Service tax not leviable on turnkey projects

But it has also brought some controversies about its chargeability in case of composite work contracts like projects for setting up plants on the turnkey basis.

The revenue department believes that the turnkey project has an element of service, namely consultancy, by engineers when they erect and install the plant. That element is to be charged to the service tax as "consulting engineers".

But taxpayers feel if that view is taken, then in case of manufacturing of items like paper and soap also engineers are consulted.

If their services are never charged to the service tax by the central excise department, there is no reason why they should ask companies like Bharat Heavy Electricals Ltd and Alstom to give them the service tax on that part of the value, which is attributable to the work performed by engineers in setting up, say, a power project.

Also a turnkey project is an indivisible one and the value is also a total concept, provided one company executes it. It is not as if one company is supplying materials and another providing engineering consultancy.

If there is a separate consulting service, provided for by another company, the price paid to them for services rendered can be charged to the service tax.

Already a number of cases has arisen and the revenue department has invariably decided against taxpayers.

In this case, Daelim Industrial Ltd installed a desulphurisation plant for Indian Oil Company. This was done on a turnkey basis.

There was no outside consultancy service employed and the project was completed by the company itself.

The contract involved residual process design, detailed engineering, procurement, supply, construction, fabrication, erection, installation, testing, commissioning and mechanical guarantee.

The revenue department held that the service tax was chargeable for consulting engineers on residual process design, detailed engineering and commissioning of plant.

The tribunal said it was a case of complete works contract. It was basically for supply of materials and erection of the plant on a turnkey basis and not for consultancy as such.

The tribunal's view has been supported by the Supre-me Court order in the State of Punjab vs Associated Hotels India case, reported in 1972, (1) Supreme Court Cases 472.

The apex court held that the primary objective of the contract would determine the issue. So, the tribunal decided that a work contract on turnkey basis was not a consultancy contract and the consultancy portion could not be "vivisected" for charging to the service tax.

Thus when a turnkey project is one contract for supply of materials and installation of the project on the turnkey basis, no service tax is chargeable on "consulting engineers".

But if one company supplies materials and another does installation, then the service tax will be chargeable on "consulting engineers" on the value paid to the consulting charges.

The author is a former member (Budget) of CBEC