2018 (6) TMI 793 - AT - Service Tax

Management Maintenance or Repair Service - it was alleged that the appellant has artificially bifurcated the value of service part and cost of materials as 70% and 30% - The department was of the view that division of contract so that the payment of VAT is made on 70% of the maintenance charges and discharge of service tax only on 30% is incorrect - Held that - It is not disputed that the appellant has discharged sales tax/VAT on the 70% of the value being the cost of materials. It is also admitted that such supply of spares is necessary for provision of services. When VAT has been discharged by the appellant on 70% the contract being a composite contract and VAT/Service Tax being mutually exclusively the further demand of service tax on the amount for which VAT has been paid by the appellant cannot sustain - demand do not sustain - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Incorrect division of contract leading to non-payment of service tax on 70% of maintenance charges.
2. Appellant's claim of deduction based on payment of VAT on spare parts.
3. Dispute regarding the artificial bifurcation of service part and cost of materials in the contract.

Analysis:
1. The case involved the appellants, registered under "Management, Maintenance or Repair Service," who entered into a composite maintenance contract with M/s. Hindustan Zinc Ltd. The appellants paid service tax on only 30% of maintenance charges, leading to a demand for service tax, interest, and penalties by the department. The original authority confirmed the demand, interest, and penalties, prompting the appeal.

2. The appellant argued that the contract with M/s. Hindustan Zinc Ltd. was a composite maintenance work involving spare parts supply. The maintenance charges were based on drilling operation, with 70% allocated to materials and 30% to labor. The appellant discharged VAT on 70% material value and service tax on the labor portion. The appellant claimed that since VAT was paid on 70% (actual spare parts value), the deduction was legitimate. Citing the Supreme Court's judgment in Safety Retreading Co. (P) Ltd. Vs CCE, the appellant contended that once VAT was paid, service tax on the same amount was not justified. The appellant also argued against invoking the extended period due to regular service tax filings.

3. The department contended that the appellant artificially divided the contract into service and sales parts, with the value of spare parts consumed during services being less than maintenance charges. Disputing the 70% and 30% allocation, the department claimed the demand was legal. However, the tribunal noted that VAT was paid on 70% of the value, making the demand for service tax on the same amount baseless. Citing the Safety Retreading Co. P. Ltd. case, the tribunal ruled in favor of the appellant, setting aside the impugned order and allowing the appeal with consequential relief as per law.