CESTAT Chennai Quashes ₹2.83 Crore Service Tax Demand On IL&FS Water

In relief to IL&FS Water Ltd., the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Chennai, has set aside a Rs. 2.83 crore service tax demand, holding that an indivisible works contract cannot be split to treat the goods component as “trading” and deny input tax credit.

A bench of Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar was dealing with a dispute arising from a water supply project executed for the Indian Oil Corporation at Paradip under a Build-Own-Operate-Transfer (BOOT) model.

The department had alleged that the company paid service tax only on the service portion of the works contract while excluding the value of goods on which VAT was paid and wrongly availed CENVAT credit on common input services without reversing proportionate credit under Rule 6 of the CENVAT Credit Rules, 2004.

It further contended that the material component involved transfer of title in goods and therefore amounted to “trading”, which is treated as an exempted service requiring reversal of credit.

Rejecting this approach, the Tribunal held that the contract was a single, indivisible works contract and not a contract for sale of goods.

“The BOOT contract outlined above is a single, indivisible contract for a water transmission project using pipelines. It's not severable into separate provisions like sale and service, each of which could be enforced independently, whereby failing to perform one provision would not necessarily breach the entire contract.”

The tribunal further held that transfer of property in goods during execution of such contracts is only incidental and does not amount to trading.

“In a contract primarily for work and labour, a separate activity of 'trading' is not intended. The contract doesn't specifically mention sale of goods or 'trading'. The transfer of property in goods consumed while executing the contract is a part of the execution of the works contract.”

On the issue of reimbursements, the Bench clarified that payments made towards materials cannot be treated as an independent activity.

“The appellant only reimburses the sub-contractor for the materials consumed in the project and onward bills IPRWL, the contract holder, for these costs. These reimbursements are part of the 'Contract Price'.”

The tribunal also noted that the company's claim of maintaining separate records and availing credit only on input services used for taxable output services was not refuted in the impugned order.

“There is no allegation that the input credit was availed wrongly.”

Holding that Rule 6 of the CENVAT Credit Rules was not applicable in such circumstances, the Tribunal concluded that the demand could not be sustained.

“This being so the impugned order merits to be set aside and the demand for duty under Rule 6(3A) of Cenvat Credit Rules 2004 along with interest does not survive. No case for penalty is hence made out.”

The tribunal accordingly set aside the impugned order and allowed the appeal with consequential relief.

For Appellant: R. Viswanathan, Chartered Accountant

For Respondent: M. Selvakumar, Authorised Representative