2020 (4) TMI 867 - HC - Service Tax

Nature of activity - sale or service - photography service - use of the paper upon which an image is printed using certain consumables and chemicals - interpretation of term sale appearing in exemption Notification No.12/03-ST dated 20.06.2003, is to be given the same meaning as given by Section 2(h) of the Central Excise Act, 1944, read with Section 65(121) of the Finance Act, 1994 - deemed sale - HELD THAT - Identical substantial questions of law have been answered in favour of the assessee 2020 (4) TMI 799 - MADHYA PRADESH HIGH COURT The Supreme Court in the matter of Safety Retreading Company 2017 (1) TMI 1110 - SUPREME COURT has considered the similar issue. The Apex Court set aside the majority view of the Special Bench of the Tribunal and held that component of gross turnover in respect of which assessee had paid taxes under local Act with which it is registered as works contractor is excluded from service tax. It has been further held that in a contract of retreading of tyres, it cannot be said that there is no sale or deemed sale of parts or other materials used in the execution of contract of repairs and maintenance - demand withheld. The substantial questions of law are answered in favour of the assessee - Appeal allowed.

Summary

Issues Involved:
1. Whether the use of raw materials in retreading old tyres constitutes a sale of goods under Article 366(29A)(b) of the Constitution.
2. Whether the term 'sale' in exemption Notification No.12/03-ST includes deemed sales as defined by Article 366(29A)(b) of the Constitution.

Detailed Analysis:

Issue 1: Use of Raw Materials in Retreading Tyres
The primary issue was whether the use of raw materials like tread rubber and vulcanizing solution in retreading old tyres amounts to a sale of goods under Article 366(29A)(b) of the Constitution. The appellant argued that the materials used in retreading are incidental to the service provided and should not be considered a sale of goods. The Tribunal initially held that the value of the materials used should be included in the value of the service, as per the Larger Bench decision in Aggarwal Colour Advance Photo System vs. Commissioner, Central Excise, Bhopal.

However, the High Court found that the Tribunal's reliance on the Aggarwal Colour Advance Photo System case was misplaced, as that case dealt with photography services, not retreading of tyres. The High Court referred to the Supreme Court's decision in Safety Retreading Company Private Limited vs. Commissioner of Central Excise, Salem, which held that in a contract for retreading of tyres, there is a sale or deemed sale of parts or materials used. The Supreme Court clarified that the component of gross turnover on which the assessee had paid taxes under the local Act should be excluded from service tax. Thus, the High Court concluded that the value of taxable service should be determined excluding the cost of materials used.

Issue 2: Definition of 'Sale' in Exemption Notification No.12/03-ST
The second issue was whether the term 'sale' in exemption Notification No.12/03-ST should be interpreted as per Section 2(h) of the Central Excise Act, 1944, or if it also includes deemed sales as defined by Article 366(29A)(b) of the Constitution. The appellant contended that the exemption should apply to the material component used in providing the service. The respondent argued that the exemption was correctly denied because the appellant did not provide documentary proof of the value of goods sold.

The High Court noted that the Supreme Court in Safety Retreading Company had already settled this issue, stating that the costs of parts or materials sold (deemed sale) should be excluded from the taxable value of services, provided there is adequate proof. The High Court found that the appellant had furnished invoices showing the break-up of the gross value received, which included the cost of materials. Therefore, the High Court held that the appellant was entitled to the exemption under Notification No.12/03-ST, subject to providing documentary proof of the value of goods sold.

Conclusion:
The High Court allowed the appeal, setting aside the Tribunal's order. It held that the use of materials in retreading tyres constitutes a sale of goods under Article 366(29A)(b) of the Constitution, and the value of taxable service should exclude the cost of such goods. The term 'sale' in exemption Notification No.12/03-ST includes deemed sales, and the appellant is entitled to the exemption, provided there is documentary proof of the value of goods sold. The substantial questions of law were answered in favor of the assessee.