2011 (9) TMI 366 - AT - Service Tax

Inclusion of the cost of material in the cost of services - Respondent providing photography services - appellants were not including the cost of material consumed for providing the said services, and were paying the Service Tax on the basis of the value arrived by deducting the cost of the chemicals and paper used in developing and printing the photographs - As in the case M/s. Agrawal Colour Photo Industries vs. Commissioner (2011 -TMI - 205988 - CESTAT, NEW DELHI (LB)). - It stands held in the said decision of the Larger Bench that the value of services in relation to photography would be the gross amount charged including the cost of goods and material used and consumed in the course of such services - However it is hit by time bar, major part of the demand stands raised by invoking the extending period of limitation - when there is a bonafide doubt as regards the non-excisability of the goods due to divergent views of the High Courts, extended period of five years cannot be invoked - no malafide can be attributable to the appellant so as to invoke the extended period of limitation - appellant is liable to pay service tax for the period which falls within the normal period of limitation - no penalty is required to be imposed on the appellants - Appeal disposed off.

Summary

Issues:
Whether the value of paper, chemicals, and packing materials used by the service provider should be included in the total gross amount charged to clients for levying service tax. Whether the demand for service tax beyond the normal limitation period is valid. Whether penalty imposition is justified in the absence of malafide intentions by the service provider.

Analysis:
The dispute in this case revolves around the inclusion of the cost of materials in the value of services provided by a photography service provider for the purpose of levying service tax. The appellants did not include the cost of materials in the value of services, leading to a show cause notice for the demand of service tax based on the gross value charged for the services. The authorities confirmed the demand and imposed a penalty, which was upheld by the Commissioner (Appeals), resulting in the present appeal.

The issue of including the cost of materials in the value of services has been settled in favor of the Revenue by a Larger Bench decision, stating that the value of services, including photography, should encompass the cost of goods and materials used during the provision of services. However, considering the timeline of the case from July 2001 to September 2005 and the show cause notice issued in November 2005, a significant portion of the demand falls under the extended period of limitation.

The Government circular and previous Tribunal decisions favored the service provider's entitlement to claim exemption for inputs and materials consumed or sold to the service recipient, indicating a genuine belief on the part of the appellant regarding the non-inclusion of material costs in the service value. Citing relevant Supreme Court precedents, the Tribunal concluded that the extended period of limitation cannot be invoked in cases of bonafide doubts or conflicting legal interpretations.

Given the bonafide belief of the appellant and the previous Tribunal decisions in their favor, the Tribunal held that the demand for the period falling within the normal limitation period is valid, while the demand beyond that period is time-barred. Consequently, the penalty imposition was set aside due to the absence of malafide intentions on the part of the appellants and their reasonable belief based on the legal landscape at the time of the dispute.

In conclusion, the Tribunal directed the authorities to recalculate the demand for service tax within the normal limitation period and waived the penalty under Section 80 of the Finance Act, 1994, based on the appellant's genuine belief and the legal clarity provided by the Larger Bench judgment.