CENVAT Credit on Leadership Fee in Turnkey Consortium Projects: Analysis of Larsen & Toubro Ltd Vs Pr. Commissioner of Central Tax (CESTAT Hyderabad)

Background of the Dispute

The matter arose from Order-in-Original No. 10/2013-ST-HYD-III-Adjn (Commnr) (TRF) dated 25.03.2013, under which:

  • CENVAT credit of Rs. 2,22,31,277/- was denied
  • The denial was made under Rule 14 of the CENVAT Credit Rules, 2004 read with Section 73 of the Finance Act, 1994
  • Interest was demanded
  • An equivalent penalty was imposed under Rule 15(4) of the CENVAT Credit Rules, 2004 read with Section 78 of the Finance Act, 1994

The assessee, Larsen & Toubro Ltd., challenged this order before the CESTAT, Hyderabad.

Project Structure and Consortium Arrangement

Rashtriya Ispat Nigam Ltd. Tender

Rashtriya Ispat Nigam Ltd. (RINL) issued an international tender for:

  • Design
  • Engineering
  • Manufacture
  • Supply
  • Erection
  • Commissioning
  • Performance guarantee

of Blast Furnace No. 3 at the Visakhapatnam Steel Plant.

Formation of the Consortium

To execute this large-scale project, a consortium was formed consisting of:

  • Larsen & Toubro Ltd. (the assessee)
  • Paul Wurth Italia S.P.A. (PWI)
  • Paul Wurth India Pvt. Ltd. (PWIPL)

Under the consortium arrangement:

  • PWI was designated as the Consortium Leader and Principal Contractor
  • Multiple contracts together formed a single turnkey Blast Furnace Project, governed by a Covering Agreement between RINL and the consortium

Supplementary Agreement and Leadership Fee

A supplementary agreement dated 12.04.2007 provided that:

  • Each consortium member would pay a “leadership fee” to PWI
  • The fee was fixed at 4.3% of the respective contract value of each consortium member

The role of PWI as leader involved overall coordination and management of the entire project, not merely supervision of goods supply under any single contract.

Tax Treatment by the Assessee

Classification and Payment of Service Tax

The assessee treated the leadership fee as consideration for Consulting Engineer Service and:

  • Paid service tax under the Reverse Charge Mechanism in terms of Section 66A of the Finance Act, 1994
  • Classified the service under Consulting Engineer Service

Distribution of Credit through ISD

Thereafter:

  • The service tax paid on the leadership fee was distributed by the Larsen & Toubro Chennai office under the Input Service Distributor (ISD) mechanism
  • The assessee then availed CENVAT credit of the distributed amount in its books

Notably:

  • The Department did not dispute the payment of service tax
  • The ISD invoices, their genuineness, the receipt of services, or mode of distribution were not questioned
  • No proceedings were launched against the ISD unit itself

Department’s Stand and Basis of the Demand

Department’s Core Allegation

The Department took the position that:

  • The leadership fee was relatable to Contract M-720
  • Contract M-720 allegedly pertained predominantly to manufacture and supply of indigenous plant and machinery
  • Such manufacture and supply activity was treated as non-taxable / exempted for service tax purposes

On this basis, the Department concluded that:

  • The service tax paid on leadership fee was attributable to trading/manufacturing activity not liable to service tax
  • Accordingly, the related CENVAT credit was not admissible

Application of Rule 6 – Denial of Credit

The Department argued that:

  • Since the service was linked to non-taxable or exempt activity, Rule 6 of the CENVAT Credit Rules, 2004 applied
  • Credit was either inadmissible in full or had to be reversed proportionately
  • Hence, confirmation of demand, interest and equivalent penalty was justified

Assessee’s Contentions Before the Tribunal

1.