2017 (6) TMI 225 - AT - Service Tax

Tribunal decision: Consumables included in gross value, Major Maintenance Reserve not taxable. Operation charges not taxable. .

The tribunal upheld the inclusion of consumables and spares in the gross value for maintenance services, dismissing the appeal. Major Maintenance Reserve ... Services provided for maintenance and repair of power plant - Major Maintenance Reserve (MMR) - activities of operation of power plant to produce electricity - demand of tax - whether the appellants are liable to pay service tax on the activities of maintenance and repair of power plant as well as operation charges and the MMR deposit? - Valuation - inclusion of cost of materials and consumables Services provided for maintenance and repair of power plant - taxability - Appellants had split the Operation Fee received by them as Operation Charges and maintenance charges in the ratio 55% and 45% respectively. Out of the 45%, they were deducting cost of spares and consumables used for such maintenance/repair and only on the balance amount, service tax liability was discharged - Held that: - a closer inspection reveals that such VAT was being paid by classifying the activity as Works Contract Service. We are unable to fathom the reason for the appellants having declared a different nature of activity before the VAT authorities. Be that as it may, for the purposes of the service tax law, deduction of cost of materials and consumables can be permitted only if there is a sale involved and there being no sale involved in the entire exercise, appellant has necessarily to discharge tax liability on the entire gross value of the maintenance or repair services on the full amount demarcated by them as maintenance or repair service, being 45% of the total amount paid to them - when the appellants themselves have vivisected the contract by apportioning 45% towards maintenance charges and 55% as operation fee, the contention raised by them that it is a composite contract is only to be brushed aside. Major Maintenance Reserve (MMR) - taxability - Held that: - Held that: - MMR amount is in the nature of a deposit by the appellant with the power company, a sort of guarantee and a ready reserve for the power company for any major maintenance. One such Trust and Retention of Amount agreement dated 16.12.1999 has been perused by us. This agreement is between the power company (SPCPL), the lender and the lending banks, from which it is clear that a trust has been created for this purpose between the owner company and the lending banks. In the circumstances, the MMR can by no stretch of imagination be considered as a part of the maintenance or repair fees paid or payable to the appellants. Therefore, they cannot be considered as taxable value under this head. Taxability of operation charges - it is the case of the department that the activities would fall under the category of Maintenance or Repair service as amended. Thus, the department is of the view that the activity of production of electricity in the power plant would amount to management of immovable property, as provided in sub clause (b) of Subsection (ii) of Section 65 (64) of the FA, 1994 - Held that: - The activity carried out in the power plant is not solely management of power plant, but operation of the same. The word operation is not used in the definition of Maintenance and repairservices which is relied by department as amended with effect from 16.06.2005 - it cannot be said that the appellants are doing management service for the reason that the management service is done by appellants to themselves and not to any other person - the demand of service tax on operation charges (i.e. 55% of the fees paid to the appellant) is not sustainable. Extended period of limitation - Held that: - since the appellants did not disclose the entire gross value of taxable services in the ST-3 returns and the returns reflected the value only after deduction of cost of materials, the notice issued invoking extended period is right and proper. Penalties - Held that: - there was undeniable confusion on the taxability per se, on these services, the penalties imposed in the orders impugned are set aside. Appeal allowed - decided partly in favor of appellant. Issues Involved:1. Service tax on maintenance and repair services.2. Service tax on Major Maintenance Reserve (MMR).3. Service tax on operation charges.Issue-wise Detailed Analysis:1. Service Tax on Maintenance and Repair Services:The appellants argued that the agreement for operation and maintenance of the power plant implies that maintenance services are consumed by self and not liable to service tax. They paid service tax on 45% of the operating fee but deducted the cost of consumables and spares, claiming VAT paid under Works Contract Service. The department contended that the cost of materials should be included in the taxable value, and the appellants wrongly availed CENVAT credit on consumables and spares. The tribunal upheld the inclusion of consumables and spares in the gross value for maintenance services, dismissing the appeal on this aspect.2. Service Tax on Major Maintenance Reserve (MMR):The appellants maintained that MMR is a deposit for major breakdowns and not subject to service tax. The department viewed MMR as taxable. The tribunal found that MMR is a reserve created under a trust for major maintenance, not part of maintenance fees, and thus not taxable. The appeal on this aspect was allowed.3. Service Tax on Operation Charges:The department argued that 55% of the operator fee apportioned towards operation charges falls under 'Management, Maintenance or Repair Service' as amended in 2005. The appellants contended that the primary activity is electricity generation, which is an excisable product, and operation does not equate to management of immovable property. The tribunal agreed with the appellants, stating that the operation of the power plant is not management of immovable property and cannot be taxed under the said service. The demand on operation charges was set aside, and the appeals were allowed.Judgment Summary:- ST/175/2007 and ST/283/2012: Inclusion of consumables and spares in maintenance service upheld; MMR not taxable; penalties set aside; extended period notice upheld; appeals partly allowed.- ST/282/2012, ST/136/2012, ST/5/2010, ST/265/2012, ST/266/2012, ST/96/2011, ST/103/2008: Demands on operation charges set aside; appeals allowed with consequential reliefs.Pronounced in open court on 23-05-2017.