Whether value of consumables is to be considered while discharging service tax?

Case:- ADOR FONTECH LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, NAGPUR

Citation:-2014 (36) S.T.R. 146 (Tri. - Mumbai)

Brief facts:- The appellants filed this appeal against the adjudication order passed by the Commissioner of Central Excise, Nagpur, whereby a demand of Rs. 81,02,717/- is confirmed with interest and penalties were imposed on the ground that the appellants are providing maintenance and repair service and while discharging the Service Tax, the appellants were not taking into consideration the value of material and consumables.
Proceedings were initiated by issuing a show cause notice dated 7-10-2008 demanding Service Tax for the period July, 2003 to March, 2008. The adjudicating authority confirmed the demand and imposed penalties.

Appellant’s contention:- The contention of the appellants is that the appellants are providing maintenance and repair service and undertaking the activity such as rebuilding of the old worn out rollers, liners, types and old worn out components of cement plants, steel plants, thermal plants, coal mines, etc. The appellants were paying VAT under the Maharashtra Value Added Tax Act on 80% of the value of the contract and on 20% of the value of the contract the appellants were paying Service Tax. The appellants were preparing worksheets on the basis of which invoices were raised and in the worksheets the cost of material and consumables was separately recorded, which is almost 80% of the value of the total contract and the appellants were paying appropriate VAT treating the same as sale of goods to their customers. The appellants submitted that as per the provisions of Notification No. 12/2003-S.T., dated 20-6-2003 there is an exemption to so much of the value of all taxable services, as is equal to the value of goods and materials sold by the service provider to the recipient of service, from the Service Tax leviable thereon under Section 65(66) of the Act subject to the condition that there is documentary proof specifically indicating the value of the said goods and materials. The contention is that as per the worksheets the value of material and consumables is separately shown, therefore the appellants are entitled for the benefit of this Notification. The appellants also relied upon the decision of the Tribunal in the case of Wipro GE Medical Systems Pvt. Ltd.v. CST, Bangalore - 2009 (14)S.T.R.43whereby the Tribunal in a similar situation held that in respect of the material sold, the Service Tax is not leviable. The Revenue challenged the order passed by the Tribunal and the Hon’ble Supreme Court dismissed the appeal reported as 2012 (28) S.T.R. J44 (S.C.).
The appellants also submitted that the major portion of the demand is time-barred. Show cause notice was issued on 7-10-2008 for the period July, 2003 to March, 2008. The contention is that in the year 2005 the Revenue raised certain queries and in reply to that, the appellants vide letter dated 25-10-2005 explained their position regarding payment of Service Tax on the 20% of the value of the contract and payment of VAT of 80% of the value of the contract. The appellants also requested the Revenue for guidance. Subsequent to this, the audit was conducted and vide audit report dated 16-12-2006, after taking into consideration the practice adopted by the appellants regarding payment of 80% of VAT on the value of material and consumables, the auditor was of the opinion that in some cases the value of material and consumables is less than 80% hence the appellants were liable to pay Service Tax on the differential value. In pursuance to the audit, the appellants paid an amount of Rs. 1,23,757/-. The contention is that as revenue was aware of the practice adopted by the appellants and there is nothing on record to show that the appellants concealed or suppressed the material facts from the Revenue hence the allegation of suppression with intent to evade payment of duty is not sustainable.

Respondent’s contention:- The Revenue submitted that it is a composite contract for maintenance and repair service and there is no separate contract for sale of material or consumables. The Revenue relied upon the decision of the Tribunal in the case of Safety Retreading Company (P) Ltd.v. CCE, Salem reported in 2012 (26)S.T.R.225whereby the Tribunal held that in case of retreading old and used tyres, the assessee has to pay Service Tax on the whole of the activity and it cannot be said that the material used for indicating the service is separately sold. The Tribunal further held that maintenance and repair service being a specific service cannot be treated as service under the category of ‘works contract’ for the purpose of Service Tax. The contention of the Revenue is that the activity undertaken by the appellants is similar to the activity which is under consideration in the case of Safety Retreading Company (supra), therefore the demand is rightly made.
In respect of limitation, the contention of the Revenue is that when the issue was examined in detail, in view of the audit, it has come to the notice that the value of material and consumables is not being taken into consideration while discharging the liability under the Service Tax hence the show cause notice was issued subsequently.

Reasoning of judgment:- The Hon’ble Court find that in this case, the appellants are discharging their Service Tax liability under the maintenance and repair service as per the provisions of Section 65(64) of the Finance Act and the ‘management, maintenance or repairs’ means any service provided by any person under a contract or an agreement, or a manufacturer or any person authorized by him in relation to management of properties, whether immovable or not; maintenance or repair of properties, whether immovable or not, maintenance or repair including reconditioning or restoration, or servicing of any goods including the motor vehicles. The appellants are not disputing the leviability of Service Tax under management, maintenance and repair service. The appellants are only challenging the impugned order whereby the Revenue included the value of material and consumables for the purpose of discharging the liability under the Service Tax. The appellants’ contention is that the material and consumables were sold on payment of appropriate VAT hence the value of material and consumables are not to be taken into consideration for the purpose of Service Tax. The appellants relied upon the provisions of Notification 12/2003-S.T. For ready reference, the provisions of the Notification are reproduced below :-
“In exercise of the powers conferred by section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts so much of the value of all the taxable services, as is equal to the value of goods and materials sold by the service provider to the recipient of service, from the service tax leviable thereon under section 65(66) of the said Act, subject to condition that there is documentary proof specifically indicating the value of the said goods and materials.”
They find that as per the provisions of the above Notification, there is a condition that there should be documentary proof specifically indicating the value of goods and material sold. In the present case, the appellants were clearing the goods under a consolidated invoice and uniformly taking 80% of the value of material and consumables and 20% towards the service. There is no separate invoice regarding the sale of goods and material.
The appellants relied heavily upon the decision of the Tribunal in the case of Wipro GE Medical Systems Pvt. Ltd. (supra). They have gone through the decision of the Tribunal. They find that in that case the assessee, apart from supplying labour, also supplying the material which had to be used under the maintenance contract. The assessee had undertaken the activity of installation of various medical equipments and during maintenance and repair, certain spare parts required replacement and the contracts covered these spare parts also. In this situation, the Tribunal held that the value of the spare parts is not to be taken into consideration for the purpose of discharging Service Tax.
In the present case, they find that the appellants are undertaking the activity of rebuilding of the old worn out rollers, liners, types and old worn out components of cement plants, steel plants, thermal plants, coal mines, etc. The activities undertaken by the appellants require processing, i.e. rebuilding of the old worn out rollers, liners, etc., and the rebuilding involves flux core wire on the old worn out rollers, liners, tyres of cement plant and other plants. The materials used for repair cannot be considered as spare parts, therefore the ratio of the above decision is not applicable on the facts of the present case.
The Revenue relied upon the Tribunal’s decision in the case of Safety Retreading Co. (supra) where the Tribunal rejected the contention of the assessee regarding supply of material separately in respect of retreading of old and used tyres. The activity undertaken by the appellants is more akin to the activity under consideration in the case of Safety Retreading Co. (supra), therefore the ratio of the above decision is fully applicable on the facts of the present case.
In these circumstances, they find no merit in the contention of the appellants that the value of material is not to be taken into consideration for purpose of Service Tax.
On limitation, they find that the demand is for the period July, 2003 to March, 2008 and the show cause notice was issued on 7-10-2008 alleging suppression with intent to evade payment of tax. They find that in response to queries raised by the Revenue vide letter dated 25-10-2005, the appellants explained their position regarding payment of Service Tax. Further, they find that audit raised an objection on 16-12-2006, whereby after taking into consideration the fact that 80% of the value of the contract is in respect of sale of goods and 20% is for the purpose of Service Tax. The audit pointed out that in some cases the value of goods and material is less than 80% and the Revenue raised a demand of Rs. 1,23,757/- in this regard and the appellants had paid that amount. In the audit report, it was specifically mentioned that after taking into consideration the documentary proof by preparing the worksheet showing segregation of value of goods and materials sold and value of service charges in terms of Notification No. 12/2003-S.T. In view of the above facts, they agree with the contention of the appellants that the allegation of suppression with intent to evade payment of tax is not sustainable. In view of this, the demand beyond the normal period of limitation is not sustainable and set aside.
As the allegation of suppression with intent to evade payment of tax is not sustainable and there is a reasonable belief on the part of the appellant in view of the audit objection and seeking guidance for the Revenue in the years 2005 and 2006, they find that it is not a case for imposition of penalties. The penalties imposed under the impugned order are set aside. The appeal is disposed of as indicated above.

Decision:- Appeal disposed off.

Comment:- The gist of the case is that the value of consumables is includible in the taxable value of service. The activities undertaken by the appellants require processing, i.e. rebuilding of the old worn out rollers, liners, etc., and the rebuilding involves flux core wire on the old worn out rollers, liners, tyres of cement plant and other plants. The materials used for repair cannot be considered as spare parts and therefore the decision of Wipro GE Medical Systems Pvt. Ltd is not applicable in present case. Hence, as per the decision of Safety Retreading Co., the value of consumables is required to be included in the taxable value of service.

Prepared by:- Monika Tak

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PJ/CASE LAW/2014-15/2455

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