Valuation of Service

PJ/CASE STUDY/2012-13/15

21 July 2012

Introduction:

As per notification no. 12/2003 value of the material has to be deducted in case of composite contracts, In the case under study, which pertains to the composite contract involving both sale of food and service element, department seek to levy tax on total value, the assessee was providing Outdoor Catering Services and department wants to levy tax on amount of sale of food as well
COMMISSIONER OF SERVICE TAX, BANGALORE v/s LSG SKY CHEF INDIA PVT. LTD.[2012 (27) STR 5 (Kar.)]

Relevant Legal Provisions:

Section 67.Valuation of taxable services for charging Service tax

(1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,—

(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration;

(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.

(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.

(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.

Explanation.—For the purposes of this section,—

(a) “consideration” includes any amount that is payable for the taxable services provided or to be provided;

(b) “money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travelers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value;

(c) “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and [book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.]]

Brief Facts:

-       The assessee is engaged in the activity of providing catering service falling under ‘Outdoor Caterer’ taxable under Section 65(76a) of the Finance Act, 1994. On scrutiny of the records by the Anti Evasion Wing of the Commissionerate, it was revealed that the assessee had not made payment of service tax on the basis of the correct value of the taxable services. The service tax liability had to be paid on the basis of the gross amount collected from the clients after deducting the abatement as per Notification dated 10-9-2004 bearing No. 20/2004-S.T. upto 28-2-2006 and Notification No. 1/2006-S.T., dated 1-3-2006. That the service tax was paid only on a part of the amount collected that is only on the handling and transportation charges, which is in contravention of provisions of Section 67 of the Finance Act, 1994.

-       The assessee received an amount of Rs. 6,35,80,011/- from the Airlines for In-flight catering from 1-4-2006 to 31-3-2007 and the value of the taxable service after abatement works out to Rs. 6,74,25,403/- on which the service tax liability works out to Rs. 82,52,869/-. The assessee however paid a sum of Rs. 26,20,702/- only. Hence the balance of amount of Rs. 56,32,167/- was sought to be recovered by them. Accordingly a show cause notice was issued.

-       The assessing authority came to the conclusion that in terms of Section 67 of the Act the assessees are liable to pay service tax on the gross amount realised from the various Airlines on account of outdoor catering service provided by them. That Section 67 clearly prescribes that the value of taxable service shall be the gross amount charged by the service provider. Further the exemption claimed by the assessee under Notification 12/2003, dated 20-6- 2003 is legally unsustainable. Accordingly, the assessing authority confirmed the demand along with interest and penalty. Aggrieved by the same, the assessee preferred an appeal to the Tribunal. The Tribunal held that the assessee is entitled to the benefit of Notification No. 12/2003. That there is inclusion of value of goods sold by the assessee and in view of the separate invoices raised for the food and beverages having been supplied and having been paid for separately, the supplied should be treated as sale of goods and hence no service tax can be levied to that extent. By relying on the judgment of the Hon'ble Supreme Court in the case of BSNL v. Union of India reported in 2006 (2) S.T.R. 161 (S.C.) the benefit of Notification 12/2003 was held applicable to the assessee. Accordingly, the appeal was allowed. The imposition of penalty was set aside and consequential reliefs were granted. Hence, the present appeals by the revenue.

Appellant’s Contention:

-       The assessee contended that they are eligible for exemption under Notification No. 12/2003, dated 20-6-2003 in respect of the value of food and beverages served to the Airlines on payment of VAT. That in a transaction of sale of food, the element of service in connection with catering was only to the extent of handling and loading of food and beverages on the aircraft. Hence they had paid service tax to that extent.

Issue Involved:

The issue involved in this case was that-

Whether the assessees are liable to pay service tax for the services rendered by him as outdoor caterers?

Order of the High Court: -

v The High Court held that The identical question with regard to the liability of the assessee towards service tax so far as service rendered by them with regard to the outdoor catering is concerned, came up for consideration before the Division Bench of this Court in Writ Appeal Nos. 671 to 726/2011 which were disposed off by the order dated 18-4-2011. By a detailed consideration and relying on various Supreme Court judgments, the Division Bench of this Court came to the conclusion that the outdoor catering contract is a contract for service by virtue of sub-clause (f) Clause 29A of Article 366 of the Constitution of India which has to be treated as composite contract and the State Legislature is competent to levy the sales tax on the sale aspect only namely, the value of the food articles.

v Further it was held by them that outdoor catering consists of goods namely, the articles of food etc., which would constitute sale. Hence, the value of the food articles are liable for sales tax which the State Government is liable to impose. The other part of outdoor catering is the service rendered by the assessee in bringing the food articles to a place designated by the client. The service so rendered by the assessee, which also includes the cost of transporting the food articles constitutes service. Therefore, to this extent alone, the assessee is liable for service tax and for the entire cost received from the Airlines. Hence, there has to be a bifurcation with regard to the sale of goods and the service provided. However, it does not empower the State Government to levy tax on the entire amount mentioned in the bill. The entire sale price includes the transportation charges also and out of that sale price what is the service aspect and what is thesale aspect requires to be decided by the authorities. It is only thereafter that sales tax could be imposed on the cost of the food articles arrived at and the remaining extent including transportation is to be treated as liable for service tax. Therefore, the court declared that a contract for outdoor catering is a composite contract which falls under sub-clause (f) of clause 29A of Article 366 of the Constitution of India and service tax payable on service aspect and sales tax is payable on deemed sales aspect and it is not an individual contract.

v Further they held that the facts involved in the present case are identical to the facts that arose in the Writ Appeal Nos. 671 to 726/2001. Under these circumstances, these appeals are disposed off in terms of the judgment dated 18-4-2011 passed in Writ Appeal Nos. 671 to 726/2011. Consequently, the substantial questions of law are answered in favour of the assessee and against the revenue.

Decision:
The appeals were disposed off in favour of assessee
Conclusion:

Composite contracts have been the issue of litigation from its inception and department wants to levy tax on sale of material also, however in the correct judgement has been given. But in the new service tax regime – there will not be litigation as the Outdoor catering are subject to abatement as per Rule – 2C of Service tax valuation rules.

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PJ/CASE STUDY/2012-13/15
21 July 2012

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