2014 (11) TMI 468 - HC - Service Tax

Management, Maintenance and Repair service - Whether the CESTAT has erred in holding that Service tax is not required to be paid on goods used in the repairing process on which Excise duty and VAT has been paid on the value of the said goods, ignoring the fact that as per the contract the respondents were under an obligation to replace the damaged parts and to maintain the transformers in a proper working condition - Held that - The assessee provided Management, Maintenance and Repair services for the repair of old and damaged transformers to Dakshinanchal Vidyut Vitaran Nigam Limited. The issue before the Tribunal was whether transformer oil, HV/LV coil and spare parts which are goods incorporated into transformers belonging to the Nigam, should be included for the purpose of quantifying the gross consideration received, as constituting the taxable value. The Tribunal has relied upon its own decisions and come to the conclusion that the law is settled; the principle of law being that where an agreement quantifies the value of materials separately from the value of services rendered, the value of the materials or goods would have to be excluded since that component is not liable to service tax. - Following decision of Commissioner of Customs and Central Excise Vs. J.P. Transformers 2014 (9) TMI 307 - ALLAHABAD HIGH COURT - Decided against Revenue.

Summary

Issues:
1. Whether service tax is demandable on goods used in the repairing process when provided as part of maintenance and repair services.
2. Whether the distinction between "works contract service" and "maintenance and repair service" affects the applicability of service tax.
3. Whether the value of goods used in the repair process should be included in the taxable value for service tax calculation.

Analysis:
1. The primary issue in this case was whether service tax could be demanded on goods used in the repairing process when provided as part of maintenance and repair services. The Tribunal concluded that where an agreement quantifies the value of materials separately from the value of services rendered, the value of the materials or goods should be excluded from service tax liability. The Tribunal relied on Notification 12/2003-ST, which exempts the value of goods and materials sold by the service provider from service tax if the agreement and invoices specifically indicate the value of goods and materials used. The Court upheld this view, emphasizing that service tax cannot be levied on the component of goods or materials when they are separately valued in the agreement.

2. Another issue raised was the distinction between "works contract service" and "maintenance and repair service" and its impact on the applicability of service tax. The appellant argued that a previous decision related to works contract service should not be applied to the current case involving maintenance and repair services. However, the Court found that the separate valuation of goods and services in the agreement was crucial, regardless of the specific type of service provided. The Court emphasized that the nature of the service (maintenance and repair) did not change the principle that service tax should not be imposed on the value of goods when distinctly quantified in the agreement.

3. The final issue addressed was whether the value of goods used in the repair process should be included in the taxable value for service tax calculation. The Court referenced a previous judgment where it was established that the separate disclosure of the cost of materials and labor, along with the payment of applicable taxes on goods used, exempted the value of goods from service tax. The Court reiterated that when the agreement clearly separates the value of goods from services, service tax should only apply to the value of services rendered. Consequently, the Court dismissed the appeal, affirming the Tribunal's decision that service tax was not applicable to the value of goods used in the repair process when distinctly accounted for in the agreement.

In conclusion, the Court upheld the Tribunal's decision, emphasizing that service tax should not be levied on the value of goods used in the repair process when separately quantified in the agreement. The judgment highlighted the importance of clear documentation and separate valuation of goods and services to determine service tax liability accurately.