2014 (7) TMI 115 - AT - Service Tax

Valuation - repair and maintenance of the transformers - composite contract or not - appellants revealed that they were paying service tax only on the Labour Charges - demand of service tax on total contracted value - Held that - on examination of the documentary evidences, we find that the agreements as also the invoices reflected the cost of the materials and the labour separately as also establishes the fact of payment of excise duty, VAT/CST on the said goods sold, it has to be held that no service tax would be leviable on the value of the materials sold. - Decided in favor of assessee. It is also seen that the Commissioner vide a separate order dated 21.02.2011 in another associated company M/s. Surya Transformers has set aside the demand based on identical ground. Though the said order was placed before the Commissioner, he has not followed the same by observing that the said order has not been accepted by the Department and the appeal has been filed there against before the Tribunal. However, there is no stay of operation of the said order. - Decided in favour of assessee.

Issues:
1. Whether the appellant is liable to pay service tax on the total contracted value inclusive of various items used in the repair of transformers.
2. Whether the appellant's contract is a composite contract for repair of old and damaged transformers.
3. Whether the appellant is obligated to replace certain parts during the repair process.
4. Whether the value of goods used for repair should be excluded from the total value charged for the levy of service tax.
5. Whether the benefit of Notification No.12/2003-ST applies to the appellant.
6. Whether the demand for service tax is barred by limitation.
7. Whether penalties should be imposed on the appellant.

Analysis:
1. The appellant, engaged in manufacturing power distribution electrical transformers, entered into contracts for repair and maintenance with specific customers. The Revenue contended that the appellant should pay service tax on the total contracted value, including various items used in repair. The Commissioner held that the contract was a composite one for complete repair, obligating the appellant to replace damaged parts. However, the Tribunal found that the appellant had paid excise duty and VAT on goods used in repair, indicating a deemed sale of goods, exempting them from service tax under Notification No.12/2003-ST.

2. The Commissioner observed that the appellant's contract was a complete repair package cost per transformer, requiring replacement of parts as a condition. The Tribunal disagreed, stating that the segregation of items in the contract for price variation did not make it a service contract inclusive of goods. Judicial precedents were cited where similar situations favored the assessee, emphasizing the exclusion of goods' value from service tax if separately disclosed and taxes paid.

3. The Tribunal highlighted that the appellant had no option not to replace items during repair, as per the contract. However, the legal requirement was to show the cost of materials separately, which the appellant had done. The Tribunal emphasized that the appellant's payment of excise duty and VAT on goods used in repair indicated a sale, exempting them from service tax on those goods.

4. The Tribunal referred to judicial decisions supporting the exclusion of material costs from service tax if separately disclosed and taxed. The Commissioner's argument that the appellant had no option not to replace parts did not negate the legal requirement to show material costs separately.

5. The Tribunal noted that the appellant had paid excise duty and VAT on goods used in repair, indicating a deemed sale, exempting them from service tax under Notification No.12/2003-ST. The Tribunal cited judicial precedents where similar situations led to exclusion of material costs from service tax, emphasizing the documentary proof of material values.

6. The Tribunal did not delve into the limitation aspect as the appeal was allowed on merits. It was acknowledged that a legal issue of interpretation was involved, and no mala fide could be attributed to the appellant to justify invoking the extended period. Consequently, the demand for service tax was not barred by limitation.

7. As the appeal was allowed on merits, the Tribunal set aside the penalties imposed on the appellant. The impugned order was set aside entirely, and the appeal was allowed, providing consequential relief to the appellant.

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