Whether value of deemed sale involved in a transaction be considered for availing benefit of notification no. 12/2003-ST?

PJ/Case Law/2013-14/2100

Case:- COMMISSIONER OF CENTRAL EXCISE, PUNE Vs LAXMI TYRES

Citation:- 2013-TIOL-1261-CESTAT-MUM

Brief Facts:-The facts relevant for consideration in this case are as follows. The Respondent are engaged in retreading of tyres and had entered into a franchisee agreement with M/s MRF. The process of retreading of tyres consisted of (i) carrying out inspection of worn out tyres supplied by their customers to check the suitability of re-treading; (ii) buffing of the tyres; iii) patching on the cuts if any; applying of solution/adhesives on the surface; iv) fixing the piece of the tread rubber and v) heating the tyre to ensure the bonding given to fix the tread rubber to the tyre. During the period 1-7-03 to 31-3-08, the appellant did not obtain any service tax registration and failed to pay service tax on the retreading activity undertaken by them. Accordingly a show cause notice was issued by the appellant demanding service tax on the gross amount charged by the appellant by classifying the service under the taxable service category of "management, maintenance or repair service". The said notice also proposed to recover interest on the service tax demanded and also proposed to impose penalties on the appellant under the provisions of the Finance Act, 1994. The said notice was adjudicated by the Commissioner of Central Excise Pune III who held as follows:-

a)    Up till 16^th June, 2005, the services of maintenance of repair had a condition that only services which were covered under a maintenance contract or agreement were taxable. The services provided by Laxmi Tyres were on casual basis to different customers and there was no agreement of any kind and therefore, the service was not a taxable service until 16-6-2005.

b)    The material used by the respondent for re-treading is sold by them to the customers on regular invoices and VAT is also paid on the prices of the same. Therefore, the value of material is excludible in terms of notification No.12/2003-ST dated 20-6-2003. If this is done, the appellant is liable to pay service tax amount after 16^th June, 2005. Subject to payment of the said amount along with interest, the proceedings are liable to be dropped.

The Revenue is aggrieved of the said order and preferred an appeal before Tribunal.

Appellant’s Contention:-The Revenue urged in their appeal memorandum is as under :-

a)            The dropping of demand for the period prior to 16-6-05 is correct as there was no periodic contract for the repair services undertaken.

b)            The dropping of proceedings for the period on or after 16-6-05 by extending the benefit of Notification No.12/2003-ST is not correct. The sale of material was not separate or independent to attract the benefit of said exemption. The respondent paid service tax only on 30% of the invoice value on the ground that normally tyre remoulding/retreading activities constituted approx. 70% material cost and balance 30% towards labour/processing charges. As per notification 12/2003, only value of goods and materials sold by the service provider to the recipient of the service is excludible subject to the condition that there was documentary proof specifically indicating the value of the said goods and materials. The materials tread rubber, cushion gum and rubber adhesives etc., have been consumed in the course of retreading of tyres and there is no independent sale. The bifurcation of the invoice value into 70% materials cost and 30% labour charges is arbitrary. As per the provisions of section 65(64) read with section 66 and 67 and its explanation, the value of taxable services for the purpose of service tax is the gross amount charged from the customer for the services rendered and the goods consumed in the process of rendering service cannot be an item of sale and therefore, the benefit of notification no. 12/2003 shall not be available.

c)            In the case of photography services, a similar question arose and the Larger bench of the Tribunal in the case ofAggarwal Colour Advance Photosystem =(2011-TIOL-1208-CESTAT-DEL-LB)held that for the purpose of section 67 of the Finance Act, 1994, the value in relation to photography would be the gross amount charged including cost of goods and materials used and consumed in the course of rendering of such service.

d)            In view of the above legal position, the demand for the period 16-6-2005 to 31-3-08 amounting to Rs. 61,41,965/- required to be confirmed along with interest and resultant penal consequences.

The Revenue re-iterated the grounds urged in the appeal memorandum also made the following submissions. This tribunal in two cases, namely, Speedways Tyre Service vs. CCE, Ludhiana [2009 (14) STR 339 (tri-Del)] = (2008-TIOL-2554-CESTAT-DEL) and Safety Retreading Co. Pvt. Ltd. vs. CCE, Salem [2012 (26) STR 225 (Tri-Chennai)] = (2012-TIOL-697-CESTAT-MAD), in identical situation pertaining to re-treading of tyres had held in the case of re-treading of tyres, the customers were only concerned about getting the worn out tyres retreaded and they were not buying any materials and therefore, the benefit of notification No. 12/2003 would not be available. In these decision, it was further held that mere fact of voluntary payment of sales tax/VAT on apportioned value attributable to value of goods sold cannot be considered as evidencing sale of goods for the purpose of notification No.12/2003-st and the assessee is not entitled to benefit of cost deduction on raw materials consumed in providing the service. Further the Larger Bench of this Tribunal in the case of Aggarwal Colour Photosystem case had held that the term ‘sold' appearing in notification no. 12/2003 has to be interpreted using the definition of ‘sale' in the Central Excise Act, 1944 and not as per the meaning of deemed sale under Article 366 (29A) (b) of the Constitution. Accordingly he prays for allowing the appeal.

Respondent’s Contention:-The Respondent on the other hand, argues that the order of the Ld. Commissioner is sustainable in law. He relies on the decision of this Tribunal in the case of Chakita Ranjini Udyam [2009 (16) STR 172 (Tri-Bang)]wherein it was held that tyre retreading of service and specified as works contract under the Karnataka VAT Act and therefore VAT paid on portion of turnover is attributable to transfer of property and therefore, benefit of notification No.12/2003 would be admissible. He also relies on the decision of this Tribunal in the case of PLA Tyre Works [2009(14)STR 32 (Tri-Chennai)] = (2009-TIOL-304-CESTAT-MAD)wherein benefit of notification no. 12/2003 was allowed in a case where service tax was paid on tyre retreading on 30% of the gross amount treating the balance 70% as value of goods. Accordingly he prays for upholding the impugned order and dismissing the appeal.

Reasoning of Judgment:-The Tribunal considered the submissions made by both the sides very carefully.

The Tribunal had also perused the sample invoice issued by the Respondent for the re-treading work undertaken by them. The said invoice gives the following details.

RM (Raw Material) Sub. To VAT	Xxxxxxx
M.VAT @ 12.5%	Xxxxxxx
L.C. (Labour Charges) Sub. to Service Tax	Xxxxxxx
Service Tax @ 10.2%	Xxxxxxx

The said invoice does not give any details of the description/quantity of the raw materials sold, unit rate for the goods sold and other relevant particulars. It merely attributes arbitrary values towards the sale of goods and labour charges without giving any basis of such sketchy details given in the document, it is difficult to come to any conclusion regarding the value of the goods sold.

The Tribunal also found Notification No.12/2003-ST dated 1-7-2003 grants exemption from so much of the value of all the taxable services, as is equal to the value of goods and materials sold by service provider to the recipient of service, subject to condition that there is documentary proof specifically indicating the value of the said goods and materials. Unless the document indicates the description and quantity of goods sold, its unit rate, the value of goods, it is difficult to accept to accept the plea that the condition of the notification is satisfied. This was the issue for consideration before the Larger Bench in the Aggarwal Colour Photosystem case relied upon by Revenue (supra) and the issue was framed as follows:-

"Whether the term 'sale' appearing in exemption Notification No.12/03-S.T., dated 20-6-03, is to be given the same meaning as given by Section 2(h) of the Central Excise Act, 1944, read with Section 65(121) of the Finance Act, 1994 or this term would also include the deemed "sale" as defined by Article 366 (29A)(b) of the Constitution?"

The Larger Bench answered this question as follows:-

"The value of other goods and material sold separately would be excluded under exemption notification No. 12/03-ST and the term ‘sold; appearing there-under has to be interpreted using the definition of ‘sale' in the Central Excise Act, 1944 and not as per the meaning of deemed sale under Article 366 (29A) (b) of the Constitution."

The Tribunal found that in view of the above position, the value of deemed sale involved in the transaction cannot be considered for the purpose of notification No.12/03-ST. In other words, the deeming fiction can be with respect to the concept of sale, but the same cannot be in respect of value of the goods sold. In the present case, the value adopted is on a deemed basis, that is, 70% of the gross amount charged. If the ratio of the larger bench decision is applied to the facts of the present case, the abatement towards value under notification NO. 12/03-ST cannot be extended and the appellant is liable to discharge service tax on the gross amount charged for the transaction. Merely because there is overlapping in the measure of tax for the purposes of levy of sales tax/VAT and service tax, there is no jurisdictional bar in the levy of service tax as held by the hon'ble apex court in the case of Idea Mobile Communication Ltd. case [2011 (23) STR 433 (SC)] = (2011-TIOL-71-SC-ST)observing that "there might be overlapping, but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is overlapping does not detract from the distinctiveness of the aspects".

The Tribunal further relied on the decisions of the Tribunal (Delhi Bench) in the case of Speedways Tyre Service and (Chennai Bench) in the case ofSafety Retreading Company Ltd. (supra) dealt with identical issue and held that invoices unilaterally raised by the appellants indicating the break-up without substantiating the amount attributable to the value of the goods supplied cannot be considered as documentary proof for purposes of notification No. 12/03-ST. The other decisions of the Tribunal relied upon by the appellant does not help as the said decisions are not in conformity with the decisions of the Larger Bench of this Tribunal and the hon'ble apex court decision in the ideal Mobile case.

The Tribunal found that in view of the above legal and factual position, the appellant is not eligible for the benefit of notification No. 12/03-ST and is liable to discharge service tax liability on the gross amount charged for the transaction for the period on or after 16-6-05 along with interest thereon in terms of provisions of Finance Act, 1994. The appellant would also be eligible to take Cenvat Credit of the excise duty/CVD, if any paid, on the materials used for the retreading service, in accordance with law. Since the issue involved interpretation of law and there were conflicting views on the subject matter, imposition of penalty is not warranted and the same is set aside. The appeal is disposed of in the above terms.

Decision:- Appeal disposed of.

Comment:- The analogy that is drawn from this case is that the value of deemed sale involved in the transaction cannot be considered for the purpose of notification No.12/03-ST. The deeming fiction can be with respect to the concept of sale, but the same cannot be in respect of value of the goods sold and the appellant is not eligible for the benefit of notification no. 12/2003-ST and is liable to discharge ST on gross amount charged for transactions for the period on or after 16/06/2005 along with interest. For claiming benefit of notification no. 12/2003, documentary evidence showing sale of goods is necessary and in the case of retreading of tyres, there was deemed sale of goods. As the condition of the notification no. 12/2003 was not complied, its benefit could not be extended to the appellant. Further, since issue involved was of interpretation of law and there were conflicting views in the subject matter, imposition of penalty was considered as not warranted and same was set aside.

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