2012 (7) TMI 324 - HC - Service Tax

Valuation - activities relating to maintaining and operating the equipments - service tax liability on enhanced value including cost of electricity supplied free of cost by the customers in the value of taxable service - Held that - Argument of the Revenue is not acceptable that the electricity supplied free of cost is a consideration in kind received by the assessee from its customers. Admittedly, the electricity supplied free of cost is meant to be consumed in the manufacture of oxygen and admittedly the oxygen so manufactured is used by the customers in the manufacture of their final product. It is the customers of the assessee who clear the final product on payment of duty and no benefit accrues to the assessee on such clearances. Thus, the electricity supplied free of cost by the customers to the assessee does not in any way amount to additional consideration received by the assessee in kind - sustainability of the demand raised against the assessee being in doubt, it is a fit case for entertaining the appeal without any predeposit - in favour of assessee.

Issues:
1. Justification of CESTAT's directive for a deposit of Rs. 1 crore for entertaining an appeal.
2. Service tax liability concerning the maintenance and operation of equipment for oxygen production.
3. Interpretation of Section 67 of the Finance Act, 1994, and Rule 3 of Service Tax (Determination of Value) Rules, 2006.
4. Consideration of electricity supplied free of cost in determining the value of taxable services.

Analysis:
1. The primary issue in this case revolves around the CESTAT's decision to require a deposit of Rs. 1 crore for considering an appeal against a tax demand. The High Court found that the CESTAT's basis for ordering the pre-deposit was the inclusion of the cost of electricity supplied free of cost by customers in the taxable service value. However, the Court disagreed with this reasoning, leading to the setting aside of the pre-deposit requirement.

2. The case concerns the service tax liability of an assessee providing equipment for oxygen production to customers. The dispute arose from the contention that the cost of electricity supplied free of cost should be included in the taxable service value. The assessee had paid service tax on fixed service charges received from steel companies for operating and maintaining the equipment used in producing oxygen for manufacturing iron and steel items.

3. The Court delved into the interpretation of Section 67 of the Finance Act, 1994, and Rule 3 of Service Tax (Determination of Value) Rules, 2006. It analyzed the provisions regarding the determination of taxable service value when consideration is partly in money and partly in kind. The Court emphasized that the consideration for services should be cash or its equivalent, and the value should not include non-monetary benefits unless they constitute consideration received.

4. The crucial aspect of the judgment focused on whether the cost of electricity supplied free of cost should be considered in determining the taxable service value. The Court opined that the electricity provided for oxygen manufacture, utilized by customers in their final products, did not amount to additional consideration for the assessee. It differentiated between excise duty on manufacture and service tax on consideration received, highlighting that unless the electricity cost was a form of consideration, it should not be included in the taxable service value.

In conclusion, the High Court ruled in favor of the assessee, setting aside the pre-deposit requirement and directing the CESTAT to hear the appeal on its merits without insisting on any deposit. The judgment clarified the distinction between consideration for services and non-monetary benefits, providing valuable insights into the interpretation of service tax laws and their application in specific scenarios.

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