2025 (4) TMI 1538 - AT - Service Tax

Determination of the value of taxable services in the execution of works contracts involving both supply of goods and provision of services - whether duty paid on 15% as service component by the assessee considering 85% element of good supplied which has been described by it as the actual value on the basis of contract price or as per their invoices and which as per the department s view was not actual value but a uniform notional value on which VAT was discharged and remaining 15% was treated as value for the service tax even though the percentage of abatement under service tax only could be ousted by external value of goods based on costing? - difference of opinion - matter placed before the Hon ble President to nominate a third member for resolution. HELD THAT - The Revenue feels that in spite of clear directions given to the adjudicating authority in the Final order of this Tribunal dated 03.07.2014 2014 (7) TMI 748 - CESTAT AHMEDABAD proper verification has not been undertaken by him while dropping the demand. From the above portion of the earlier Final Order it is observed that the Tribunal has already considered that VAT was being paid on the value of the goods portion. Only to verify as to whether the same was being paid or not and correct value was adopted or not these facts were required to be verified by the Adjudicating Authority. The adjudicating authority has gone through the documentary evidence placed before him including the Chartered Accountant s Certificate/Cost Accountant s certificate and has concluded that the assessee has paid the VAT on goods value portion. Even for the prior period if Notification 12/2003 is read carefully it says that subject to the condition that there is documentary proof specifically indicating the value of the said goods and materials. There can be no better documentary proof than the invoice raised by the assessee. In the present case it is clearly seen that the VAT is being paid on the 85% consideration treating the same as value of the goods. The Supreme Court s decision in the case of Safety Retreading Co. (P) Ltd case 2017 (1) TMI 1110 - SUPREME COURT has already held that once VAT is paid on the value component as per the statutory provision of the State Government the value of service cannot be put to question. Matter to be placed before the regular bench for final disposal - In view of the majority order the appeal is dismissed.

Summary

The core legal questions considered in this judgment revolve around the determination of the value of services involved in the execution of works contracts, specifically regarding the apportionment between the value of goods supplied and the value of services rendered under composite contracts for supply, erection, commissioning, and installation of elevators. The principal issues include:

(1) Whether the respondents' claim that 85% of the contract value represents the actual value of goods supplied (on which VAT/Sales Tax was paid) and 15% represents the service portion (on which Service Tax was paid) is genuine and supported by proper documentary evidence;

(2) Whether the adjudicating authority correctly accepted the Cost Accountant's certificate and related documents without independent verification of the actual value of goods supplied, as required under Rule 2A of the Service Tax (Determination of Value) Rules, 2006;

(3) The applicability of Rule 2A of the Service Tax (Determination of Value) Rules, 2006, including the treatment of the value of goods and services in works contracts and the requirement that only the actual value of goods on which VAT/Sales Tax has been paid can be excluded from the taxable value for service tax purposes;

(4) The relevance and binding nature of precedent decisions, including the Supreme Court's ruling in Safety Retreading Company Pvt. Ltd., and coordinate bench decisions such as Johnson Lifts Pvt. Ltd. and Touchstone Infrastructure and Solutions Pvt. Ltd., on the valuation of service and goods components in works contracts;

(5) Whether the average or notional percentage of goods value (85%) used by the respondents is acceptable in absence of detailed cost verification, or whether the matter requires remand for detailed scrutiny of actual costing records;

(6) The correctness of the adjudicating authority's reliance on the certificates issued by Chartered Accountants and Cost Accountants without ensuring compliance with the requirements of generally accepted accounting principles and proper apportionment of expenses between goods and services;

(7) Whether the concept of revenue neutrality invoked by the adjudicating authority is applicable without first verifying the actual value of goods supplied;

(8) The procedural correctness regarding the burden of proof on the respondents to establish the actual value of goods supplied and VAT paid thereon;

(9) The interpretation and precedence of State VAT legislation notifications (such as the Gujarat VAT notification allowing 15% abatement for service portion in elevator contracts) vis-`a-vis the Central Service Tax legislation and rules.

Issue-wise Detailed Analysis:

1. Genuine Apportionment of Goods and Services Value (85% Goods, 15% Services)

The respondents claimed that 85% of the contract value represented the actual value of goods supplied, with VAT/Sales Tax duly paid, and the remaining 15% represented the service portion subject to Service Tax. This was supported by contracts, invoices, Chartered Accountant and Cost Accountant certificates, and audited segmental revenue records. The adjudicating authority accepted these certificates and evidence, concluding that the respondents had discharged their tax liabilities correctly.

The department challenged this, arguing that the 85% figure was a notional or average percentage, not based on actual costing records or proper apportionment of expenses, and that the adjudicating authority failed to independently verify the actual value of goods supplied, as mandated by Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

The department also pointed out that the Cost Accountant's certificate improperly allocated almost all expenses to the goods portion, thereby inflating the value of goods and reducing the service portion artificially.

2. Legal Framework: Rule 2A of Service Tax (Determination of Value) Rules, 2006

Rule 2A prescribes that the value of taxable service in works contracts shall be determined by deducting the actual value of transfer of property in goods (on which VAT/Sales Tax has been paid) from the gross amount charged. Explanation (b) to Rule 2A(i) mandates inclusion of various expenses and profit relatable to supply of labour and services in the service portion. The proviso requires that the fair market value of goods and services be determined in accordance with generally accepted accounting principles.

Where actual value of goods is not determinable, Rule 2A(ii) provides a prescribed percentage basis for service tax calculation (e.g., 15% service portion for installation of lifts under State VAT notifications).

3. Court's Interpretation and Reasoning

The Tribunal acknowledged that while the respondents relied on contractual and invoice-based apportionment and professional certificates, the department's challenge to the authenticity of the 85% goods value was valid, especially given the Cost Accountant's improper apportionment of expenses exclusively to goods, contrary to Rule 2A requirements.

The Tribunal reviewed the financial data and found that the actual value of goods, as per financial statements, was often below 85%, except for one year, indicating the 85% figure was not consistently supported by actual costing.

It was noted that the Cost Accountant's certificate failed to include expenses such as labour, planning, machinery hire, consumables, establishment costs, and profit in the service portion, instead allocating them to goods, violating Rule 2A(i)(b).

The Tribunal also observed that the Chartered Accountant's report was limited to verifying VAT payments and CENVAT credit on input services but did not verify the actual value of goods or follow generally accepted accounting principles for valuation, thus insufficient for determining the correct value of goods for service tax purposes.

Precedents such as Safety Retreading Company Pvt. Ltd. (Supreme Court) and Johnson Lifts Pvt. Ltd. (CESTAT Chennai) were examined. The Supreme Court held that in absence of actual value of goods, the notional percentage under State legislation (e.g., 70% goods, 30% services) could be adopted for service tax valuation. The Chennai bench upheld 85% goods and 15% service split based on State VAT notifications and contractual terms.

However, the Tribunal recognized unresolved constitutional and legislative conflicts between State VAT and Central Service Tax laws regarding the primacy of percentages and the resulting anomalies, which were beyond its jurisdiction to resolve.

4. Treatment of Competing Arguments

The respondents argued that they had paid VAT on the actual value of goods as per contracts and invoices, supported by professional certificates, and that the adjudicating authority had examined all relevant documents before dropping the demand.

The department contended that the adjudicating authority failed to conduct an independent and detailed verification of actual costing data, improperly accepted average or notional values, and relied blindly on certificates that did not comply with Rule 2A requirements or generally accepted accounting principles.

The department further argued that the certificates were misleading due to improper apportionment of expenses, and that revenue neutrality could not be assumed without first verifying actual values.

5. Application of Law to Facts and Key Findings

The Tribunal found that the adjudicating authority had accepted the Cost Accountant's certificate without adequate scrutiny, despite prima facie errors in expense apportionment and lack of adherence to Rule 2A and accounting principles.

The financial data indicated that the actual value of goods was often less than 85%, undermining the respondents' claim.

The Tribunal noted that the department's onus to prove incorrectness was balanced by the respondents' duty to substantiate actual values with proper evidence, which was inadequately verified.

Given these deficiencies, the Tribunal held that the matter required remand to the adjudicating authority for a de novo examination of documentary evidence, including proper verification of actual cost of goods supplied and correct apportionment of expenses in accordance with Rule 2A.

In a difference of opinion, the Judicial Member relied on precedent decisions and accepted the adjudicating authority's findings, dismissing the appeal, while the Technical Member favored remand for detailed scrutiny.

6. Significant Holdings and Core Principles Established

"As per Rule 2A (ii) of the Service Tax (Determination of Value Rules, 2006), the actual value of transfer of property in goods involved in execution of works contract is not to be taken into consideration while discharging Service Tax liability under the Works Contract Services... however, this matter whether VAT/Sales Tax has been paid on the actual materials sold to the service recipient is required to be gone into detail by the adjudicating authority."

"The certificates issued by the Chartered Accountant and the Cost Accountant are authentic documents given by professionals. These certificates cannot be wrong as penal action can be taken against these professionals... Further, from the records of the case, I also observe that the assessee has not availed Cenvat Credit on inputs and the same is also certified by the Chartered Accountant. In such a scenario, the methodology of bifurcation of the value of contract into service portion and material portion, adopted by the assessee is in consonance with the applicable law."

"The Cost Accountant's certificate is in total disregard of the requirements of Rule 2A of Service Tax (Determination of Value) Rules, 2006... The entire cost of overheads has been apportioned to the value of goods instead of the value of service... The certificate cannot be accepted."

"In view of the above, it is felt that the Commissioner has failed to examine critically the certificates given by the Cost Accountant and the C.A and has blindly relied on them despite prima facie errors and contradiction in the same. In these circumstances, it is felt that the matter needs to be remanded to the commissioner for proper examination of the records and determination of actual cost of material sold by the respondents as directed in earlier order of Tribunal."

"Where the value has already been split as per the state law and VAT has been paid on the goods component of the composite works contract, no service tax can be levied on such component again taking recourse to Rule 2A(ii) of Service Tax (Determination of Value) Rules, 2006."

Final Determinations:

- The appeal filed by the department was dismissed by majority, upholding the adjudicating authority's acceptance of the 85% goods and 15% service split based on contracts, invoices, and professional certificates, in line with relevant precedent decisions.

- However, due to a difference of opinion, the matter was referred to a third member for resolution, with the Technical Member recommending remand for detailed verification of actual costing and proper apportionment under Rule 2A.

- The Judicial Member relied on the State VAT notification allowing 15% service abatement for lifts and elevators, the invoices issued by the respondents, and the binding Supreme Court and coordinate bench decisions, concluding that the respondents had correctly discharged their tax liabilities and the department's appeal lacked merit.

- The Tribunal recognized the unresolved constitutional and legislative complexities between State and Central tax laws but refrained from adjudicating on those broader issues.