Consulting Engineer's services were brought under the Service Tax net by the Finance Act, 1997, w.e.f. 7-7-1997 vide Notification No. 23/97, dated 2-7-1997. The service shall be taxed, if provided by a consulting engineer to clients.

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 Chapter -'Payment of Service Tax'.

The definition of consulting engineer has been given under clause (31) of section 65. It provides:

“consulting engineer means any professionally qualified engineer or an engineering firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering but not in the discipline of computer hardware engineering or computer software engineering".

Therefore, the services will fall under the consulting engineer's service, if

§ any advice, consultancy or technical assistance;

§ is rendered in one or more disciplines of engineering excluding computer (hardware/ software) engineering.

(1) 'advice' and 'consultancy'

The term 'advice' refers to 'opinion given about what should be done; piece of information' and 'consult' refers to 'seek information or advice from' and ‘consultancy' refers to 'professional advice' (reference the Oxford Mini Dictionary). Therefore, in the context of service tax 'advice or consultancy' means to give professional opinion about what should be done in future.

(2) 'technical assistance'

The term 'technical' refers to 'pertaining to art, especially a useful art or applied science' (reference the Chambers English Dictionary). The term/assistance' means 'help'. Therefore, in the context of service tax 'technical assistance' means providing assistance on the basis of special skill and knowledge. For instance, a civil engineer provides technical assistance in designing the high rise building or bridge or physical testing etc.

(3) 'disciplines of engineering'

The Government in its Circular F. No. B. 43/5/97-TRU, dated 2-7-1997 (appended as Annexure I) has clarified that the services which attract the levy include all the services which are rendered in the capacity of a professional person and specifically includes the services pertaining to -

§ Structural engineering works

§ Civil engineering works

§ Mechanical engineering works

§ Electrical engineering works

§ Construction management

With change of time and expanding horizons of education, disciplines of engineering are also increasing. There are numerous disciplines of engineering for which there cannot be an exhaustive list, for the purpose of service tax, it should be understood in the context of its commonly understood meaning and scope.

(4) Inspections and certifications by certifying agencies are consulting engineering services

A point was raised before the Government, whether the service of 'third party inspection and certification' carried out by a professionally qualified engineer or an engineering firm can fall under the category of advice, consultancy or technical assistance? While examining the issue, the Government in the Circular F. No. 177/5/2001-CX.4 (Order No. 1/1/2003 under section 37B of the Central Excise Act), dated 26-2-2002 (appended as Annexure-11), has clarified that certification given under authority of any statute/ international protocol/ code/ convention, cannot be considered to be a consultancy job. An advice is generally optional in nature and has no statutory force, therefore, the activity of certification will not fall under the category of advice. The technical assistance is normally for the purpose of achieving a particular aim or result, thus, certification work done under statutory authority cannot be considered to be technical assistance.

To issue the certificate under the statutory authority, it will obviously be necessary for the certifying agency to conduct some survey/ inspection, such survey/ inspection will not amount to consultancy, advice or technical assistance. However, if survey/ inspection is done by an agency other than the certifying agency, then such survey/ inspection will fall under the category of consultancy, advice or technical assistance. The reader may note that the Finance Act, 2003, w.e.f. 1-7-2003, has brought the 'technical inspection and certification services' under the Service Tax net, which has been discussed in detail in separate Chapter on such service. Therefore, now such inspections and certifications services are taxable under that category of taxable service, which has also been clarified by the Government in para 2.5 of the Circular No. 59/8/2003, dated 20-6-2003 (appended as Annexure I in Chapter on 'technical inspection and certification services'. Further, the Finance Act, 2003, w.e.f. 14-5-2003 has introduced a new section 65A to provide the manner of determination of classification of taxable services, which has been discussed in detail in the Chapter -'Classification of Services', therefore, now, service tax for 'technical inspection and certification services' shall be paid according to that category of taxable service.

(5) Architectural services fall under the consulting engineering services

No, in a point raised before the Government - whether the services rendered by the Architects would come under the purview of service tax levied on services provided by consulting engineers, the Government in the Trade Notice No. 1/98-ST, dated 5-1-1998 (appended as Annexure III) has clarified, "the term 'Consulting Engineer' will not include 'architect' within its scope and therefore, service tax levy on services rendered by a consulting engineer in any discipline of engineering will not cover the architectural services rendered by architects". However, the reader may note that 'architect's services' has been taxed separately w.e.f. 16-10-1998, for detailed discussion refer to Chapter 'Architect's services' of this book.

As mentioned in the above point, the Finance Act, 2003, w.e.f. 14-5-2003, has introduced a new section 65A, now, determination of classification of taxable service shall be made according to the manner given in the provision of Section 65A and tax shall be paid according to that category of taxable service.

(6) Computer engineer computer engineering firm falls under the consulting engineering services

The Finance (No. 2) Act, 2004, w.e.f. 10-9-2004 has made change in the definition of consulting engineer and specifically excluded the computer (hardware/ software) engineering from its scope. Therefore, now, a computer engineer or a computer engineering firm which renders any advice, consultancy or technical assistance in any manner to a client will be out of the ambit of consulting engineering services. For instance - advice to client in development of software programme or technical assistance in the development of a software programme of a client will squarely fall under the ambit of consulting engineering services. The reader may note that prior to 10-9-2004, when service in respect of discipline of computer (hardware/ software) engineering were covered under consulting engineering services, the Government had exempted (w.e.f. 28-2-1999) the consulting engineering service in relation to computer software as mentioned at the end of this chapter (vide Notification No. 4/99-ST, dated 28-2-1999 appended as Annexure IV). As now such services have been excluded from the purview of 'consulting engineer service' hence the aforesaid Notification No. 4/99 has been withdrawn by Notification No. 23/2004-ST, dated 10-9-2004.

(7) Services rendered by qualified engineers as insurance surveyor and loss assessor falls under the consulting engineering services

No, number of professionals other than engineers can also be engaged by the insurer for surveying and loss assessments which suggest that the services provided by the surveyor or loss assessor is not in the field of engineering. The Board in its Circular No. 34/2/2001-CX, dated 30-04-2001 (appended as Annexure V) has clarified that the term 'consulting engineer' as defined in the context of Service Tax will not include those qualified engineers who act as 'insurance surveyors and loss assessor' within its scope and therefore, such services will not be covered within the ambit of consulting engineering services. However, the reader may note that, services of 'surveyor and loss assessor' has been taxed separately, w.e.f. 16-7-2001, for tails discussion, refers to Chapter -'Insurance Auxiliary Services'.

Taxable service

The definition of taxable service provided by a consulting engineer has been given under sub-clause (g) of clause (105) of section 65. That is:

any service provided "to a client, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering".

(1) Scope of taxable services

The Government in its Circular F. No. B. 43/5/97-TRU, dated 2-7-1997 (appended as Annexure I) has clarified, "the scope of the service of a consultant may include any one or more of the following categories

(i) Feasibility study;

(ii) Pre-design services/ project report,

(iii) Basic design engineering;

(iv) Detailed design engineering;

(v) Procurement;

(vi) Construction supervision and project management;

(vii) Supervision of commissioning and initial operation; (viii) Manpower planning and training;

(ix) Post-operation and management;

(x) Trouble shooting and technical services, including establishing systems and procedure for an existing plant.

Though the above list is not exhaustive, it illustrates the wide scope and nature of the services rendered by a consulting engineer.

In the case of Commissioner of Central Excise, Shillong v Rabindra Das (2003) 158 ELT 487 (Tribunal-Kolkata) relying on the judgment in the case of V. Shanmughavel (Dr.) v CCE Chennai-II (2001) 131 ELT 14 (Mad) it is held that functions performed by the assessee such as -

(i) planning of building,

(ii) preparation of land map,

(iii) preparation of ground plan of factory,

(iv) stability certificate,

(v) installed capacity assessment,

(vi) property valuation

come within the ambit of the term 'Consulting Engineer'. As discussed in subsequent pages on this Chapter, V. Shanmughavel case is not applicable after the clarification issued by the Government vide Circular F. No. 177/5/2001CX.4, dated 26-2-2002 (appended as Annexure-11).

(2) Services rendered by an employed engineer are taxable services

When a consulting engineer is an employee in a concern and giving any advice, consultancy and technical assistance in any disciplines of engineering, as an employee of the concern, this will not be taxable service because in this case, there is relationship of an employee and an employer. However, if such consulting engineer also works as an independent consultant then services rendered by him in independent capacity, in respect of any advice, consultancy and technical assistance in any disciplines of engineering shall be taxable services. Since, the Act does not require, in contrast to. the Chartered Accountant's services, an engineer must be a practitioner, therefore, if a consulting engineer along with his employment also renders services in the field of consulting engineering services, he shall be liable to pay the tax in respect of such services.

(3) All services rendered in professional capacity are taxable services

No, a consulting engineer or an engineering firm is liable to pay service tax only in relation to 'advice, consultancy or technical assistance in any manner', therefore, if anything is done, which does not consist of 'advice, consultancy or technical assistance' it would not be covered under the ambit of service tax, This is in contrast to certain other services, for instance - in the case of Chartered Accountant's services, a service is taxable if rendered 'in professional capacity' by a practising chartered accountant. The word 'in professional capacity' is not mentioned in the definition of taxable service of consulting engineering service. Therefore, if a consulting engineer or engineering firm renders any services 'in professional capacity' which does not consist of 'advice, consultancy or technical assistance' will not be covered under the service tax. Thus, if a practising chartered accountant issues a certificate (subject to Notification No. 59/98, dated 16-10-1998), it will amount to a taxable service rendered by him 'in professional capacity' whereas, if a consulting engineer or an engineering firm, whose profession gives him authority to issue a certificate in certain case of the factual figures, against fee, it will not be a taxable service. Similarly, if a consulting engineer is a visiting faculty in an educational institute, the amount charged by him from such services would not be charged to service tax because of the aforesaid reason.

(4) Annual maintenance contracts (AMC)/after sale services contracts are taxable services

An engineering firm rendering services under annual maintenance contracts (AMC) or after sale service contracts will not be covered under the service tax if such services are in the form of repair. However, if service is rendered in the form of advice, consultancy or technical assistance, it will become taxable service. The reader may note that the Finance Act, 2003, w.e.f. 1-7-2003, has brought 'maintenance or repairing service' which includes annual maintenance contracts (AMC), under service tax net, which has been discussed in detail in the Chapter on such services.

(5) Immovable property valuation is taxable services

In the case of V. Shanmughavel (Dr.) v C.C.E. Chennai-II (2001) 131 ELT 14 (Mad) it was held that the advice offered by an engineer whether it is a firm or an individual or a company on the basis of his engineering knowledge in respect of immovable property valuation would certainly amount to an advice which is integrally connected with the engineering discipline. In the case of Commissioner of Central Excise, Shillong v Rabindra Das (2003) 158 ELT 487 (Tribunal-Kolkata) relying on the aforesaid judgment of Madras High Court, it is held that inter alin property valuation comes within the ambit of the term 'Consulting Engineer'. Similar decision was given in the case of CCE v S.B. Gopalakrislina (2004) 164 ELT 185 (Tri.-Bang.). But, the Government in the Circular F. No. 177/5/2001-CX.4, dated 26-2-2002 (appended as Annexure-11) has clarified that certification given under authority of any statute/ international protocol/ code/ convention, cannot be considered to be a consultancy, advice or technical assistance. Therefore, if an engineer or engineering firm issues the certificate in respect of immovable property valuation under the statutory authority, it will not amount to consultancy, advice or technical assistance. Further, the words 'in professional capacity' is not mentioned in the definition of taxable service of consulting engineering service. Therefore, services rendered 'in professional capacity' but which do not consist of 'advice, consultancy or technical assistance' will not be within the ambit of service tax under this category of taxable service. As mentioned earlier in this Chapter, the reader may note that the Finance Act, 2003, w.e.f. 1-7-2003, has brought the 'technical inspection and certification services' under the Service Tax net, which has been discussed in detail in separate Chapter on such service. The Government has also clarified in para 2.5 of the Circular No. 59/8/2003, dated 20-6-2003 (appended as Annexure I in Chapter on 'technical inspection and certification services') that 'technical inspection and certification services would cover certification of all types including that of immovable property. Therefore, now such inspections, valuation and certifications services will be taxable under that category of taxable service. Further, the Finance Act, 2003, w.e.f. 14-5-2003, has introduced a new section 65A to provide the manner of determination of classification of taxable services which has been discussed in detail in the Chapter - 'Classification of Services'. Therefore, now, determination of classification of taxable service shall be made according to the manner given in the provision of section 65A and tax shall be paid according to that category of taxable service.

(6) Some doubts and clarifications regarding taxable service

1. A foreign engineering firm renders any services in India, which are under the ambit of consulting engineering services, will attract the service tax.

2. A foreign engineering firm, if gives any part of the work to an Indian engineering firm, on sub-contract basis in respect of consulting engineering services in India, in that case, an Indian firm shall not be liable to pay tax, only foreign firm shall have to pay the tax.

3. A foreign engineering firm, if gives any part of the work to an Indian engineering firm, on sub-contract basis in respect of consulting engineering services in India and an Indian firm raises bill directly to the client, instead of foreign firm, in that case, an Indian firm shall be liable to pay tax even though the firm was acting as a sub-contractor.

4. The definition of 'consulting engineer' does not provide that it should be 1commercial concern'. Therefore, consulting engineering services rendered by any person including a charitable institution will be covered under this service, though services may be rendered on 'no profit no loss' basis.

(7) Design or drawing etc. done during the turnkey projects are taxable service

The Government in its Circular No. 49/11/2002-ST [F. No. 137/13/2001-CX.4], dated 18-12-2002 (appended as Annexure VI) has clarified that designing, drawing done and also technical assistance provided during the course of execution of turnkey project for construction of flats, building etc. by construction agencies are services provided to client, and service is definitely of 1consulting engineer', hence taxable. However, 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 (design and detailed engineering, commissioning of the plant) subject to tax under the consulting engineer service. For details refer to Chapter - 'Payment of Service Tax'.

(8) 'Erection & commissioning charges' are liable to service tax

The Government in its Circular No. 49/11/2002-ST [F. No. 137/13/2001CX4], dated 18-12-2002 (appended as Annexure VI) has 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) 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 stated that the Finance Act, 2003, w.e.f. 1-7-2003, has brought 'commissioning and installation service' separately, which has been discussed in detail in the Chapter on such services, under the service tax net and therefore now the contents of the aforesaid Circular to such extent have become redundant. As mentioned earlier in this Chapter, the Finance Act, 2003, w.e.f. 14-5-2003, has introduced a new section 65A. Now, determination of classification of taxable service shall be made according to the manner given in the provision of section 65A and tax shall be paid according to that category of taxable service. Therefore, the views of the author have been upheld by the Government.

(9) Transfer of technology under foreign collaboration is taxable service

The companies in India may enter into agreement with foreign companies for the transfer of technology or know how and in consideration for the same pay lump sum and/or running royalty. The question may be raised whether transfer of technology or know how is covered under the consulting engineer service. A service is taxable under consulting engineer service only if provided in the form of 'advice', 'consultancy' or 'technical assistance' and not for 'use' of technical information or know how provided by the consulting engineer. Thus, an agreement for the transfer of technology/ know-how is not covered under the 1consulting engineer service'. However, on 'import of technology' under foreign collaboration, cess is payable under the Research & Development Cess Act, 1986. In the case of Shree Warana Sahakari Dudh Utpadak Prakyia Sangh Limited v C.C. & C. Ex., Pune (2003) 155 ELT 465 (Tribunal-Mumbai) it was held that technical know-how is regarding manner of producing the end product. It is like a recipe. Technical know-how can never be transferred as in all cases of job work raw materials are never transferred by supplier to job worker, cost of technical know-how could not be included in assessable value. In the case of Naran Lala Metal Works Limited v Commissioner of C. Ex., Surat-I (2003) 156 ELT 281 (Tribunal-Mumbai) it was held that technical know-how charges, erection and commissioning of equipment charges are not includible in the assessable value under Central Excise.

In the case of Aviat Chemicals Private Limited v CCE (Service Tax), Mumbai, in Appeal No. ST/45/04-NB (A), decided on 7-6-2004, CESTAT, Delhi Bench held that "no consultancy or advice is involved in leasing or sale of trademarks. It is a transaction in intangible property and not a case of granting any advice." The Tribunal set aside the order for "demanding service tax after treating the grant of right to use trademark as consultancy"; whereas the Revenue authorities treated such agreement is covered under consulting engineer service.

In the case of Navinon Ltd v CCE, Mumbai-VI in the Appeal No. E/803/04 in the Order No. A-713/WZB/2004/C-III, dated 13-8-2004, SESTAT, West Zonal Branch, Mumbai, it was held that payment of "Royalty" for use of technology or know how is not a service under consulting engineer service and it was also held that there is no provision under service tax for deduction of tax at source. Para 5 of the order is reproduced below:

"The amount, which the appellants have to remit to M/s. Ciba Geigt Ltd., Switzerland, are -mentioned in the agreement under the heading "Royalty". Payment of royalty in the common parlance are not insisted as payment for a service provided. It is understood as a share of product or profit reserved by owner for permitting another the use of property. Royalty payments in the present case for the use of technology and know-how cannot be equated with any services to be provided by M/s. Ciba Geigy Ltd. to the appellants and therefore, the order of the lower authorities attracting a levy of tax on royalty payments made are required to be set aside".

The reader may note that the Finance (No. 2) Act, 2004, we.f. 10-9-2004, has brought intellectual property rights services other than copyright under the service tax net, therefore, now aforesaid service will also be taxed as a separate category of taxable service as discussed in a separate Chapter on the said service.

Liable to pay service tax

Service tax is liable to be paid when consulting engineer's services are provided by

§ a professionally qualified engineer or

§ an engineering firm

(1) 'professionally qualified engineer'

The word 'engineer' means 'one who designs or makes, or puts to practical use, engines or machinery of any type, including electrical or one who designs or constructs public works, such as roads, railways, sewers, bridges, harbours, canals etc.' (reference the Chambers English Dictionary). The word 'professional' means pertaining to a profession or engaged in a profession or in the profession in question' (reference the Chambers English Dictionary). A person is regarded as a professionally qualified person, if he has attained any particular qualification after undergoing the systematic study and rigorous examinations as well as practical training. In the present context of service tax a 'professionally qualified engineer' means an individual, who has special knowledge and degree or diploma in the field of engineering. The Government in its Circular F. No. B. 43/5/97-TRU, dated 2-7-1997 (appended as Annexure 1) has clarified, “consulting engineering shall include self-employed, professionally qualified engineer who may or may not have employed others to assist him. It may be noted that merely requisite knowledge cannot make a person 'professionally qualified engineer unless he has degree or diploma in any discipline of engineering. Therefore, if a person, who without the degree or diploma, on the basis of his practical knowledge and experience, renders any advice, consultancy or technical assistance he will not be covered under the service tax.

(2) 'engineering firm'

The term 'firm' albeit has been defined under section 4 of the Indian Partnership Act, 1932 as 'collective' association of persons 'who have agreed to share the profits of a business', and in sub-section (23) of section 2 of the Income tax Act, 1961 also the 'firm' has been assigned the same meaning. The term 'firm' means 'the title under which a company transacts business or a business house' (reference the Chambers English Dictionary). The term 'firm' in the context of service tax cannot be construed in limited sense; it refers to a concern engaged in providing services of engineering. The Government in its Circular F. No. B. 43/5/97-TRU, dated 2-7-1997 (appended as Annexure 1) has clarified that an engineering firm may be "organized as a sole proprietorship, partnership, a Private or a Public Limited Company". The word 'engineering firm' includes a company [Tata Consultancy Services v Union of India 2001 (130) ELT 726 (Kar)]. In the case of M.N. Dastur & Company Limited v Union of India 2002 (140) ELT 341 (Cal), it was also held that advice offered by an engineer either as an individual or a firm or a company which is integrally connected with the 'engineering discipline' comes within the ambit of service tax. It is not necessary that the persons who owned the 'firm' must also be engineers, a 'firm' may involve in providing consulting engineering services by employing other 1consulting engineers' with whose professional expertise and assistance, the 'firm' runs its business, for example, 'Larsen & Turbo' (L&T), a prominent engineering company.

(3) Firm should be 'commercial concern'

No, in the definition of 'consulting engineer', it has not been mentioned that an engineering firm should be a 'commercial concern'. The term 'commercial concern' refers to undertake commercial activities for consideration with profit motive. In the absence of the word 'commercial concern' from the definition of 1consulting engineer', if an engineering firm works without a profit motive, it shall be liable to pay service tax. Thus, NGO, trust or any other institution rendering any advice, consultancy or technical assistance in one or more disciplines of engineering even on 'no profit no loss' basis shall be liable to pay service tax on the gross amount charged for such services.

(4) Sub-contractor is liable to pay service tax

No. The Government in its Circular F. No. B. 43/5/97-TRU, dated 2-7-1997 (appended as Annexure 1) has clarified that the services should be rendered to a client directly, and not in the capacity of a sub-consultant/ associate consultant to another consulting engineer, who is the prime consultant. In case services are rendered to the prime consultant, the levy of service tax does not fall on the sub-consultant but is on the prime or main consulting engineer who raises a bill on his client (which includes the charge for services rendered by the subconsultant).

Consulting engineer's services liable to be charged to tax

Consulting engineer's services liable to be charged to service tax when provided to

§ a client;

§ in any manner;

§ either directly or indirectly;

§ in relation to one or more disciplines of engineering.

(1) Client

Services are liable to be charged to tax only when it is provided to a 'client'. The word 'client' as per the dictionary meaning means "a person who employs a lawyer or professional adviser; a customer" (reference the Chambers English Dictionary) or "a person using the services of a professional person; customer" (reference the Oxford Mini Dictionary).

Therefore, the 'client' is necessarily an external person who hires or uses the services of another person for consideration. Service tax will attract only if services are rendered to a client, not to the other department within the same concern. In other words, services must be provided to a separate entity or external person. When services are provided to a charitable institution for which no fee is charged it is not a client. Therefore, there is no question of service tax unless services are provided to a client on payment basis.

(2) Meaning of 'in any manner'

Services are subject to tax when provided 'in any manner'. The words 'in any manner' signify that manner of giving advice or consultancy or technical assistance may be oral, or in writing, or may be over the telephone, or video conference or by any other mode of communication like fax or e-mail.

(3) 'Directly or indirectly'

Services are subject to tax when provided 'directly or indirectly'. Sometimes, it may be possible that service provider may not alone be able to execute the work and take the help of other person or concern by employing them on sub contract basis for the execution of work. In this case, even if service provider gets the part of the service done by employing the services of other person or concern, it will be treated that services are provided by the original service provider and tax would be charged on the entire services.

Value of taxable services for charging tax

The value of taxable services in relation to consulting engineer's services provided by a consulting engineer to the client shall be the gross amount charged from the clients in respect of engineering services [section 67].

Explanation 1 has also been added to section 67, which provides that, for the removal of doubt, in respect of only certain specific services, it is declared that certain amount shall be the part of value of taxable services and certain amount shall not be the part of the value of taxable services, but nothing has been specified in respect of consulting engineer's services.

(1) Reimbursement of out of pocket expenses are part of taxable value

No, the Government in its Circular F. No. B. 43/5/97-TRU, dated 2-7-1997 (appended as Annexure 1) has clarified that service tax on consulting engineers shall be the gross amount charged to the client excluding the amount incurred on behalf of the client towards expenses which are reimbursed on actual basis. Therefore, if a consulting engineer has incurred certain expenses such as travelling expenses, boarding and loading expenses etc. which are reimbursed by the client, the same are not subjected to service tax. However, the assessee, in this respect, must provide documentary evidence to substantiate his claim.

(2) Reimbursement of expenses is deductible - when bill raised for taxable services on lump sum basis

Yes, the Government in its Circular F. No. B. 43/5/97-TRU, dated 2-7-1997 (appended as Annexure 1) has clarified, "in case client is billed on lump sum basis, any deductions from the same on account of reimbursable expenses, for the purpose of determining the value of taxable service shall be permitted on the basis of documentary evidence adduced" by the consulting engineer. The reader may note that in the relevant para of the aforesaid circular, there are some typographical errors.

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

Where a consulting engineer gets a contract for turnkey project which will include supply of materials, labour charges etc., the value of taxable services shall be the amount which is attributable to advice, consultancy or technical assistance in one or more disciplines of engineering. However, in case a consolidated bill was raised that includes the amount in respect of consulting engineer's services, in this case, the department may levy the service tax on the entire amount of the bill unless the service provider provides documentary evidence to the satisfaction of the assessing officer in respect of other charges. Therefore, in such cases, to avoid the dispute, it is advisable to give break-up in the bill for the amount charged in respect of various services, materials, components etc. The Government has issued Notification No. 12/2003-STdated 20-6-2003, w.e.f. 1-7-2003 (appended as Annexure IV and discussed in details in Chapter on 'Payment of Service Tax) by giving a general exemption from part of the value of all taxable services from service tax which represents the cost of goods or material sold by the service provider to the receiver of such services during the course of providing taxable service provided it has been 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 Chapter '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. 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 as consultancy under Consulting Engineer and the contract on the turnkey basis is not a consultancy contract. For details refer to - 'Payment of Service Tax'.

Therefore, in case of consulting engineer's services, the value of taxable services shall be the gross amount charged by the service provider for such services rendered by him without claiming any abatements towards administrative/ office expenses incurred for rendering such services. In other words, 'gross amount' here indicates that no deduction shall be allowed in respect of any expenditure incurred by the service provider which has proximate connection in rendering the services by him.

Exempted consulting engineer's services

(A) In relation to Computer Software

The Government has exempted the taxable services provided to any person by a consulting engineer in relation to computer software from the whole of the service tax (vide Notification No. 4/99-ST, dated 28-2-1999 (appended as Annexure IV). As mentioned earlier, the Finance (No. 2) Act, 2004, w.e.f. 10-92004 has made change in the definition of consulting engineer and specifically excluded the computer (hardware/ software) engineering from its scope. Therefore, now the aforesaid Notification No. 4/99 has been rescinded by the Government, as after the aforesaid changes, the said exemption Notification had become redundant.

(B) On transfer of technology

The Government has exempted the taxable services provided by a consulting engineer to a client on transfer of technology from so much service tax as is equivalent to the amount of cess paid on the said transfer of technology under the provisions of Section 3 of the Research and Development Cess Act, 1986 [vide Notification No. 18/2002-Service Tax, dated 16-12-20021 (appended as Annexure VII)

(1) Effect on difference in Service tax rate and Cess i.e. 5% under the Notification No. 18/2002, dated 16-12-200

The exemption under the aforesaid Notification No. 18/2002 dated 16-127 2002 is available on the taxable services provided by a consulting engineer to a client on transfer of technology from so much service tax as is equivalent to the amount of cess paid on the said transfer of technology under the provisions of Section 3 of the Research and Development Cess Act, 1986. When aforesaid exemption Notification was issued, the cess rate and service tax rate were similar i.e. 5%, but now service tax rate is enhanced to 8%, w.e.f. 14-5-2003, and further enhanced, w.e.f. 10-9-2004, to 10%, therefore, there is difference in rate of tax i.e. 5%. The exemption under the aforesaid Notification is not restricted to cess paid on taxable service rendered on transfer of technology but equal to cess paid, while cess is paid on the entire amount towards 'import of technology', service tax is payable only on taxable service. Therefore, in such case, cess paid always would be a higher amount than the service tax payable on taxable service, thus, entire amount of service tax payable on taxable service rendered (by consulting engineer) on transfer of technology will be exempted, thus, enhancement of service tax rate will not affect the exemption granted by aforesaid Notification.

(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 or 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 mav note that detailed discussion about aforesaid exemptions along with relevant notifications have been given in the Chapter on '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 Chapters of this Book.

Annexure I

Service tax on consulting engineers

[C.B.E. & C. Circular F. No. B. 43/5/97-TRU, dated 2-7-1997, relevant extracts]

3. Consulting engineers

3.1 Consulting engineer means any professionally qualified engineer or engineering firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering. The taxable service rendered by a consulting engineer means any service provided to a client, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering. The rate of service tax is 5% and the value of taxable service in relation to service provided by a consulting engineer to a, client shall be the gross amount charged by such engineer from the client for advice, consultancy or technical assistance in any manner in one or more disciplines of engineering.

3.2 Consulting engineers shall include self-employed, professionally qualified engineer who may or may not have employed others to assist him or it could be an engineering firm -whether organised as a sole proprietorship, partnership, a Private or a Public Ltd. Company.

3.3 The services which attract the levy include all the services which are rendered in the capacity of a professional person and specifically include the services pertaining to structural engineering works, civil/ mechanical/ electrical engineering works or relating to construction management. All services rendered within the above scope of the term engineering attract service tax provided they are rendered in the capacity of a consulting engineer. The scope of the services of a consultant may include anyone or more of the following categories

(i) Feasibility study;

(ii) Pre-design services/ project report;

(iii) Basic design engineering;

(iv) Detailed design engineering;

(v) Procurement;

(vi) Construction supervision and project management;

(vii) Supervision of commissioning and initial operation;

(viii) Manpower planning and training;

(ix) Post-operation and management;

(x) Trouble shooting and technical services, including establishing systems and procedures for an existing plant.

Though the above list is not exhaustive, it illustrates the-wide scope and nature of the services rendered by a consulting engineer.

3.4 The services should be rendered to a client directly, and not in the capacity of a sub-consultant/ associate consultant to another consulting engineer, who is the prime consultant. In case services are rendered to the prime consultant, the levy of service tax does not fall on the sub-consultant but is on the prime or main consulting engineer who raises a bill on his client (which includes the charge for services rendered by the sub-consultant).

3.5 As in the case of manpower recruitment agencies, service tax on consulting engineers shall be the gross amount charged to the client for services rendered in relation to 1 (the recruitment of manpower) excluding the amount incurred by the 2 (manpower recruitment agency) on behalf of the client towards

expenses which are reimbursed on actual basis and in case the client is billed on a lump sum basis, any deductions from the same on account of reimbursable expenses, for the purposes of determining the value of taxable service shall be permitted on the basis of documentary evidence adduced by the 1 (agency).

3.6 Normally the consulting engineer receives remuneration from the client for the services rendered by him as per the stipulations in the contract/ agreement between them. The payment from the client is received at different stages, based on the completion of work at each stage. The consulting engineers shall be required to pay service tax on the payments received at each stage from the client by the 15th of the succeeding month. Subsequent modifications, if any, in the bills raised to the client at the time of final payment may be allowed after verification.

3.7 The services rendered by a consulting engineer on overseas projects shall be fully exempted from payment of service tax provided it is received in convertible foreign exchange (Notification No. 25/97-ST, dated 2-7-1997 refers).

Annexure II

Providing service of third party inspection and certification whether liable to Service Tax - Regarding

[M.F. (D.R.) Circular F. No. 177/5/2001-CX.4 (37B Order No. 1/1/2002-ST), dated 26-2-2002]

In exercise of the power conferred under section 37B of the Central Excise Act, 1944 (as made applicable to Service Tax by section 83 of the Finance Act, 1994), the Central Board of Excise and Customs considers it necessary, for the purpose of uniformity in connection with classification of services, to issue the following instructions.

2. Doubts have been raised as to whether "third party inspections and certifications" carried out by certifying agencies in respect of marine as well as non-marine equipments, can be considered as a service provided by a “consulting engineer" or not.

3. This matter was also raised by two service providers before the Mumbai High Court, in Writ Petition No. 1436/2000. The petition was disposed of by the Hon'ble Court on 11-9-2001 with directions to the Board to issue a section 37B Order in the matter for ensuring uniformity.

4. The two service providers were heard in the matter on 4th January, 2002. Views of the field formations were also procured. Some of the types of inspection and certification work carried out by the said two service providers relate to:

1. Marine

(i) New Construction

(ii) Periodical Surveys

(iii) Marine equipment and components

(iv) Type approval

(v) Marine specification

(vi) Confirmation of class

2. Non-Marine

(i) Plan approval and Inspection

(ii) ASME Inspection Service

(iii) System Integrity and Management

5. It is observed that "as per clause (18) of section 65 of the Finance Act, 1994, "Consulting Engineer" means any professionally qualified engineer or an engineering firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering".

6. The issue, therefore, is whether the service of 'third party inspection and certification' carried out by a professionally qualified engineering or an engineering firm can fall under the category of advice, consultancy or technical assistance.

7. The main point raised by some service providers is that where they are carrying out any certification as required by any statute it cannot come under the purview of either consultancy, advice or technical assistance. As for example, some of them have been authorised under section 9 of the Merchant Shipping Act, 1958, to survey and classify ships and issue necessary certification. [refer S.O. No. 769(E), dated 7-11-1997 issued under section 9 of the Act, ibid].

8. In the case of 'Management Consultants', the Board had clarified, in Para 11 of the section 37B Order No. 1/1/2001-ST, dated 27-6-2001, that ............. banks who are required to play only a statutory role under any Act or regulation, such as Takeover Regulations of SEBI, and do not provide any advice or consultancy but merely verify and submit a report to the concerned authorities, in connection with merger and acquisition transaction, are not treated as Management Consultants………………..” The definition of "Management Consultant" also uses the words 'consultancy, advice or technical assistance'.

9. Certificates given under authority of any statute/ international protocol/ code/ convention, cannot be considered to be a consultancy job. It is then to be examined whether this activity can come under the purview of advice or technical assistance. An advice is generally understood to be optional in nature and has no statutory force. It is upto the client to accept the advice or not. The activity of certification will therefore not fall under the category of advice. As regards 'technical assistance', it is observed that an assistance is normally for the purpose of achieving a particular aim or result. A certificate given by, say, the Boiler Inspector under the Factories Act, 1948, about the safety of a boiler, cannot be considered to be an 'assistance' to the person using the said boiler in his factory. Thus, if a certifying agency issues a 'Cargo ship safety construction certificate' under section 299A(i) of the Indian Merchant Shipping Act, 1958, it cannot be considered to be either an advice or a technical assistance.

10. To issue certificates under the authority of any statute it will obviously be necessary for the certifying agency to conduct some survey/ inspection. Thus the survey/ inspection by an agency for the purposes of issuing certificates by the same agency under an authority of law, will also not amount to consultancy advice or technical assistance. If, however, the shipping company gets the ship surveyed or inspected by another, agency before taking it for certification by an authorised agency, only then can it be said that the first agency is providing some technical assistance or advice.

11. It will, therefore, be essential to examine each activity of a service provider on the basis of facts, the terms of agreement between the assessee and the clients and the corresponding provisions of Indian or International Statute/ Convention/ Protocol or Code, to determine whether the certificate being given is under the authority of any such statute, convention, protocol or code. If it is so, the payment received for that service will not be taxable under the head 11consulting engineer".

12. Any other inspection, survey, assessment, technical assistance, consultancy, recommendation, advice, undertaken/ provided directly or indirectly, by the assessee would be liable to Service Tax under the head 'Consulting Engineer'.

Annexure III

'Architects’1 not under ambit of services provided by Consulting Engineers

[CCE, Delhi-I, Trade Notice No. 1/98-S.T., dated 5-1-1998]

Attention of the Trade and all other concerned is invited that a number of references have been received from the trade and industry and the field formations as to whether the services rendered by Architects would come under the purview of Service Tax levied on the services provided by consulting engineers.

2. The matter has been carefully examined by the department. As per sub clause (g) of clause (41) of section 65 of the Finance Act, 1994, as amended, the taxable service has been defined as "any service provided to a client, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering". Clause (II) of the said section defines a consulting engineer as "any professionally qualified engineer or engineering firm who, either directly or indirectly renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering. To come under the purview of Service Tax, the service rendered should be in a discipline of engineering and it should be rendered by a professionally qualified engineer or an engineering firm.

3. In this context, it is pertinent to note that there is a separate piece of legislation for architects, namely, The Architects Acts, 1972 which provides for the registration of architects and for matters connected therewith. Under this legislation, a Council of Architecture has been constituted for registration of architects and for governing other matters connected therewith. Any person who wants to practise as an 'architect' has to register himself with the Council of Architecture subject to satisfaction of qualifications prescribed in this regard. The educational qualifications prescribed for registration of architects is a degree or diploma in architecture. Thus, the law itself recognises architects as a distinct or separate profession.

4. The All India Council for Technical Education who were consulted in the matter have clarified that 'architecture' and 'engineering' are two separate disciplines of technical education and these are two separate professions. Consulting Engineers Association of India who were consulted in the matter have stated that though there is overlapping in architectural and engineering services, yet "Architecture" discipline and "Engineering" decipline are two different disciplines and separate educational facilities exist for both the disciplines.

5. In the light of the facts mentioned above, it is clarified that the term 'Consulting Engineer' will not include 'architects' within its scope and therefore the Service Tax levy on the services rendered by a consulting engineer in any discipline of engineering will not cover the architectural services rendered by architects.

6. It is quite possible that many a time an engineering firm will be providing both engineering services and architectural services and a lump sum amount is charged for both the services. In such cases service tax will have to be collected on the entire amount charged. However, if separate break-up is given in the bill for engineering services and architectural services, then service tax needs to be paid only the charges for engineering services.

Annexure IV

Consulting Engineer - Exemption in Relation to Computer Software Consultancy

[Notification No. 4199-ST, dated 28-2-1999, rescinded by Notification No. 23/2004-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 services provided to any person by a consulting engineer in relation to computer software, from the whole of the service tax leviable thereon under section 66 of the said Act.

Annexure V

Services by Qualified Engineers as Insurance Surveyors and Loss Assessors

[CBEC Circular No. 34/2/001-CX, dated 30-4-2001]

I am directed to say that doubts have been raised as to whether the services rendered by qualified engineers as insurance surveyor and loss assessor, would come under the purview of service tax levied on the service provided by the consulting engineers.

2. The matter has been examined in the Board's office. As per sub-cause (g) of clause (48) of section 65 of the Finance Act, 1994 as amended, the taxable service in case of consulting engineer has been defined as "any service provided to a client, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering". Hence the services which will come under the purview of service tax in the category of consulting engineer will be those rendered in a discipline of engineering, by a qualified engineer or an engineering firm.

3. Section 64UM of the Insurance Act, 1938, prescribes that any qualified engineer, chartered accountant, cost accountant, actuary, any person holding diploma in relation to insurance from a recognised institute or any technical qualification which may be prescribed, can act as surveyor or loss assessor after obtaining a licence.

4. It is evident that a number of professionals other than engineers can also be engaged by the insurer for surveying and loss assessments. The very fact that a number of professionals such as Chartered Accountant, Cost Accountant, Actuary, or a person holding diploma in relation to insurance can provide services as surveyors or loss assessor in itself suggest that the service provided by the surveyor or loss assessor is not in the field of engineering. It is a job, which can be performed by an engineer, so also by other specified professionals. The function to be performed by the surveyor or the loss assessor is to compute and assess the nature and quantum of loss/valuation of property, which may require basic knowledge of accounting, mathematics and science, etc. The services provided by any qualified engineer in the area of insurance survey or loss assessment are therefore not in the nature of services in an engineering discipline. Even as per the WTO classification of services, insurance survey and loss assessment is categorised as insurance auxiliary services and not as "consulting engineer services".

5. In view of the facts mentioned above, it is clarified that the term 1consulting engineer' as defined in the Finance Act, 1994 will not include those qualified engineers who act as 'insurance surveyors and loss assessor' within its scope and therefore service tax levy on the consulting. engineer in any discipline of engineering will not cover the insurance surveying and loss assessment services rendered by a qualified engineer.

Annexure VI

Service Tax on Consulting Engineers - Regarding

[Circular No. 49/11/2002-ST [F. No. 137/13/001-CX.4] dated 18-12-2002]

I am directed to invite your attention to section 65(25) of the Finance Act, 1994 (as amended), which defines Consulting Engineer as "any professionally qualified engineer or an engineering firm, who, either directly or indirectly, renders, any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering". The types of services a consulting engineer normally renders are illustrated in Board's letter F. No. 43/5/97-TRU, dated 2-7-1997, services relating to construction activities are covered therein.

2. Some construction agencies take up turnkey projects for construction of flats, administrative building, etc. For constructing these flats they have to do some designing, drawing and also provide advise and technical assistance. The contract is generally for a lump sum amount with no separate allocation for the above charges. Some field officers are taking part of the contract as a 'service' provided by a 'consulting engineer' and levying service tax on the same. Representations have been received that in respect of such turnkey contracts for carrying out construction activities the designing and drawing work is a service provided to themselves in the course of the construction activity and there is, therefore, no question of charging any service tax on this amount.

3. This issue has been examined in the Board. For any civil construction work to commence, a lot of preparatory work is required, e.g. soil testing, survey, planning, designing, drawing, etc. Once the design and drawings are completed by the construction company, it always seeks the approval of the client before proceeding with the construction. If the client suggests some changes they are incorporated in the design. This portion of the work is provided to its client and the service is definitely of a 'consulting engineer' and hence taxable.

4. Another point raised is whether "erection & commissioning charges" are liable to service tax, or not. This matter has also been examined in the Board. The 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 [Refer para 3(vii) of Board's letter dated 2-7-1997]

Annexure VII

[Notification No. 18/2002-ST [F. No. 177/4/2002-CX.4], dated 16-12-2002]

In exercise of the powers conferred by sub-section (1) of 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 services provided by a consulting engineer to a client on transfer of technology from so much of the service tax leviable thereon under section 66 of the said Act, as is equivalent to the amount of cess paid on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986 (32 of 1986).

Annexure VIII

Application of Service Tax on activities of Erection and Commissioning

Circular No. 79/9/2004-ST [F. No. 137/38/2003-CX.4], dated 13-5-2004

I am directed to draw attention to the Circular No. 49/11/2002-ST, dated 1812-2002, whereby it was clarified that the work of Erection and Commissioning is in the nature of services provided by a "Consulting Engineer" and hence taxable under Service Tax. Also in the year 2003, Service Tax was imposed on Commissioning and Installation Service, effective from 1st July, 2003. in terms of Circular No. 59/8/2003, dated 20 June, 2003, issued from File No. B-3/7/2003TRU, it was clarified that charges for erection of plant would not be covered Linder the Commissioning and Installation services.

In the light of above conflicting views, several representations have been received in the Board for clarification as to whether -

• the charges for erection would be covered under Service Tax or not?

• the Commissioning or Installation service would be covered under Service Tax under Consulting Engineer service effective from 7-7-1997?

The issue has been examined by the Board in consultation with the Ministry of Law and justice and in this regard I am directed to say that charges for erection, installation and 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. Accordingly, the clarification issued vide Circular No. 49/11/2002-ST, dated 18-12-2002 stands modified to this extent.