ERECTION, COMMISSIONING OR INSTALLATION SERVICES

Commissioning or Installation Services are brought under the Service Tax net by the Finance Act, 2003, w.e.f. 1-7-2003 vide Notification No. 7/2003, dated 20-6-2003. The scope of the service is proposed to be enlarged by the Finance (No. 2) Act, 2004 to include the erection services within its ambit. The services shall be taxed, if provided by a commissioning or installation agency.

Rate of Service Tax: The rate of service tax is specified in section 66 of the Act. The Finance (No. 2) Act, 2004 has substituted the charging section 66, and the rate of service tax is enhanced from 8% to 10% ad valorem. The increase in tax rate has come into force from the date of enactment of the Finance (No. 2) Act, 2004 i.e. 10-9-2004. Further, the Finance (No. 2) Act, 2004, w.e.f. 10-9-2004 has also levied an education cess @ 2 % of the service tax. The cess paid on inputs services shall be available as credit for payment of cess on output services. For further discussion in this regard, refer to 'Payment of Service Tax'.

'Erection, Commissioning or Installation Services'

The definition of 'erection, commissioning or installation' has been given under clause (39A) of section 65. That is:

“erection, commissioning or installation means any service provided by a commissioning and installation agency in relation to erection, commissioning or installation of plant, machinery or equipment".

There was always a doubt whether 'erection, commissioning or installation' services fall within the ambit of 'consulting engineering service'. There were different interpretations offered. The Board in its recent Circular No. 49/11/2002-ST, dated 18-12-2002 (appended as Annexure VI in the 'Consulting engineering services') clarified that work of erection and commissioning of machineries and plants is definitely one of providing 'technical assistance' to buyer of plant/machinery and is, therefore, in the nature of services provided by a 'Consulting Engineer' and hence taxable. Now, the Central Board of Excise and Customs has modified its earlier clarification vide the Circular No. 49/11/2002-ST, dated 18-12-2002 and in its Circular No. 79/9/2004-ST, dated 13th May, 2004 (appended as Annexure VIII in the 'Consulting engineering services') has clarified that "charges for erection, installation & commissioning are not covered under the category of Consulting Engineer Services. Commissioning or Installation service will be separately taxable under relevant entry and are not chargeable under Consulting Engineer Services." The author has already held the same view, which is now being upheld by the Government. Now, the scope of the service is proposed to be enlarged by the Finance (No. 2) Act, 2004, w.e.f. 10-9-2004, to include the erection services within its ambit.

The words 'erection, commissioning or installation' have not been defined mi the context of service tax therefore, these should be understood in the context of its commonly understood meaning and scope. As per the common understanding, the activity of installation means the act of putting an equipment, machinery, or plant into its place and making it ready for use. The activity of installation will start after erection, which would refer to putting up civil structures. Commissioning of a plant would mean operationalising an installed plant/ equipment/ machinery.

Taxable service

The definition of taxable service provided by a commissioning or installation agency has been given under sub-clause (zzd) of clause (105) of section 65. That is:

“any service provided "to a customer, by a commissioning and installation agency in relation to erection, commissioning or installation".

(1) Erection of plant is taxable service

In a point raised before the Government whether charges for erection of plant are covered under service tax?" The Government in its Circular No. 59/8/2003, dated 20-6-2003 (appended as Annexure 1) has clarified that "the law specifically provides for taxation of commissioning and installation of plant, machinery or equipment. Thus all activities other than the commissioning and installation of the plan machinery/equipment per se, will not be chargeable to service tax". Now, the scope of the service is enlarged by the Finance (No. 2) Act, 2004, w.e.f. 10-92004, to include the erection services within its ambit.

(2) Putting up a water tank, fitting pipes and tubing, etc is taxable service

No, in a question raised before the Government - Whether the services like a plumber putting up a water tank, fitting pipes and tubing, an electrician putting up electric wire and fittings will be chargeable to service tax, the Government in its Circular No. 62/11/2003, dated 21st August, 2003 (appended as Annexure II) has clarified that putting up a water tank, piping, electric wiring in a residential premises etc. would not be covered in the definition of taxable service and thus would not be taxable.

(3) Installation of booster motors, air conditioners, etc. is taxable service

Yes, in a question raised before the Government - Whether the services like installation of booster motors, air conditioners, water filters, hand-pumps, water heater etc. will be chargeable to service tax, the Government in its Circular No. 62/11/2003, dated 21st August, 2003 (appended as Annexure II) has clarified that installing a booster pump, air conditioner, water filter and water heater, etc. would be covered in the definition and be taxable, as all these things are machinery or equipment.

Liable to pay service tax

Service tax is liable to be paid when commissioning or installation services are rendered by a commissioning or installation agency.

(1) 'Commissioning or installation agency'

The definition of 'commissioning or installation agency' has been given under clause (29) of section 65. That is:

"commissioning and installation agency means any agency providing service in relation to erection, commissioning or installation".

The definition has only specified that any agency providing 'erection, commissioning or installation' services will be covered within the ambit of service tax. It is not necessary that such agency shall be a 'commercial concern'. Therefore, every organization whether a proprietorship firm or a company or even trust, society etc., shall also be termed as agency for this purpose. However, w.e.f. 21-8-2003, the Government has exempted the commissioning or installation services provided by a commissioning and installation agency, other than a commercial concern from the whole of service tax vide Notification No. 18/2003, dated 21-8-2003 (appended as Annexure III). Therefore, in view of the aforesaid Notification, erection, commissioning or installation services provided by an agency, which is not a commercial concern like trust, society etc. shall not be liable to pay service tax.

(2) 'Commercial concern'

The term 'commercial concern' denotes a firm or a business entity or organization, engaged in commercial activities like sale, purchase or providing services for consideration and having profit motive. A charitable institution cannot fall under the category of a 'commercial concern', because it does not have profit motive. The term 'commercial concern' in the context of this service means the concern engaged in providing commissioning or installation services.

(3) Individual is liable to pay service tax

No, the Government in its Circular No. 62/11/2003, dated 21st August, 2003 (appended as Annexure II) has clarified that "Notification No. 18/2003 Service Tax, dated 21-8-2003 has been issued which exempts commission or installation services provided by a commissioning or installation agency other than a commercial concern. Accordingly the commissioning or installation services provided by an individual will be exempt from service tax". The author is of the view that the aforesaid clarification makes very' clear that the individual cannot be regarded as an agency or a commercial concern, therefore an individual who rendered commissioning or installation services will not be covered under service tax.

Commissioning and installation services are liable to be charged to service tax

Commissioning or installation services are liable to be charged to service tax when provided

§ to a customer

§ in relation to erection, commissioning or installation

(1) Customer

Services are liable to be charged to tax only when it is provided to 'customer'. The word 'customer' as per the dictionary meaning is "one accustomed to frequent a certain place of business: a buyer: a person" (reference the Chambers English Dictionary) or "a person buying goods or services from a shop, etc." (reference the Oxford Mini Dictionary). Therefore, the 'customer' is necessarily an external person who purchases a commodity or service from a shop or business concern for consideration. However, it is not necessary that customer should be a regular customer of the commissioning or installation agency.

Value of taxable services for charging tax

The value of taxable services in relation to services provided by a commissioning or installation agency shall be the gross amount charged by such agency from a customer for services in relation to erection, commissioning or installation [section 671. The words 'gross amount' is used in contrast to the ‘net amount', therefore, no abatement shall be allowed in respect of administrative/ office expenses incurred in respect of such services.

(1) Cost of parts or other material is part of taxable value

No, as per clause (vii) of the Explanation 1 to section 67, which provides that, for the removal of doubt, it is declared that the value of taxable service does not include "the cost of parts or other material, if any, sold to the customer during course of providing erection, commissioning or installation service".

The Government in its Circular F. No. B. 11/1/2001-TRU, dated 9th July, 2001 (appended as Annexure I in the 'authorized service station') has clarified that to claim the benefit of the cost of parts or accessories, such cost should be shown separately in the bill/invoice, the said clarification shall be applicable in this category of service also.

Further, the Government has issued Notification No. 12/2003-ST, dated 20-6-2003, w.e.f. 1-7-2003 (appended as Annexure IV in the 'Payment of Service Tax') by giving a general exemption for all taxable service from the levy of service tax of the value of goods and materials sold by the service provider. While explaining the scope of exemption under aforesaid Notification No. 12/2003, the Government in para 2.9.1 of its Circular No. 59/8/2003, dated 20-6-2003 (appended as Annexure V in the 'Payment of Service Tax') has also clarified, "This exemption would be available only in cases where the sale of such goods is evidenced and the sale value is quantified and shown separately in the invoice. The aforesaid Notification No. 12/2003 has been amended w.e.f. 10-9-2004, vide Notification No. 12/2004-ST, dated 10-92004, and now, w.e.f. 10-9-2004 the abatement under the aforesaid Notification shall be available if no credit of duty paid on such goods and materials sold, has been taken under the provisions of the CENVAT Credit Rules, 2004 (which has been discussed in the 'Credit of service tax and excise duty') or where such credit has been taken by the service provider on such goods and materials, such service provider has paid the amount equal to such credit availed before the sale of such goods and materials.

(2) Value of taxable service when bill raised for turnkey project

Where a 'commissioning or installation agency' gets a contract for turnkey project for commissioning and installation which is indivisible and no separate value could be assigned to commissioning or installation of goods, The point has been clarified by the Government in its Circular No. 59/8/2003, dated 20-62003 (appended as Annexure 1) that "it has been provided in law that service tax is leviable on commissioning or installation charges only and not on the material and goods supplied. However, it is upto the service provider to show the break-up of commissioning or installation charges. In case service provider shows consolidated charges, service tax would be leviable on such consolidated amount". The Government has issued Notification No. 19/2003 (as discussed in subsequent point hereunder) to provide deduction of 67% on presumptive basis from the gross amount where consolidated amount has been charged for supply of plant, machinery or equipment and service charges.

In the case of Daelim Industrial Co. Limited v Commissioner of Central Excise, Vadodara (2003) 155 ELT 457 (Tribunal-Delhi), which is now affirmed by the Supreme Court by dismissing the petition for Special Leave to Appeal (Civil) No. 24294 of 2003 of the Revenue -(2004) 170 ELT A181, it is held that it is well settled that a works contract cannot be vivisected and part of it subject to tax. For details refer to 'Payment of Service Tax'. Further in the case of State of Uttar Pradesh v Union of India 2004 (170) ELT 385 (SC) it was held that merely because service tax is imposed on telephone service it cannot be said that State Government cannot impose any tax. It was also held that "the question whether a given activity is one of sale or service is a vexed question.. it is possible that an activity may be service for purposes of one Act and sale for purposes of another Act".

(3) 'Erection' is a construction service

Erection would refer to the civil works to installation/commissioning of a plant or machinery. By the Finance (No. 2) Act, 2004, w.e.f. 10-9-2004, the scope of service tax under installation and commissioning is being extended to include erection also. Erection involves civil works, which would otherwise fall under the category of construction services. However, the Government in its Circular/letter F. No. B2/8/2004-TRU, dated 10th September 2004 (appended as Annexure V) has clarified that "in case of a composite contract for erection, commissioning and installation, the erection charges would be taxed as part of this category of service".

(4) Presumptive deduction/abatement from value of taxable service

In case of a contract, which involves the erection, commissioning or installation service along with supply of plant, machinery or equipment, w.e.f. 21st August, 2003, a presumptive deduction/ abatement of 67% of the gross amount charged from the customer for such contract shall be given, provided the exemption available under the Notification No. 12/2003, dated 20-6-2003, (as discussed above) has not been availed (vide Notification No. 19/2003, dated 21-8-2003, appended as Annexure IV, which has been amended w.e.f. 10-9-2004 vide Notification No. 12/2004-ST, dated 10-9-2004). In other words, in this case, the value of taxable service shall be limited to 33% of the gross amount charged, therefore, service tax, in this case shall be levied on 33% of the gross amount charged. For the purpose of Notification No. 19/2003, it is provided that "gross amount charged shall include the value of the plant machinery, equipment, parts and any other material sold by the commissioning and installation agency, during the course of providing erection, commissioning or installation service".

It has been provided that exemption under the Notification No. 19/2003 is optional and if exemption under Notification No. 19/2003 is claimed then exemption under Notification No. 12/2003 cannot be claimed. In other words, simultaneous exemption under Notification No. 12/2003 and Notification No. 19/2003 cannot be claimed. It may be noted that ordinarily the service charges for erection, commissioning or installation of plant etc. do not constitute 33% of the total charges including value of plant etc., therefore, if service provider charges separately for the value of plant etc. and for service charges for commission or installation then exemption under Notification No. 12/2003 is more beneficial but where consolidated amount is charged for value of plant etc. and services for commission or installation then service provider should avail the exemption under Notification No. 19/2003. Further, the Notification No. 19/2003, dated 21-8-2003, has been amended w.e.f. 10-9-2004 vide Notification No. 12/2004-ST, dated 10-9-2004. Now, w.e.f. 10-9-2004, it is provided that benefit under Notification No. 19/2003 shall not be available if credit of duty paid on inputs or capital goods has been taken under the provisions of the CENVAT Credit Rules, 2004 (which has been discussed in the 'Credit of service tax and excise duty').

(5) Value of taxable service where lumpsum payment is received prior to 1-7-2003 but the entire or part of service is provided on or after 1-7-2003

The Government in its Circular No. 65/14/2003, dated 5th November 2003 (discussed and appended as Annexure VII in the - 'Payment of Service Tax') has clarified that "where the value of taxable service has been received in advance for a service which became taxable subsequently, service tax has to be paid on the value of service attributable to the relevant month/quarter which may be worked out on pro rata basis". Accordingly on the services rendered on or after 1-7-2003 for which the lumpsum payment has been received prior to 1-7-2003 (i.e. prior to the date of imposition of levy on taxable service), the value of taxable service shall be worked out on pro rata basis.

Exempted erection, commissioning or installation services

(A) Exemption to other than commercial concern

The Government, w.e.f. 21-8-2003, has exempted the taxable service provided to a customer in relation to erection, commissioning or installation by a commissioning and installation agency, other than a commercial concern from the whole of service tax (vide Notification No. 18/2003, dated 21-8-2003 appended as Annexure III). While clarifying the scope of exemption under the aforesaid Notification, the Government in its Circular No. 62/11/2003 (appended as Annexure II) has clarified that "Accordingly the commissioning or installation services provided by an individual will be exempt from service tax".

(B) Exemption for the amount received prior to 10-9-2004

The Government, w.e.f. 10-9-2004 has exempted from whole of service tax the portion of the taxable value, in respect of services provided to a customer, by a commissioning and installation agency in relation to erection', which is received by the service provider prior to the 10th day of September 2004 [vide Notification No. 25/2004-ST, dated 10-9-2004 appended as Annexure VI in the - 'Stock Broker's service']. As mentioned earlier, the Finance (No. 2) Act, 2004, w.e.f. 10-9-2004 has expanded the scope of this service and the 'erection' services are also brought under the service tax net, therefore, to avoid any confusion about the tax on receipt prior to 10-9-2004, such exemption has been given. It may be noted that the Government in its Circular No. 65/14/2003, dated 5th November, 2003 (appended as Annexure VII in the - 'Payment of Service Tax') had clarified that "where the value of taxable service has been received in advance for a service which became taxable subsequently, service tax has to be paid on the value of service Attributable to the relevant month/quarter which may be worked out on pro rata basis". Further, w.e.f. 97-2004 the Service Tax Rules, 1994 have been amended vide Notification No, 5/2004-ST, dated 9-7-2004. As per the aforesaid amendment, where the value 0 taxable service is received before providing the taxable service, the service tax shall be paid on the value of service attributable to the relevant month, or quarter, as the case may be. In other words, where payment is received in advance, service tax will be payable on pro ;ata basis. Therefore, if the above exemption Notification would not have been issued then a service provider would be held liable to pay service tax on the portion of amount so received in advance before the imposition of levy of service tax which related to the portion of taxable services rendered on or after the date of imposition of service tax.

(C) General Exemption

The Government has granted exemption from the whole of Service Tax in respect of all taxable services, for services provided to United Nations or an International Organisation. Similarly, the exemption, subject to certain conditions, has also been granted for taxable service provided to a developer units of Special Economic Zone (SEZ). The Government, w.e.f. 20 November, 2003 has restored the exemption, as an interim measure, from the whole of service tax when payment is received in convertible foreign exchange for the taxable services rendered in India provided it was not repatriated from or sent outside India, such exemption was earlier withdrawn w.e.f. 1-3-2003. The reader may note that detailed discussion about aforesaid exemptions along with relevant notifications have been given in the 'Exemption from whole of Service Tax - Some Cases'.

N.B. The readers may note that provisions, procedures and other related discussion related to registration, payments of service tax, filing of return, interest and penalty, assessment procedure, appeal, refund of tax, etc., which are same, as applicable in respect of other taxable services, have been given in separate.

Annexure I

Clarification on the scope of the term for levy of service tax

[Circular No. 59/8/2003 [F. No. B3/7/2003-TRU], dated 20-6-2003, relevant extracts, as corrected by Corrigenda Circular No. 62/11/2003, dated 21-8-20031

2.6 Commissioning and installation services

Certain doubts have been raised in case of 1 [commissioning or installation]. In this regard, the following is clarified, -

In case of commissioning and installation it has been pointed out that in case of turnkey project, the contract may be indivisible and no separate value could be assigned to commissioning or installation of goods. Doubts have also been raised as to what would be the value of taxable service. It is 1 [clarified] that it has been provided in law that service tax is leviable on 2 [commissioning or installation] charges only and not on the material and goods supplied. However, it is upto the service provider to show the break-up of commissioning or installation charges. In case service provider shows consolidated charges, service tax would be leviable on such consolidated amount.

A doubt has been raised as to whether charges for erection of plant are covered under the service tax or only commissioning and installation charges. It is clarified that the law specifically provides for taxation of commissioning and installation of plant, machinery or equipment. Thus all activities other than the commissioning and installation of the plant/ machinery/ equipment per se, will not be chargeable to service tax.

Annexure II

Miscellaneous issues relating to imposition of service tax on commissioning or installation services

Circular No. 62/11/2003 [F. No. B3/7/2003-TRU], dated 21-8-2003, relevant extract

1.1 Commissioning or installation of plant, equipment or machinery by a commissioning or installation agency, is chargeable to service tax. A doubt has been raised as to whether the services like a plumber putting up a water tank, fitting pipes and tubing, an electrician putting up electric wire and fittings, installation of booster motors, air conditioners, water filters, hand-pumps, water heaters, etc. will be chargeable to service tax.

1.2 As commonly understood, the activity of installation means the act of putting an equipment, machinery or plant into its place and making it ready for use. The activity of installation will start after erection which would refer to putting up civil structures. Commissioning of a plant would mean operationalising an installed plant/ equipment/ machinery. In this backdrop it is clarified that putting up a water tank, piping, electric wiring, in a residential premises etc. would. not be covered in the definition of taxable service and thus would not be taxable. However, installing a booster pump, air-conditioner, water filter, water heater, etc. would be covered in the definition and be taxable, as all these things are machinery or equipment.

1.3 Notification No. 18/2003-Service Tax, dated 21-8-2003 has been issued which exempts commission or installation services provided by a commissioning or installation agency other than a commercial concern. Accordingly the commissioning or installation services provided by an individual will be exempt from service tax.

1.4 Notification No. 19/2003-Service Tax, dated 21-8-2003 has been issued which provides that in case of a contract which involves the commissioning or installation service along with supply of plant, machinery or equipment, service tax will be payable only on 33% of the gross amount charged for commissioning or installation and supply of plant, machinery or equipment. It is optional for the assessee to avail of this notification. It is emphasized under this notification that the gross amount (33% of which is chargeable to service tax) shall include the value of the plant, machinery, equipment, parts and any other material sold by the service provider along with the commission or installation service. The benefit of this notification can be availed for a contract only if the exemption under notification 12/2003-Service Tax, dated 20-6-2003 is not availed for that contract.

1.5 Corrigendum to Circular No. 59/8/2003: In Service Tax Circular No. 59/8/2003, dated 20th June, 2003, in paragraph 2.6,

(i) in the first sentence the words "commercial coaching and training" may be read as "commissioning or installation";

(ii) in the first bullet the sentence "It is submitted that it has been provided in law that service tax is leviable on erection and commissioning charges only and not on the material and goods supplied." may be read as "It is clarified that it has been provided in law that service tax is leviable on commissioning or installation charges only and not on the material and goods supplied."

Annexure III

Exemption from service tax on service provided to a customer in relation to erection, commissioning or installation by a commissioning and installation agency, other than a commercial concern

[Notification No. 18/2003-ST [F. No. B3/7/2003-TRU], dated 21-8-2003, as amended by Notification No.12/2004-ST, dated 10-9-2004]

In exercise of the powers conferred by section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service provided to a customer in relation to 1 [erection commissioning or installation by a commissioning and installation agency, other than a commercial concern, from the service tax leviable thereon under section 66 of the said Act.

Annexure IV

Exemption of service tax on 67% of the gross amount charged from the customer under a contract for supplying a plant, machinery or equipment and erection, commissioning or installation of the said plant, machinery or equipment

[Notification No. 19/2003-ST [F. No. B3/7/2003-TRU], dated 21-8-2003,

as amended by Notification No. 12/2004-ST, dated 10-9-2004]

In exercise of the powers conferred by section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to 1 [erection] do, hereby exempts the taxable service provided to a customer in relation to commissioning or installation by a commissioning and installation agency, from so much of the service tax leviable thereon under section 66 of the said Act, as is in excess of the amount of service tax calculated on a value which is equivalent to thirty-three per cent of the gross amount charged from the customer under a contract for supplying a plant, machinery or equipment and 2 [erection,] commissioning or installation of the said plant, machinery or equipment, subject to the following conditions, namely:

(i) the exemption contained in this notification is optional to the commissioning and installation agency;

and (sic)

(ii) the benefit under this notification shall be allowed only if the commissioning and installation agency has not availed the benefit under the Notification of the Government of India, in the Ministry of Finance (Department of Revenue), No. 12/2003-Service Tax, dated the 20th June, 2003, [G.S.R. 503(E), dated the 20th June, 2003], for the said contract; and (sic)

3 [(iii) the benefit under this notification shall be allowed only if no credit of duty paid on inputs or capital goods has been taken under the provisions of the Cenvat Credit Rules, 2004.]

Explanation. -For the purposes of this notification, the gross amount charged shall include the value of the plant, machinery, equipment, parts and any other material sold by the commissioning and installation agency, during the course of providing 4 [erection] commissioning or installation service.

Annexure V

Issues pertaining to service tax - Regarding

Letter F. No. B2,/8/2004-TRU, dated 10-9-2004, relevant extracts

14. Extension of service tax on installation and commissioning to erection services: Service tax was levied on commissioning and installation of plant, machinery and equipment w.e.f. 1-7-2003. The general practice is that 'erection, commissioning and installation' are contracted as a composite package. There have been a number of doubts and queries regarding the distinction between erection and commissioning/ installation. Erection would refer to the civil works to installation/ commissioning of a plant or machinery. In this year's budget, the scope of service tax under installation and commissioning is being extended to include erection also. Erection involves civil works, which would otherwise fall under the category of construction services. However, in case of a composite contract for erection, commissioning and installation, the erection charges would be taxed as part of this category of service.