CESTAT: Service Tax Can’t Be Demanded On Generator Sales Citing Installation
Pranav B Prem
In a significant ruling, the Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that service tax cannot be demanded on the sale of diesel generators (DG sets) by treating them as "works contracts" merely because the generators were also installed and commissioned by the seller. The tribunal set aside the service tax demand, providing relief to the appellant, M/s Spain Electronotics Limited. The bench, comprising Hon'ble Ms. Binu Tamta (Judicial Member) and Hon'ble Mr. P.V. Subba Rao (Technical Member), clarified that the nature of the transaction remains a sale, not a works contract, even if the seller installs and commissions the equipment.
Background of the Case
M/s Spain Electronotics Limited ("the appellant") is registered with the service tax department for providing "erection, commissioning, and installation services" under Section 65(105)(zzd) of the Finance Act, 1994. The anti-evasion wing of the service tax commissionerate initiated an investigation, alleging that the appellant had rendered "supply of tangible goods" services under Section 65(105)(zzzzj) of the Finance Act. The investigation focused on the appellant's supply of 1000 KVA DG sets to the Panipat-Jalandhar LPG pipeline project and their installation and commissioning of these generators. Based on this, the department issued the following demands:
Show Cause Notice (SCN) dated 05.07.2013 – Rs. 62,01,346 under "supply of tangible goods" service for 2008-09.
SCN dated 15.09.2015 – Rs. 5,78,816 under "works contract" service for 2013-14, alleging that the sale and installation of DG sets constituted a composite works contract.
Statement of Demand dated 04.04.2016 – Rs. 7,13,828 under "works contract" service for 2014-15, calculated based on a presumed 25% growth rate.
The appellant did not submit replies to the first and third notices but responded to the SCN dated 27.11.2015. Despite multiple opportunities for a personal hearing, the appellant did not appear, leading to the confirmation of these demands in the order-in-original. On appeal, the Commissioner (Appeals) upheld the demand.
Arguments by the Appellant
The appellant contended that the DG sets were sold to customers with the installation being an incidental service provided free of charge. As no additional consideration was charged for the installation and commissioning, the nature of the transaction remained a sale and not a taxable service. The appellant further argued that the supply of DG sets to the Indian Oil Corporation Limited (IOCL) met the criteria for a "deemed sale" under Article 366(29A) of the Constitution of India. Therefore, the transaction was liable to VAT/sales tax under state laws and not service tax under central law.
In support, the appellant relied on the five criteria established by the Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India, 2006 (2) STR 161 (SC) to determine whether a transaction qualifies as a deemed sale. These conditions include:
Availability of goods for delivery.
Consensus ad idem regarding the identity of goods.
Legal right to use the goods, including necessary permissions.
Exclusive legal right of the transferee during the contract period.
Transferor's inability to transfer the right to others during the contract period.
The appellant demonstrated that all these conditions were satisfied, as the DG sets were delivered to IOCL with exclusive possession and control, rendering the transaction liable for VAT, not service tax.
Tribunal's Observations and Decision
After reviewing the evidence and submissions, the Tribunal ruled in favor of the appellant, holding that the service tax demand was unsustainable. The bench observed: "When a large equipment such as DG set is purchased, the customer naturally wants the seller to install and commission it so to necessary to ensure that the DG sets were in working order. Merely because the goods were installed and commissioned after sale, the contract would not become a works contract services. It is more or less like a refrigerator or air-conditioner bought by someone for home use. The seller sells the refrigerator and also delivers and installs which satisfies the buyer that it is in good working condition."
The Tribunal emphasized that:
Supply of Tangible Goods Service – The supply of DG sets to IOCL involved the transfer of effective possession and control, satisfying the conditions for a deemed sale under Article 366(29A) of the Constitution. As such, only VAT could be levied by the state, and no service tax could be imposed under Section 65(105)(zzzzj) of the Finance Act.
Works Contract Service – The predominant nature of the transaction was the sale of DG sets. Since no separate charge was levied for installation or commissioning, it did not constitute a works contract service. The tribunal found that incidental services do not alter the nature of the principal transaction.
Presumed Growth Calculation – The third demand, based solely on the assumption of a 25% growth in taxable services, lacked any supporting evidence and was deemed arbitrary and unsustainable.
The Tribunal, while setting aside the demands, remarked: "The demand of service tax on the sale of generators by treating them as ‘works contracts’ merely because the generators were also installed and commissioned by the appellant cannot be sustained and is liable to be set aside."
Appearance
Advocates for the Appellant : Ms. Vandana Singh
Authorised Representative for the Respondent : Shri Anand Narayan
Cause Title: M/S Spain Electronotics V. Commissioner (Appeals-I)
Case No: Service Tax Appeal No. 50585 Of 2019
Coram: Hon’ble Ms. Binu Tamta [Member (Judicial)], Hon’ble Mr. P.V. Subba Rao [Member (Technical)]
[Read/Download order]
