clause (29A) of Article 366 of the Constitution, service tax can be levied on the value of service/labour in the case of an indivisible works contract after the 46 amendment to the Constitution. However, as rightly contended by the respondents, the apex court's decision cited supra is not an authority for the proposition that sales tax can be levied by the States on the value of goods involved in a works contract prior to the 46 amendment. In the above case, the Supreme Court was concerned with the constitutional validity of the 46 amendment by which State legislature was empowered to levy service tax on certain transactions described in Sub -clause (a) to (f) of Clause (28A) of Article 366, which otherwise did not satisfy the normal meaning of the expression "sale of goods". Noting the legislative history of tax on the sale and purchase of goods, the apex court observed in para 5 of its judgment that the power to levy sales tax was conferred on the States by the Constitution vide entry 54 of List II of the seventh Schedule to the Constitution which covered "taxes on the sale or purchase of goods other than newspaper". The Bench noted that prior to the 46 amendment, controversy about levy of sales tax on the value of goods involved in a works contract had arisen before some High Courts. In the case of Gannon Dunkerley v. State of Madras, AIR 1954 Mad 1130, the Hon'ble Madras High Court arrived at the conclusion that the transaction in question, viz. building contracts were not contracts for sale of goods as defined under the Sales of Goods Act, 1930 and, therefore, the assessees were not liable to pay sales tax on the amounts received by them from the person for whom they had constructed buildings. However, the Hon'ble High Courts of Kerala, Nagpur, Rajasthan and Mysore had taken a different view. Ultimately, the question as to whether cost of goods supplied by building contractor in the course of construction of building could be subjected to sales tax was finally resolved by the apex court in State of Madras v. Gannon Dunkerley & Co. : AIR 1958 SC 560, wherein the Court held that in a building contract which was one, entire and indivisible, there was no sale of goods and it was not within the competence of the provincial legislature under Entry 48 in List II in the Seventh Schedule of the Government of India Act, 1935 (now Entry 54 of List II under the Constitution) to impose a tax on the supply of material used in such a contract by treating it as a sale. In order to overcome the above decision of the apex court, a new clause, viz. Clause (29A) was introduced in Article 366 of the Constitution by the 46 Amendment. Clause (29A) reads as under: