The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that CENVAT credit of service tax paid on “leadership fee” under a consortium arrangement cannot be denied by artificially dissecting an integrated turnkey project into separate components. 

The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) set aside a demand of ₹2.22 crore along with interest and an equivalent penalty imposed on Larsen & Toubro Ltd. (L&T). 

The appeal arose from an order passed by the Commissioner of Central Excise, Customs and Service Tax, Hyderabad, which had disallowed CENVAT credit amounting to ₹2,22,31,277 and imposed interest and penalty under the CENVAT Credit Rules, 2004 and the Finance Act, 1994. 

The dispute originated from a major blast furnace project undertaken at the Visakhapatnam Steel Plant. Rashtriya Ispat Nigam Ltd. (RINL) had awarded an international turnkey contract for the design, engineering, manufacture, supply, erection, commissioning and performance guarantee of Blast Furnace No. 3.

To execute the project, a consortium comprising Larsen & Toubro Ltd., Paul Wurth Italia S.P.A. (PWI), and Paul Wurth India Pvt. Ltd. was formed. Under a supplementary agreement, consortium members agreed to pay a “leadership fee” to PWI, which acted as the consortium leader and principal contractor. The fee was fixed at 4.3% of the respective contract value of each consortium member. 

L&T discharged service tax on the leadership fee under the Reverse Charge Mechanism by classifying the activity as “Consulting Engineer Service” and subsequently availed CENVAT credit through the Input Service Distributor (ISD) mechanism. 

The Department argued that the leadership fee related primarily to a contract involving manufacture and supply of indigenous plant and machinery. According to the Revenue, the service tax paid on such fee was attributable to non-taxable or exempt manufacturing activities and therefore credit was not admissible under Rule 6 of the CENVAT Credit Rules. Based on this reasoning, the Department denied the credit and confirmed the demand. 

The Bench observed that the service tax paid on the leadership fee had been validly distributed through the ISD mechanism and the Department had neither questioned the payment of tax nor challenged the genuineness of invoices, receipt of services, or distribution of credit. Importantly, no proceedings had been initiated against the ISD unit itself. 

The Tribunal held that once credit had been validly distributed through an ISD, denying the credit at the recipient’s end merely on the basis of alleged procedural irregularities was legally unsustainable. Relying on earlier judicial precedents, the Bench reiterated that substantive CENVAT benefits cannot be denied for procedural lapses when receipt of services and distribution of credit remain undisputed. 

A significant aspect of the ruling concerns the Department’s attempt to isolate one contract relating to supply of machinery and attribute the leadership fee solely to that portion of the project.

The Tribunal noted that the blast furnace project was executed through multiple interconnected contracts under a single covering agreement with RINL. The leadership fee was paid to PWI for overall management, coordination, integration and successful execution of the entire project and was not linked exclusively to the manufacture of goods. 

Relying upon the Supreme Court’s principles in BSNL and Gannon Dunkerley cases, the Tribunal held that the true nature of a transaction must be determined based on the substance of the contract rather than by artificially splitting an integrated arrangement.

Accordingly, the Bench ruled that the Department’s attempt to isolate one contract and deny credit amounted to an impermissible vivisection of a composite turnkey project. 

The Tribunal further held that the service received from PWI was classified as “Consulting Engineer Service,” which was specifically covered under Rule 6(5) of the CENVAT Credit Rules during the relevant period.

Rule 6(5) provided full credit for specified taxable services unless such services were used exclusively for exempted goods or exempted services. Since the Department failed to establish that the leadership fee was used exclusively for exempted activities, the Tribunal concluded that denial of credit under Rule 6(5) was unjustified. 

The Bench also emphasized that the Department had accepted the service tax paid by L&T under the Reverse Charge Mechanism. Once the tax payment itself was accepted and the receipt of services was undisputed, denial of corresponding credit would merely create a revenue-neutral situation.

The Tribunal observed that in such circumstances allegations of tax evasion become difficult to sustain and this factor further strengthened the assessee’s case. 

Having concluded that the credit was legally admissible, the Tribunal held that the entire demand of ₹2.22 crore was unsustainable. Consequently, the interest demand and equal penalty imposed under Rule 15(4) of the CENVAT Credit Rules read with Section 78 of the Finance Act were also set aside. 

The Tribunal additionally noted that the dispute involved interpretation of consortium agreements, Rule 6 and ISD provisions, and that all transactions had been fully disclosed in statutory records. In the absence of fraud, suppression or wilful misstatement, imposition of penalty was wholly unwarranted.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Adjudication in S. 70 Summons Cases to Be Handled by Jurisdictional Officers: MP GST Dept.