Whether service tax is chargeable on value of goods used for providing the service ?

PJ/Case Law/2014-15/2370

Case:- M/s SAMTECH INDUSTRIES Vs COMMISSIONER OF CENTRAL EXCISE, KANPUR; M/s SURYA TRANSFORMER Vs COMMISSIONER OF CENTRAL EXCISE, NOIDA; M/s PARAMAX ELECTRONICS (P) LTD Vs COMMISSIONER OF CENTRAL EXCISE, NOIDA; M/s MAHENDRA ENGINEERING LTD Vs COMMISSIONER OF CENTRAL EXCISE, LUCKNOW; M/s ABC TRANSFORMER PVT LTD Vs COMMISSIONER OF CENTRAL EXCISE, NOIDA; M/s S T TRANSFORMER Vs COMMISSIONER OF CENTRAL EXCISE, MEE

Citation:- 2014-TIOL-643-CESTAT-DEL

Brief facts-The appellants in these appeals were engaged in the business of manufacture as well as repair of transformers. In course of repair of transformers they very often replaced certain components like HV/LV coils etc. and also the used transformer oil for filling. They were liable to pay service tax in respect of the service of repair of old transformer provided by them to their clients and for which they have service tax registration. In the invoices issued by them to their customers they have shown the service charges and the value of the transformers oil and other consumables and of the components parts replaced, separately. While Service Tax/VAT was paid on the amount charged for the transfer oil/ consumables and the components used for repair, service tax was being paid by them only on the service/ Labour charges. The Department was of the view that the service tax was chargeable on the gross amount charged for repair of the transformers including value of consumables like transformer oil and the component parts like HV/LV coil etc. used. On this basis after issue of Show Cause Notices, service tax demands of various amounts were confirmed against them by six separate orders passed by the Commissioners, the details of which were given below:-

S. No.	Party's Name	Order-in-Original No. and Date	Service Tax & Demand conformed	Penalty, If any imposed
1.	M/s.Samtech Ind.	17/ST/Comm./2011, dt.16.8.11 passed by CCE, Kanpur	Rs.1,84,92,181 along with interest u/s 75 of Finance Act, 1994	Rs.1,84,92,181 u/s 78 & Rs. 5000/- u/s 77 & Rs.200/- per day u/s 76
2.	M/s.Paramax Electronics Pvt. Ltd.	16/Comm./Noida/2012- 13, dt.27.7.12, passed by CCE, Noida	1,32,62,762/- along with interest u/s 75 of Finance Act, 1994	1,32,62,762/ u/s 78 ibid.
3.	M/s. Mahendra Engineering Ltd.	23/Comm./LKO/ST/2011- 12, dt. 28.11.11, passed by CCE, Lucknow	2,21,12,729/- along with interest u/s 75 of Finance Act, 1994	2,21,12,729/- u/s 78 ibid and Rs.10,000/- u/s 77 ibid
4.	M/s. Surya Transformers	16/Comm./Noida/2012- 13, dt. 27.7.12, passed by CCE, Noida	Rs.62,84,767/- along with interest u/s 75 of Finance Act, 1994	Rs.62,84,767/- u/s 78 & Rs. 5000/- u/s 77 ibid
5.	M/s. S.J. Transformers	04/Comm./2011-12, dt. 18.10.11 passed by CCE Meerut	Rs.3,37,45,549 along with interest u/s 75 of Finance Act, 1994	Rs. 3,37,45,549 u/s 78, Rs.200/- per day, u/s/ 76 & Rs. 5000/- u/s 77 ibid
6.	M/s. ABC Transformers	13- 14/Comm./Noida/2012- 13, dt. 24.07.12, passed by CCE Noida	Rs. 2,88,01,574 along with interest u/s 75 of Finance Act, 1994	Rs.2,88,01,574 u/s 76,77 & 78 of the Finance Act, 1994

Appellant’s contentions:- Sh. Parveen Sharma, Advocate, representing M/s. ABC Transformers, and M/s. Paramax Electronics Pvt. Ltd. and Sh. Vineet Singh, Advocate, representing M/s. Samtech Industries, M/s. S.J. Transformers M/s. Mahendra Engineering Ltd. and M/s. Surya Transformers Appeal, pleaded that value of the goods used for repair of the transformers was not includible in the assessable value of the service, as the appellant in their invoices were charging separate amount for Service Tax/Labour Charges and for the goods used for repairs, on which Sales Tax/Vat was being paid and therefore the supply for goods used for repair activity had to be treated as sale, that the value of the goods used for repair cannot be part of the value of service, that these were not the cases where a consolidated amount was charged by the appellants for repair of the transformers which cannot be split into the value of the goods used and the value of the service, that the manner of billing adopted by appellant shows that their contracts with their clients were split contracts for providing service and the supply of goods required for service, that Hon'ble High Court in case of Balaji Tirupati Enterprises Vs. C.C.E. reported in 2013 (32) S.T.R. - 530 (All.) had held that the goods used during repair were deemed to have been sold in execution of work contract and their value would not be part of the value of the service, that in any case, during the period of dispute, the Exemption Notification No.12/2003-ST dt. 20.06.2003 was in force and since there was sale of goods involved in the transactions of the appellants with their clients and the condition of the Notification of not availing Cenvat Credit in respect of the goods used for providing service were satisfied, this exemption would be available and the value of the goods used would not be part of the assessable value of the service and as such no service tax can be charged on the value of the goods used and that, therefore, the impugned orders were not sustainable.

Respondent’s contentions:- Sh. Davinder Singh, learned Jt. CDR, defended the impugned orders by reiterating the findings of Commissioners and citing the judgment of Larger Bench of Tribunal in case of Aggarwal Colour Advance Photo System Vs. CCE, Bhopal reported in 2011(23)-STR-608 = 2011- TIOL-1208-CESTAT-DEL-LB pleaded that the contracts of the appellant with their customers were for repair of transformers. When repair & maintenance service was taxable and in term of section 67 of the Finance Act, 1994, service tax was chargeable on the gross amount charged, value of the goods used for providing service would have to be included in the assessable value of the service. In terms of the provisions of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, any expenditure or cost incurred by the service provider in course of providing the taxable service was includible in the assessable value of the service, except when such expenses/costs have been incurred by the service provider as pure agent, as defined in Sub-Rule(2) of Rule 5 ibid. The appellants do not fall in the category of "Pure Agents" and in view of the factual matrix of these cases, for the purpose of charging service tax, value of the components and consumables like transformer oil used would have to be included in the assessable value of the service. He, therefore, pleaded that there was no infirmity in the impugned orders.

Reasons of judgment:- The Tribunal considered the submissions from both the sides and perused the records. The appellants provided the services of repair of transformers to their customers and in course of repair, they used various parts and consumables like transformers oil, for which separate amounts were shown in the invoices. The invoices issued by them show the value of the goods used and the service charges separately. The amounts charged for various parts like HV/LV oils and transformer oil were as per the rates specified in the contracts. It was not disputed that in respect of the supply of the goods used for providing the service of repair, Sales Tax/VAT was paid. This fact was clear from the invoices placed on record. In view of this, the appellants' contracts with their customers had to be treated as split contracts for supply of goods and rendering the service. When the value of the goods used had been shown separately in the invoices and Sales Tax/VAT had been paid on the same, the supply of the goods would have to be treated as sale and the transactions which were sale, cannot be the part of service transaction. In view of this, they held that Service Tax would be chargeable only on the Service/Labour charges i.e. on service component and the value of goods used for repair would not be includible in the assessable value of the service. The Ld. DR had cited Rule 5(1) of the Service Tax (determine of Valuation) Rules, 2006 accordingly to which that "where any expenditure or costs were incurred by any service provider in the course of providing a taxable service, all such expenditures or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value of the services for the purpose of charging service tax on the said service, unless such costs or expenditure have been incurred by the service provider as "Pure Agents" of the service recipient. However, this Rule had been struck down as Ultra Vires the provisions of Section 66 & Section 67 of the Finance Act, 1994 by Hon'ble Delhi Court in the case of Intercontinental Consultants & Technocrafts Pvt. Vs. Union of India & Others Ltd. reported in - 2012 TIOL-966-HC-Del.-ST. In view of this judgment of Hon'ble Delhi High Court, the value of goods used for providing the service, which had been shown by the appellant separately in their invoices and on which Sales Tax/VAT had been paid, cannot be included for assessable value and no Service Tax can be charged on the same. The impugned orders, therefore, were not sustainable. The same were set aside. The appeals were allowed.

Decision:- Miscellaneous Application No.ST/Misc/60886/2013 for extension of stay in respect of Appeal No. ST/286/2012 also stands disposed off as the appeals itself had been allowed.

Comment:- The analogy drawn from the case is that the value of goods used for providing the service, which had been shown by the appellant separately in their invoices and on which Sales Tax/VAT had been paid, cannot be included for assessable value and no Service Tax can be charged on the same.

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PJ/Case Law/2014-15/2370

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