CESTAT Bars Vivisection Of Turnkey Project, Allows CENVAT Credit To L&T

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 12 June held that authorities cannot artificially dissect an integrated turnkey project to deny CENVAT credit, and that the substance of the contractual arrangement must prevail over isolated treatment of individual components.

Technical Member A.K. Jyotishi and Judicial Member Angad Prasad allowed the appeal filed by Larsen & Toubro Ltd. (L&T) and set aside a demand of Rs. 2.22 crore along with interest and penalty. The Bench held:

“The Department's attempt to isolate Contract M-720 and deny credit accordingly amounts to impermissible vivisection of a composite contractual arrangement.”

The dispute arose from a consortium comprising L&T Ltd., Paul Wurth Italia S.P.A. and Paul Wurth India Pvt. Ltd., which executed Blast Furnace No. 3 at the Visakhapatnam Steel Plant. Under a supplementary agreement, the consortium appointed Paul Wurth Italia as the consortium leader and principal contractor and agreed to pay it a “leadership fee”.

L&T discharged service tax on the leadership fee under the reverse charge mechanism and availed CENVAT credit through the Input Service Distributor (ISD) mechanism. The Department denied the credit, contending that the leadership fee related to a contract primarily involving the manufacture and supply of indigenous equipment and therefore pertained to non-taxable activities.

Before the Tribunal, L&T argued that the project constituted a composite turnkey arrangement and that the Department could not isolate one contract to deny credit. It also submitted that it validly distributed the service tax paid under reverse charge through the ISD mechanism and that the service qualified as “Consulting Engineer Service” under Rule 6(5) of the CENVAT Credit Rules, 2004.

The Tribunal noted that the Department did not dispute the payment of service tax, the receipt of services, the genuineness of invoices, or the ISD distribution of credit. It also recorded that no proceedings were initiated against the ISD unit. It relied on the Supreme Court's decision in BSNL v. Union of India and held:

“the true nature of a transaction must be determined from the substance of the contract and not by artificially splitting an integrated arrangements.”

Further, the Bench found that the leadership fee covered overall management, coordination, and execution of the blast furnace project and did not relate exclusively to manufacture under any specific contract. It held that the Department's attempt to isolate a single contract and deny credit amounted to impermissible vivisection of a composite arrangement.

The Tribunal also held that acceptance of service tax under the reverse charge mechanism and its valid distribution through the ISD mechanism rendered denial of credit at the recipient's end revenue-neutral. It concluded that the service fell within Rule 6(5) of the CENVAT Credit Rules and was not used exclusively for exempt activities.

Accordingly, the CESTAT allowed the appeal, set aside the demand of Rs. 2.22 crore along with interest and penalty, and granted consequential relief to L&T Ltd.