2013 (11) TMI 1306 - AT - Service Tax

Valuation - Undervaluation of the service - retreading of tyres - Management, Maintenance or Repair Service - Appellant have filed returns and paid service tax on the labour component of the work done by them and not on the material component on which they have paid VAT - Held that - as per the decision of apex court legal fiction, as is well known, should be applied only to the extent for which it was enacted. It, although must be given its full effect but the same would not mean that it should be applied beyond a point which was not contemplated by the legislature or which would lead to an anomaly or absurdity - Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided. The approach of the assessing authority, to us, thus, appears to be correct - Ruling of the apex court in the case of Imagic Creative (2008 (1) TMI 2 - Supreme Court of India) was not considered by the Tribunal in Safety Retreading Co. case (2012 (6) TMI 719 - CESTAT, CHENNAI (THIRD MEMBER)) and further, we are in agreement with the law laid down by the Supreme Court in the case of Imagic Creative Private Ltd. There is a prima facie case made out in favour of the appellant and accordingly, there will be stay of the impugned demand of tax, interest and penalty till the final disposal of the appeal - Stay granted.

Summary

Issues:
1. Whether the value of materials consumed during the provision of taxable service should be included in the gross value of service for the purpose of service tax.
2. Whether the dominant object in the service of tyre retreading is the element of service, and if material cost is deductible from the value of service.
3. Whether the legal fiction created by Article 366(29 A) of the Constitution of India impacts the taxation on the service aspect and the transfer of goods involved in a works contract.
4. Whether the rulings in various cases support the appellant's contention that material value on which VAT is paid should not be added to the value of taxable services.

Analysis:

1. The appellant, a retreader of tyres, filed returns and paid service tax on the labour component but not on the material component. The Revenue issued a show-cause notice for undervaluation of service under 'Management, Maintenance or Repair Service'. The Commissioner confirmed the demand, stating that the gross value of taxable services includes the total amount charged by the service provider without deduction for material cost. The appellant contested this, leading to the appeal.

2. The appellant argued that the job done is a works contract involving the transfer of materials, making service tax payable only on the service aspect. Citing legal precedents, the appellant emphasized that service tax and VAT are mutually exclusive, and service tax should apply only to the service component of a composite contract. The Tribunal found merit in this argument and granted a stay on the demand of tax, interest, and penalty.

3. The appellant relied on rulings such as Almec Enterprises and Wipro GE Medical Systems Pvt. Ltd. to support their claim that material value subject to VAT should not be added to taxable service value. The Tribunal considered these arguments and found that the legal fiction created by Article 366(29 A) impacts the taxation framework concerning service and goods involved in works contracts.

4. The Revenue, represented by the learned DR, supported the findings in the original order and cited a ruling from the CESTAT Madras. However, the Tribunal noted that the apex court's decision in Imagic Creative case was not considered in the CESTAT Madras ruling. Based on the legal principles established by the Supreme Court, the Tribunal granted a stay on the demand pending the final disposal of the appeal, aligning with the appellant's contentions and legal interpretations.