Inclusion of material value in value of taxable service

PJ/Case Laws/2010-11/1052

Case: Chakita Ranjini Udyam v/s Commr. of C. Ex., Cus. & S.T., Mysore

Citation: 2009 (16) S.T.R. 172 (Tri. - Bang.)

Issue:- The material value cannot be included in the value of taxable services.

Brief Facts:- Appellants are carrying out work of retreading of old tyres used in motor vehicles. They were not including the value of materials such as tread rubber, cushion gum, vulcanizing solution, which were used/consumed in the activity of retreading/reconditioning of tyres in the value of taxable services. The invoice issued by them showed the ‘Material Charges’ separately on which VAT was paid and on the charges towards ‘Labour & Other Charges’, service tax was being paid.

Revenue issued a Show Cause Notice on the ground that the gross amount charged by the appellants should be the value of taxable services and the cost of material should be included in it. But the appellants had discharged the Service Tax liability only on the rubber and other charges.

In adjudication proceedings, the Joint Commissioner held that since the invoice gives clear value for raw material used and specifically mentions it as “deemed sale value for transfer of property in goods involved in the execution of Tyre Retreading job vide this invoice”, the appellant was correct in excluding the value of the raw material used considering it as a sale. Proceedings initiated by the Show Cause Notice were dropped.

However, the Commissioner initiated revision against the impugned order. A Notice was issued to the appellant demanding Service Tax on the gross invoice value. Consequently, differential Service Tax amount was demanded. Penalties were also proposed to be imposed.

The Commissioner held that the appellants were liable to discharge the service tax liability on the gross receipts. Consequently, the order passed by the Joint Commissioner set aside and confirmed the proposed demand with interest. Penalty of Rs. 200/- per day under Section 76 of the Finance Act for the period prior to 18-4-2006 and @ 200/- per day or 2% of the tax whichever is higher from 18-4-2006 till the date of actual payment was imposed.

Appellants have filed appeal against the impugned order.

Appellant’s Contention:- Appellant relied on the following decisions:-

Super Transports (P) Ltd. v. CCE, Trichy [2008 (10)S.T.R.54 (Tri.-Chennai)]
Speedways Tyre Service v. CCE, Ludhiana [2008 (9)S.T.R.106 (Tri.-Del.)]
PLA Tyre Works v. CCE (ST), Trichy [2008 (9)S.T.R.20 (Tri.-Chennai)]

Reasoning of Judgment:- The Tribunal noted that the ‘Tyre Retreading’ is a composite contract involving both sale of materials and rendering of services. It is specified as Works Contract under the Karnataka Value Added Tax Act (KVAT), 2003 and listed as Sl. No. 21 under Schedule VI to KVAT Act, 2003. The appellants were paying VAT on that portion of their turnover attributable to transfer of property. For the purpose of arriving at the value of service, sales value, as separately charged in the tax invoice on which VAT is paid is claimed as exempted under explanation 1(g)(vi) to Section 67 of the Finance Act upto 17-4-2006 and Notification No. 12/2003, dated 20-6-2003 for the entire period of dispute viz. 16-6-2005 to 31-7-2006.

The Tribunal further noted that Notification No. 12/2003-ST, dated 26-6-2003 exempts so much of the value of all taxable services, as is equal to the value of goods of materials sold by the service provider to the recipient of service from the service tax leviable thereon under Section 66 of the Finance Act. The appellants were entitled for the benefit of the above Notification. The Commissioner has not examined the applicability of the said Notification.

The Tribunal held that it is clear that the activity of the appellant is treated as Works Contract under the Karnataka State Legislation. There is evidence that the appellants were paying VAT on the materials used while rendering the services of retreating. The invoices clearly indicated separately cost of the materials. Moreover, this Tribunal, in several cases, has held that the cost of materials/goods cannot be taken into account for purposes of Service Tax especially, when VAT is paid on the materials. This has been held in the following cases:-

Shilpa Color Lab v. CCE, Calicut [2007 (5)S.T.R.423 (Tri.-Bang.)]
Adlabs v. CCE, Bangalore [2006 (2)S.T.R.121 (Tri.-Bang.)]

Moreover, it was noted that the Shilpa Color Lab decision was based on the decision of the Apex Court, in the case of BSNL v. UOI [2006 (2)S.T.R.161 (S.C.)]. The appellants were entitled for the benefit of the Notification No. 12/2003.

The Tribunal was of the view that the order passed by the Joint Commissioner is legal and proper.

Decision:- Appeal allowed with consequential relief, if any.

Comment:- This decision will have far reaching effect. The construction industry is sometimes forced to include the value of material and claim abatement. But this does not allow them to take the credit. But if they opt for notification 12/2003 then they will pay the service tax on labour charges as well as take the Cenvat credit.

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PJ/Case Laws/2010-11/1052

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