Activity of Retreading of Tyres before 16.06.2005 - taxability of u/Maintenance & Repair Service

PJ/Case Laws/2011-12/1338

Case: Stallion Rubbers Ltd. v/s Commissioner of C. Ex., Jaipur-I

Citation: 2011 (23) S.T.R. 380 (Tri.-Del.)

Issue:- Activity of Retreading of Tyres before 16.06.2005 – whether taxable under definition of “Maintenance and Repair” service?

For Proof of existence of Maintenance or Repair service contract – written contract not needed – the agreement can be oral also.

Brief Facts:- Appellant were undertaking retreading of old tyres against the supply order received from the Defence Department of Govt. of India. According to Revenue retreading of old tyres undertaken by the appellants was "maintenance and repair" activity in terms of Section 65(64) of the Act for which liability arose w.e.f. 1-7-2003. Show cause notices were issued for the for the period from July, 2003 to March 2006 and April, 2006 to January 2007. It was alleged in the show cause notice that that the appellant did not disclose the "Maintenance or Repair" carried out for Defence Department and has intention to evade payment of service tax during the relevant period.

The Adjudicating Authority confirmed the demand of recovery of service tax with interest and imposed penalties also.

Appeal was filed on the ground that the matter was decided without examining legal position as it existed prior to 16-6-2005. Prior to 16-6-2005 maintenance or repair service falling under Section 65(64) of the Finance Act, 1994 covered only ‘Maintenance and Repair’ carried on under a maintenance contract or agreement. The activity of retreading was just a job work as per supply orders and not chargeable to tax. The definition under Section 65(64) the Finance Act, 1994 as it existed prior to 16-6-2005 did not include activities carried out against agreements other than those for maintenance. The term maintenance required an ongoing exercise for the upkeep and efficient working of an equipment or otherwise. The supply orders of the Defence were not maintenance contract or agreements but they were essentially orders for undertaking the work of retreading of tyres on one time basis. Repairs without maintenance were not taxable. CBEC vide circular dated 27th July, 2005 had clarified that maintenance was to keep a machine, building etc. in good condition by periodical checking and servicing or repairing. While repair is one time activity, maintenance is a continuous process of which repairing may be incidental or ancillary. In para 16.4 of the circular, it has been categorically stated that repair or servicing carried out under a contract other than maintenance contract of agreement, was not covered within the purview of service tax prior to 16-6-2005.

The Commissioner (Appeal) held that activity was like works contract for repair of old tyres and Board's Circular No. B1/6/2005- TRU., dated 27-7-2005, clarified that prior to 16-6-2005 repair service carried out without contract or agreement was not taxable. He was of the view that when the activity was carried out for the benefit of other that was so done under a contract only. In para 9 of the order, the first appellate Authority found that the appellant was holding Central Excise Registration No. AABCS59O6MXM001 for the manufacture of excisable goods i.e. hot rubber under sub-heading 4006.10, cold rubber under sub-heading 4008.22, cushion under sub heading 4006.10 and vulcanizing cement under sub heading 3506.00 and the appellant became liable to service tax with effect from 1-7-2003 as service provider of maintenance and repair service. In para 10 of the order, the appellate authority held that the appellant never came forward for registration with the department and applied for amendment of registration as late as on 21-1-2006 when action was initiated against them. Therefore, extended period was invokable and the appellant contravening law, penalty was imposable. The Commissioner (Appeal) held that services provided by appellant w.e.f. 01.07.2003 fell under the category of “maintenance and repair” service will be liable to service tax and that appellant had suppressed material facts, therefore, the extended period was rightly invoked and penalties under various sections of the Finance Act, 1994 were rightly imposed.

Appellants being aggrieved by the order passed by the Commissioner (Appeals) are in appeal before the Tribunal.

Appellant’s Contention:- Appellant submitted that there was no repair and maintenance contract executed. The appellant only carried out the activity of retreading of tyres to make that usable which is essentially a manufacturing activity not amounting to rendering of service. But the Commissioner (Appeals) erred in holding that the appellant was a manufacturer. By letter dated 20-11-2007, the appellant explained that although they were engaged in the manufacturing activity they are not providing maintenance and re-pair service of those goods. Repair being done to tyres which was not manufactured by them there shall not be taxability. Maintenance and repair was not relating to the goods manufactured by the appellant and no maintenance of tyres manufactured by others shall not make the appellant liable to tax. Prior to 16-6-2005 maintenance and repair activity carried out under contract or agreement was alone covered by service tax law for taxation. Repairs or servicing not being covered by maintenance contract or agreement were not liable to tax. Retreading of tyres on job work was not taxable. CBEC's circular clarified that maintenance was to keep machine, building, etc. in good condition by periodical checking and servicing or repair. Repair is only one time activity while maintenance is a continuous one and repair and maintenance carried out without a contract or agreement were not liable to tax prior to 16-6-2005. The appellant relied on the decisions of the Tribunal in the case of Cochin Shipyard Ltd. v. CCE, Cochin [2007 (7) S.T.R. 291], Uni Power System Ltd. v. CCE, Cochin [2007 (7) S.T.R. 590] and in CCE, Jaipur v. Dusdad Transformer & switchgears (P) Ltd. [2007 (5) S.T.R. 37] to submit that as per Board’s circular dated 27-7-2007, prior to 16-6-2005 repair or servicing carried out under a contract other than maintenance contract or agreement were not covered by law for taxation.

Respondent’s Contention:- Revenue contended that repair and maintenance was the activity carried out under contract whether written or verbal makes no difference when the activity was to make repair of goods serviceable and usable. As per the order given by the Defence department, contract was executed by the party. Board clarified that to attract service tax contract or agreement need not necessary be maintenance contract or agreement.

Reasoning of Judgement:- The Tribunal held that analysis of definition of “Maintenance or Repair service” prior to 16.06.2005 shows that any service provided under maintenance contract or agreement between the parties were taxable service. Similarly any service provided by a manufacturer or a any person authorised by him in relation to the maintenance or repair or servicing of any goods or equipment, excluding motor vehicle were liable to service tax. The parties to the contract are recipient in one hand and the service provided on the other, or recipient in one hand or manufacturer or other person authorised by him on the other. The maintenance contract or agreement may be written or oral. Format or document does not decide the taxability while substance of the con-tract decides incidence of the contract.

The work orders issued by the Defence department to the appellant which were relied upon documents for adjudication remained undisputed. That throws light to suggest that entire activity of the appellant was subject to warranty. Accordingly to the clause 19 of the supply order dated 8-7-2004 shows that if a retreaded tyre gives less than 75% (12,000 kms) of the guaranteed kilometerage i.e. 16,000 kms, the retreading firm would pay the 100% retreading charges back to the purchaser. Similarly, a slab was provided for the proportionate calculation of such liability. Accountability of the retreaders throwing light that if the tyres meant for retreading are found unsuitable that shall be returned back to the indentor and if any defects is found in the course of inspection, retreader shall return the tyre on freight pre-paid basis to the consignee and no retreading charges shall be payable.

It was held that there is no doubt that retreading of tyre is a service provided consuming certain goods in the process to add economic life to the used tyre and make the same usable. There was economic activity carried out for consideration. The activity was repair of old tyre for making the same usable. Totality of reading of contract and supply order suggests that there was commercially viable and feasible contract between parties prescribing obligations of each other recognising services to be provided by the appellant was the essence of the contract followed by certain penalties and warranty clauses in the contract. The meaning of 'repair or maintenance' under Section 65(64) of Finance Act, 1994 during the material period does not necessarily require a written contract or agreement to be entered into by the parties. When need of one and the contribution of the other to fulfil the need of the former surfaces and promise recognising such contribution followed by consideration payable binds each other, that results in a contract or agreement. The offer and acceptance of the proposition of retreading of tyre resulted in binding contract of the parties to carry out their promise. Therefore, there was no need of any written contract or agreement to bring the appellant to the fold of law. All the three citations made by the appellant did not deal with the modality of the contract and that remained in silence. Even the Board by its circular, nowhere spell out that the contract or agreement shall necessarily be in writing. In the absence of legislative mandate that the contract should necessary be in writing, there is no scope to grant relief.

Decision:- Appeal dismissed.

Comment:- This decision has gone to basic principles of Contract which was taught in initial days of professional life. There has to offer and it should be accepted for a consideration to form a contract. It was clearly told in those day that the offer and acceptance can be oral or written. Those basic lessons on agreement and contract for Indian Contract Act are still very useful and important. This can be seen from this decision.

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PJ/Case Laws/2011-12/1338

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