2008 (9) TMI 861 - Commissioner - Central Excise

Issues Involved:
1. Eligibility for deduction of raw material consumed during photography activities for payment of Service Tax.
2. Eligibility for benefit of Notification No. 12/2003-S.T., dated 26-3-2003 and subsequent clarification vide Circular F.No. 233/2/03-CX.4, dated 7-4-2004.
3. Invocation of larger period of limitation.
4. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Detailed Analysis:

1. Eligibility for Deduction of Raw Material Consumed:
The appellants argued that they were entitled to deduct the expenses incurred towards the purchase of raw materials (paper and chemicals) used in providing photography services from the gross receipts. They relied on several judgments, including Express Colour Lab., Spectrum Colour Lab., and Adlabs v. CCE, Bangalore, which supported their claim that the cost of materials consumed should not be included in the taxable value of services.

The adjudicating authority, however, dismissed these citations, relying instead on the Supreme Court's ruling in C.K. Jidheesh v. Union of India, which held that contracts for developing and printing color photographic films are pure service contracts with no element of sale of goods, making the entire amount received liable for service tax.

Upon appeal, the appellate authority considered the Supreme Court's decision in BSNL & Anr. v. UOI & Ors., which clarified that after the 46th Amendment, the sale element in composite contracts could be isolated and subjected to sales tax. This ruling overruled previous decisions, including Rainbow Color Lab. and C.K. Jidheesh, which the adjudicating authority had relied upon. The appellate authority concluded that the raw materials consumed during photography services are within the definition of sale under Article 366(29A) of the Constitution of India, and thus their value should not be included in the assessable value of taxable services.

2. Eligibility for Benefit of Notification No. 12/2003-S.T.:
The appellants contended that they complied with Notification No. 12/2003-S.T., which allows for the deduction of the value of goods and materials sold during the provision of services. They argued that the adjudicating authority misinterpreted the notification by not considering the cost of materials consumed.

The appellate authority agreed with the appellants, citing the case of Express Colour Lab., which held that deductions are allowable for consumables even if their value is not shown on each bill or invoice, provided there is documentary proof of their cost. The appellate authority also referenced the case of Jyoti Art Studio v. CCE, Hyderabad, which supported the deduction of raw material costs without their being mentioned in the invoice/bill, aligning with Section 67 of the Finance Act, 1994.

3. Invocation of Larger Period of Limitation:
The appellants argued that the invocation of the larger period of limitation was barred by law and relied on Zee Telefilms Ltd. v. CCE, Mumbai, and Vijaya Advertisers v. CCE, Tirupathi, to support their claim.

The appellate authority did not explicitly address this issue in the final order, focusing instead on the substantive issues regarding the eligibility for deductions and the applicability of penalties.

4. Imposition of Penalties:
The adjudicating authority had imposed penalties under Sections 76, 77, and 78 of the Finance Act, 1994, for various contraventions, including failure to pay the correct amount of service tax and not submitting S.T. 3 returns timely.

The appellate authority, however, found that since the demand for service tax was unsustainable, the penalties under Sections 76 and 78 were also unwarranted. The only penalty upheld was the Rs. 1000/- under Section 77 for the late submission of returns.

Conclusion:
The appellate authority modified the Order-in-Original by dropping the demand for service tax and the associated penalties under Sections 76 and 78, while upholding the penalty under Section 77. The decision was based on the Supreme Court's ruling in BSNL & Anr. v. UOI & Ors., which clarified the treatment of composite contracts involving the sale of goods and services.

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