Supreme Court Clarifies Definition of Consulting Engineer Under Finance Act, 1994: Commissioner of Central Excise vs. M/s Sepco Electric Power Construction Corporation (2022)

Date of the Judgment: July 11, 2022
Citation: Civil Appeal No. 4928 of 2018
Judges: M.R. Shah, J. and Sanjiv Khanna, J.
Can a “body corporate” be considered a “consulting engineer” under the Finance Act, 1994? The Supreme Court of India addressed this question in a recent case, clarifying the scope of the definition before a 2005 amendment. This judgment is significant for understanding service tax liabilities for engineering firms. The bench comprised Justices M.R. Shah and Sanjiv Khanna, with the majority opinion authored by Justice M.R. Shah.

Case Background

M/s Sepco Electric Power Construction Corporation, a company based in China, entered into a contract with M/s. Bharat Aluminium Co. Ltd. (BALCO) on April 26, 2003. Under this agreement, Sepco was to provide “Design Engineering Services” and “Project Management & Technical Services,” essentially rendering “Consulting Engineer Services.” The Revenue Department argued that Sepco was liable to pay service tax on these services but had neither registered under the Service Tax Act nor paid the due taxes. The department calculated the taxable service value at Rs. 1,12,90,53,457, with a service tax liability of Rs. 10,42,71,437, which remained unpaid.

Timeline

Course of Proceedings

The Commissioner of Central Excise, Raipur, issued a show cause notice on May 26, 2006, to Sepco under Section 73 read with Sections 65, 66, and 68 of the Finance Act, 1994, demanding service tax, interest, and penalties. The Commissioner confirmed the demand on January 31, 2007, ordering recovery of Rs. 10,42,71,437 along with interest and penalties under Sections 76, 77, and 78 of the Finance Act, 1994. Sepco appealed to the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi. The CESTAT allowed Sepco’s appeal on December 4, 2015, setting aside the demand, stating that during the relevant period (August 2003 to November 2005), a body corporate was not covered under the definition of “Consulting Engineer.” The Revenue then appealed to the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of Section 65(31) of the Finance Act, 1994, which defines “consulting engineer.” The relevant sections are:

• Section 65(31) 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;
• Section 65(105)(g) of the Finance Act, 1994: defines “taxable service” 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.
• Section 66 of the Finance Act, 1994: levies a tax on the value of taxable services.
• Section 68 of the Finance Act, 1994: mandates that every person providing taxable service shall pay service tax.
• Section 69 of the Finance Act, 1994: mandates that every person liable to pay service tax shall make an application for registration.
• Section 70 of the Finance Act, 1994: mandates that every person liable to pay service tax shall assess the tax due and furnish a return.

The Finance Act, 1994, imposes a service tax on various services, including those provided by “consulting engineers.” The definition of “consulting engineer” was amended in 2005 to include “any body corporate or any other firm,” but the dispute in this case concerns the pre-amendment period. The core question is whether the original definition of “consulting engineer” can be interpreted to include a “body corporate.”

Arguments

Revenue’s Arguments:

• The Revenue argued that the definition of “Consulting Engineer” under Section 65(31) of the Finance Act, 1994, should be interpreted to include a “body corporate,” even before the 2005 amendment.
• They contended that the taxable attribute is the provision of services in a professional capacity, irrespective of whether the service provider is an individual, a firm, or a body corporate.
• The Revenue emphasized that a strict interpretation of tax statutes should not lead to absurd results that contradict the legislative intent. They cited the Supreme Court’s decision in Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co., (2018) 9 SCC 1, to support this point.
• They argued that excluding a “body corporate” would create an anomaly, as services provided by individuals or partnership firms would be taxed, while similar services provided by companies would be exempt.
• The Revenue relied on the decisions of the Karnataka High Court in Tata Consultancy Services v. Union of India, 2001 (130) ELT 726, and the Calcutta High Court in M.N. Dastur Limited v. Union of India, 2006 (2) STR 532 CAL, which held that the term “consulting engineer” includes a company.
• They submitted that the 2005 amendment was merely clarificatory and did not introduce a new concept.
• The Revenue also cited Motipur Zamindari Co. Ltd. v. State of Bihar, AIR 1953 SC 320, to argue that there is no reason to differentiate between an individual and a company.
• They argued that the definition of “consulting engineer” should be interpreted in a way that avoids absurdity and mischief, as highlighted in K.P. Varghese v. Income Tax Officer, Ernakulam (1981) 4 SCC 173 and Bhag Mal v. Ch. Prabhu Ram, AIR 1985 SC 150.

Respondent’s Arguments:

• The respondent argued that the definition of “consulting engineer” under Section 65(31) of the Finance Act, 1994, before the 2005 amendment, did not include a “body corporate.”
• They contended that the amendment on 01.05.2006, which specifically included “any body corporate or any other firm,” was a substantive change and not merely a clarification.
• The respondent cited the Explanatory Memorandum to the Finance Bill, 2006, and a letter from the government, which indicated that the amendment was intended to bring “engineering consulting services by body corporate” within the tax net for the first time.
• They argued that the term “engineering firm” should be interpreted using the principle of noscitur a sociis, meaning it should take color from the term “professionally qualified engineer” and thus refer to a partnership firm of qualified engineers.
• The respondent submitted that the term “firm” in common parlance and legal circles refers to a partnership firm, not a company.
• They cited several provisions in various acts, including the Finance Act, 1994, the Income Tax Act, 1961, and the Companies Act, 2013, where “firm” and “company” are treated as distinct entities.
• The respondent relied on CIT v. Century Spinning and Manufacturing Co. Ltd. (1953) 24 ITR 499 and Vazir Sultan Tobacco Co. Ltd. v. CIT, A.P., Hyderabad, (1981) 4 SCC 435, to argue that where an expression is not defined, the ordinary natural meaning should be adopted.
• They cited CIT v. Vatika Township Private Limited, (2015) 1 SCC 1, to argue that if a provision is ambiguous, the interpretation favoring the assessee should be preferred.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether a “body corporate” is covered within the definition of “consulting engineer” under Section 65(31) of the Finance Act, 1994, prior to the amendment in 2005?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed the decisions of the Karnataka High Court in Tata Consultancy Services v. Union of India [2001 (130) ELT 726] and the Calcutta High Court in M.N. Dastur Limited v. Union of India [2006 (2) STR 532 CAL], which held that the term “consulting engineer” includes a company.
• The Court distinguished the decisions of the Delhi High Court in CCE v. Simplex Infrastructure & Laundry Works [2014 (34) STR 191 (DEL)] and the Karnataka High Court in CST Bangalore v. Turbotech Precision [2010 (18) STR 545] and Commissioner of Service Tax, Bangalore v. ARACO Corporation, Japan [2010 SCC OnLine KAR 5448], stating that these decisions contained no reasoning or reference to the earlier binding decisions.
• The Court cited Commissioner, Central Excise & Customs, Kerala v. Larsen & Toubro Limited [(2016) 1 SCC 170], noting that the appeals were dismissed on a separate issue of taxability of works contract.
• The Court cited Motipur Zamindari Co. Ltd. v. State of Bihar [AIR 1953 SC 320], stating that there is no justification to differentiate between an individual and a company.
• The Court cited Vanguard Fire & General Insurance Co. Ltd., Madras v. Fraser and Ross [AIR 1960 SC 971], stating that statutory definitions must be read subject to qualifications and context.
• The Court cited K.P. Varghese v. Income Tax Officer, Ernakulam [(1981) 4 SCC 173], emphasizing that statutory provisions must be construed to avoid absurdity and mischief.
• The Court cited Bhag Mal v. Ch. Prabhu Ram [AIR 1985 SC 150], stating that the Court may modify language to achieve legislative intent and produce rational construction.
• The Court cited Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co. [(2018) 9 SCC 1], to emphasize that strict interpretation should not lead to absurdity.
• The Court cited Commissioner of Income Tax, Bangalore v. J.H. Gotla, Yadagiri [(1985) 4 SCC 343], to emphasize that the Court may modify language to achieve legislative intent and produce rational construction.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the need to avoid an absurd and illogical interpretation of the Finance Act, 1994. The Court emphasized that excluding a “body corporate” from the definition of “consulting engineer” would create an anomaly, where similar services provided by individuals and partnership firms would be taxed, but not those provided by companies. This would lead to an unintended and irrational classification. The Court also stressed the importance of interpreting statutes in a manner that aligns with their legislative intent and avoids mischief. The Court relied on the principle that a taxing statute should be interpreted to avoid absurdity and injustice, and that the definition of “person” under the General Clauses Act includes a company. The court also considered that the amendment in 2005 was merely clarificatory.

Logical Reasoning:

The Court considered alternative interpretations, such as the respondent’s argument that “engineering firm” should be limited to partnership firms. However, the Court rejected this interpretation because it would lead to an illogical distinction between different types of service providers. The Court reasoned that the legislative intent was to tax all service providers providing similar services, irrespective of their legal structure.

The Supreme Court held that the respondent, M/s Sepco Electric Power Construction Corporation, was liable to pay service tax for providing consultancy engineering services as a “consulting engineer” underthe Finance Act, 1994, even before the 2005 amendment. The Court set aside the CESTAT order and remanded the matter back to CESTAT for fresh consideration on other grounds.

Implications

The Supreme Court’s judgment has significant implications for engineering firms and service tax liabilities. Key takeaways include:

• Broad Definition of Consulting Engineer: The term “consulting engineer” under the Finance Act, 1994, prior to the 2005 amendment, now includes “body corporate,” meaning companies providing engineering consultancy services were liable to pay service tax even before the amendment.
• Service Tax Liability: Engineering companies that provided consultancy services during the relevant period (before 2005) may now be liable to pay service tax, interest, and penalties.
• Impact on Past Cases: The judgment sets a precedent that could impact other cases where the definition of “consulting engineer” was disputed before the 2005 amendment.
• Clarity on Taxable Services: The ruling clarifies that the nature of the service is the determining factor for service tax liability, not the legal structure of the service provider.
• Need for Compliance: Engineering firms should review their past service tax liabilities and ensure compliance with the law, even for the pre-amendment period.
• Clarification of Legislative Intent: The judgment underscores the importance of interpreting tax laws in a manner that aligns with the legislative intent and avoids absurd or illogical outcomes.

Conclusion

The Supreme Court’s decision in Commissioner of Central Excise vs. M/s Sepco Electric Power Construction Corporation (2022) provides a crucial clarification on the definition of “consulting engineer” under the Finance Act, 1994, before the 2005 amendment. The Court has established that a “body corporate” is included within the definition, thereby ensuring that companies providing engineering consultancy services are also liable for service tax. This judgment upholds the legislative intent to tax all service providers rendering similar services, regardless of their legal structure, and it avoids an anomalous interpretation of the tax laws. The ruling has far-reaching implications for engineering firms, particularly those that provided consultancy services before the 2005 amendment and may now face service tax liabilities. It also highlights the importance of a purposive interpretation of tax laws to prevent absurdity and injustice.