2023 (5) TMI 391 - AT - Service Tax

Valuation of taxable services - installation and commissioning and works contract services - two business models for manufacturing as well as for installation of the elevators - cost of material and the element of service for both supply as well as installation of the equipment clearly declared - Section 67 of the Finance Act, 1994 and Rule 2A of the Service Tax (Determination of Value) Rules, 2006 - HELD THAT - The provisions for valuation of taxable services for the purpose of charging service tax is contained in Section 67 ibid. Determination of the value and manner of payment and collection of tax has been provided in Rule 2A ibid - On a conjoint reading of both Section 67 and Rule 2A ibid, it reveals that wherever Value Added Tax (VAT) or Sales Tax has been paid on the supply of goods, such value should be deducted for the purpose of determination of the service component, on which service tax is liable to be paid by the assessee. On perusal of the contract and other documents available in the case file, it is found that the appellants had clearly demonstrated the cost of material and the element of service for both supply as well as installation of the equipment. On the basis of VAT amount paid on the supply component, the jurisdictional VAT authorities have assessed the appellant-assessee on the basis of the declarations made by them. Since, one statutory competent authority is accepting the modus operandi adopted by the appellants, considering the transaction as sale of goods, for the same set of transaction, different view cannot be expressed by the other government department namely, the service tax department in claiming that the supply amount has not been properly reflected in the books of accounts by the appellants. Since, the adjudicating authority has not recorded any specific finding as to what amount is to be considered for the purpose of determination of the service tax liability, there are no hesitation, but in accepting the commercial documents submitted by the appellants to conclude that there is proper bifurcation of the amount towards supply of equipment and towards the services for installation and commissioning of the same at the site of the customer. In the case of Lumino Industries Ltd. 2022 (1) TMI 509 - CESTAT KOLKATA , it has been held that when the contract provides for separate values for supply of materials and provision of services and that such value is also clearly determinable from the invoice, only the contracted value for rendition of service is liable for payment of service tax. In the present case since, the appellants are maintaining proper and adequate accounting records to demonstrate that there is segregation of the price towards supply of material and for installation and commissioning of equipment, denial of the value declared by the appellants without proper substantiation by the adjudicating authority, cannot also stand judicial scrutiny - thus, based on records maintained, the appellants appropriately discharged the VAT amount and the liability has never been questioned or objected to by the authorities under the respective statute. Thus, under such circumstances, the learned Adjudicating Authority cannot fasten the impugned demands confirmed in the impugned order on the appellants. There are no merits in the impugned orders, insofar as the adjudged demands were confirmed therein on the appellants - appeal allowed.

Summary

Issues Involved:
1. Whether the appellants paid VAT on the actual sale value of the materials.
2. Whether the service tax liability should be determined based on the gross amount including materials and services.
3. Whether the contracts are indivisible works contracts.
4. Whether the extended period of limitation and penalties are applicable.

Summary:

Issue 1: VAT Payment on Actual Sale Value of Materials
The department claimed that the appellants did not pay VAT on the actual sale value of the materials. The adjudicating authority found that the payment terms were linked to the progress of work, not material supply, and the contract did not indicate any divisibility between materials and services. Additionally, there was no evidence of VAT invoices or customer awareness of individual item values.

Issue 2: Service Tax Liability Determination
The appellants argued that the service tax should be levied only on the installation and commissioning charges, not on the material component, as per Section 67 of the Finance Act, 1994, and Rule 2A of the Service Tax (Determination of Value) Rules, 2006. They provided documents showing bifurcation of material and service costs and VAT payment on materials. The Tribunal agreed, stating that VAT-paid value should be deducted for service tax determination, and accepted the appellants' commercial documents.

Issue 3: Indivisible Works Contracts
The adjudicating authority asserted that the contracts were indivisible works contracts with no separate sale of goods, as evidenced by contract terms and lack of separate sale documents. However, the Tribunal found that the appellants demonstrated clear cost segregation and upheld that only the service portion should be taxed.

Issue 4: Extended Period of Limitation and Penalties
The adjudicating authority invoked the extended period of limitation and imposed penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The Tribunal, however, found no merit in the adjudged demands, noting that the appellants maintained proper accounting records and discharged VAT appropriately, which was not disputed by VAT authorities.

Conclusion:
The Tribunal set aside the impugned orders, allowing the appeals in favor of the appellants, and ruled that only the service portion of the contract should be subject to service tax, not the material component on which VAT was paid.