Research Institute vs Nagpur

[Arising out of Order-in-Appeal no. SR/230/NGP/2011 dated 31/01/2011 passed by the Commissioner of Customs, Central Excise & Service Tax (Appeals), Nagpur.]

For approval and signature:

Honble Shri M V Ravindran, Member (Judicial) Honble Shri C J Mathew, Member (Technical)

1. Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? : No 2. Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? : No 3. Whether Their Lordships wish to see the fair copy of the Order? : Seen 4. Whether Order is to be circulated to the Departmental authorities? : Yes

National Environmental Engineering

Research Institute

Appellant Vs

Commissioner of Customs, Central Excise & Service Tax

Nagpur

Respondent

Appearance:

Shri Durgesh Nadkarni, Advocate for the appellant

Shri A.K. Goswami, Addl. Commissioner (AR) for the respondent

CORAM:

Honble Shri M V Ravindran, Member (Judicial) Honble Shri C J Mathew, Member (Technical)

Date of hearing: 29/07/2015 Date of decision: 29/07/2015

ORDER NO: ____________________________

Per: C J Mathew:

This appeal of M/s National Environmental Engineering Research Institute (NEERI), Nagpur is directed against the Order-in-Appeal No. SR/230/NGP/2011 dated 31st January 2011 of Commissioner of Customs, Central Excise & Service Tax (Appeals), Nagpur which has modified the liability of service tax determined by the Deputy Commissioner of Central Excise (Service Tax), Nagpur to the extent of ` 1,86,17,905/- for the period July 1997 to March 2001while upholding the penalties imposed under section 76 and section 77 of Finance Act, 1994 by the original authority.

2. The appellant is a constituent laboratory of the Council for Scientific & Industrial Research (CSIR) and is registered under the Registration of Societies Act, 1960. It has an elaborate mandate encompassing the field of environmental science and engineering since its creation in 1958. About 125 scientists from various disciplines figure on its rolls and, supported by technical staff, undertake various studies and projects in the field of environmental science and engineering.

3. The case of Revenue as stated in the show cause notice dated 10th October 2002 is that the appellant was engaged in rendering consulting engineer service valued at ` 46,78,48,801/- during the period from 7th July 1997 to 31st March 2001without being registered as service provider and on which they had failed to discharge tax liability of ` 2,33,92,441/-. The matter had gone through one round of adjudication before being remanded back by the first appellate authority. Subsequently, the appellant admitted that 151 of the projects undertaken during the period were classifiable as consulting engineer service and remitted tax of ` 1,20,06,928 by 28th April 2006 but contested the demand relating to 116 projects which were claimed to be classifiable under scientific or technical consultancy services which was made leviable to tax only from 16th July 2001. The original authority allowed exemption of a turnkey project and confirmed tax liability of `2,32,17,905/- including the amount admitted by the appellant. In addition to charging of interest thereon, penalties under section 76, 77 and 78 of Finance Act, 1994 were also imposed. The first appellate authority dropped demand pertaining to another turnkey contract for M/s Paramount Pollution Control Ltd and further set aside the penalty under section 78 as the same had not been invoked in the show cause notice. The appellant is now before us seeking to have the impugned order set aside on the ground that they, being a society, are excluded from the definition of service provider and that the identified projects are not covered by the scope of section 65(31).

4. On a perusal of the impugned order, we find that the first appellate authority has scrutinized 107 projects of NEERI executed during the relevant period to ascertain liability to tax as provider of consulting engineer service against the claim of the appellant that they have rendered service in the category of scientific or technical consultancy and, in deciding the mater, has almost entirely relied upon the entry in Wikipedia on the subject of environmental engineering. The learned Counsel for the appellant and learned Departmental Representative too found the allure of the same source to be irresistible  the former to demonstrate the unique functions of the appellant and the latter to portray the appropriateness of the impugned order. Here a note of caution would not be amiss: Wikipedia has universal appeal among internet users because of the range of subjects covered, its widespread accessibility and its amenability to updating but, by reason of the same attributes, it fails to acquire oracular significance. Indubitably, it is a source of knowledge for amateur research and may map out directions for extensive foray into any topic but being subject to emendation at any time from all and sundry, with or without appropriate qualification, it can, at best, fill up gaps that are not particularly critical to a final conclusion. Placing sole or near absolute reliance on its contents for tax determination detracts from the credibility of the findings.

5. Learned Counsel for the appellant contends that NEERI, being a registered society, is not within the ambit of taxable service which is restricted to service rendered by engineering firms. He further contends that it has been held by the Tribunal in re Shaumbari Sugar & Allied Ind Ltd vs. CCE Meerut-I [2006(4)STR567] and re Shree Sidhbal Steels Ltd vs. CCE Meerut [2007(8)STR191] that tendering of a few engineering advice does not detract from the main activity to make it an engineering firm. We do not find this contention to be relevant to the primary dispute before us viz., classification of the service rendered by the appellant in execution of certain specified projects.

6. The learned Counsel and learned Departmental Representative reiterated the grounds of appeal and the findings in impugned order respectively. We observe that the appellate authority has segregated the 107 disputed projects as follows:

- Environmental Biotechnology (5)

- Environmental Impact Assessment (56)

- Environmental Monitoring (38)

- Environmental Policy Analysis (7)

- Hazardous Waste Management (1) before going on to conclude that these are engineering projects. In the absence of any other records before us, we have necessarily to fall back on the relevant provisions of the taxing statute to adjudicate between the respective claims. Consulting implies that the work in question is not undertaken by in-house experts and would thereby extend to the entire gamut of activities from identifying a problem to execution of the entire work or any one or more of the component parts. Such consulting could, inter alia, relate to engineering or to scientific and technical; and as these constitute distinct and mutually exclusive taxable services with no scope for overlap, differences between them cannot but be acknowledged. In the light of the specific claim of the appellant on this point, we find that the first appellate authority has failed to take into account this distinction in resolving the dispute. We, therefore, have to do so.

7. According to the Encyclopaedia Britannica Engineering is the application of science to the optimum conversion of the resources of nature to the uses of humankind. The field has been defined by the Engineers Council for Professional Development, in the United States, as the creative application of scientific principles to design or develop structures, machines, apparatus, or manufacturing processes, or works utilizing them singly or in combination; or to construct or operate the same with full cognizance of their design; or to forecast their behaviour under specific operating conditions; all as respects an intended function, economics of operation and safety to life and property. The term engineering is sometimes more loosely defined, especially in Great Britain, as the manufacture or assembly of engines, machine tools, and machine parts. .

The function of the scientist is to know, while that of the engineer is to do. The scientist adds to the store of verified, systematized knowledge of the physical world; the engineer brings this knowledge to bear on practical problems. Engineering is based principally on physics, chemistry, and mathematics and their extensions into materials science, solid and fluid mechanics, thermodynamics, transfer and rate processes, and systems analysis.

Unlike the scientist, the engineer is not free to select the problem that interests him; he must solve problems as they arise; his solution must satisfy conflicting requirements. Usually efficiency costs money; safety adds to complexity; improved performance increases weight. The engineering solution is the optimum solution, the end result that, taking many factors into account, is most desirable. It may be the most reliable within a given weight limit, the simplest that will satisfy certain safety requirements, or the most efficient for a given cost. In many engineering problems the social costs are significant.

Engineers employ two types of natural resourcesmaterials and energy. Materials are useful because of their properties: their strength, ease of fabrication, lightness, or durability; their ability to insulate or conduct; their chemical, electrical, or acoustical properties. Important sources of energy include fossil fuels (coal, petroleum, gas), wind, sunlight, falling water, and nuclear fission.

8. Each of the recognised engineering disciplines is, therefore, the application of scientific knowledge to functional needs. We are compelled to draw attention to the word discipline because it is expressly used in the definition found in section 65(31) and its importance needs to be accentuated because contemporary discourse has adopted the use of engineering to describe processes in diverse fields far removed from the general and original understanding of it. The tag of discipline would indicate a rigour that is attached to formal academic study and syllabi. Accordingly, engineering would limit itself to the handful of academic disciplines in which engineers acquire their professional qualification. By this token, consulting engineer service is what a qualified engineer does, individually or as a set of individuals, for another entity. And these are, broadly speaking, civil, mechanical, electrical electronic, chemical and all of them deal with transformation of matter from one form to another. Scientific, on the other hand, according to Merriam Webster dictionary, means of, relating to, or exhibiting the methods or principles of science. To the extent that a project does not advise upon the manner in which matter is to be altered or constructed to solve one or more problems and the activity is one of observing phenomena, enhancing knowledge base and contributing to data, such an activity would be in the realm of scientific. This is the benchmark that would both distinguish between the two rival claims.

9. In relation to the first category, the impugned order has concatenated the title of one of the projects with a sub-description in the unauthenticated source to conclude that all five are engineering projects. While titles may, in general, indicate contents, determination of tax liability without examining the specifics is inappropriate Considering the mandate of the appellant as well as the staffing pattern of the organisation, it is more probable that the projects are research studies which would later require the services of engineers for feasible remedial action.

10. In relation to the second category, substantial reliance has been placed on the same unauthenticated source to hold such assessments to be one facet of environmental engineering. The first appellate authority has further assumed these to be engineering projects because project reports are a requirement of environmental impact assessment stage laid down by the Ministry of Environment & Forests. It would appear that the scope and depth of environmental impact assessment has not been appreciated in proceedings thus far. Increasing concerns about environmental degradation as a consequence of economic development has compelled governments across the world to require all or certain categories of structures and space utilisation to be preceded by a study of the effect of population and activity on water and air quality as well as on soil, flora and fauna. The conclusions of such studies are examined in the public or a restricted domain to impose such terms and conditions of usage on the project proposal to mitigate and compensate for degradation. When the project developer decides to comply with the terms and conditions, action thereon for design and engineering of the structure and usage would be within the realm of engineering. Hence, by no stretch can such assessments be deemed to involve engineering.

11. The appellate authority, in considering the 38 environmental monitoring projects, does not entertain any doubt that that these, besides actual measurement, involve predicting, evaluation and suggestions for remedial action. And in the specific analysis of one project, he unhesitatingly regards it as natural resource management and thereby within the ambit of the exposition on environmental engineering in the unauthenticated source. It should be amply clear that mere measurement of phenomena and comparison with the normative cannot be equated with activity that suggests altering of matter to achieve a desired outcome. Monitoring studies are not in the realm of engineering though subsequent remedial action maybe.

12. The appellate authority classified the remaining eight projects as other applications of environmental engineering as stated in the unauthenticated source. Such superficial fitment within the segregation cited in the unauthenticated source is not sufficient to deem the said activity as engineering. More so, as the distinction between the two types of consulting is so visibly apparent.

13. From the above it is amply evident that the disputed projects do not involve engineering. Levying of tax on the consideration received for the disputed projects on the ground that these arise from rendering consulting engineer service is, therefore, not sustainable. The appellant has admitted these to be scientific and technical studies. We find that the appellant has registered itself as scientific and technical consultants with effect from 4th January 2002 shortly after this service was made taxable and has discharged tax liability on the projects admitted as engineering consulting. As the disputed projects are not engineering, they were not taxable during the relevant period. The appeal is, accordingly, allowed by setting aside the demand of ` 1,86,17,905/- in the impugned order.

(Pronounced in Court)

(M V Ravindran) Member (Judicial) (C J Mathew) Member (Technical)

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