Tribunal rules 2% VAT deduction on service charges impermissible

The Tribunal ruled in favor of the appellant, holding that the deduction of 2% VAT by the service recipient on total gross service charges for Commercial and Industrial Construction Service was impermissible during the relevant period of 2005-2006 when works contract service was not taxable. The Tribunal cited relevant judgments and determined that since the service itself was not taxable at that time, the demand for service tax on the 2% VAT deduction was not sustainable. The appeal was allowed, and the demand raised by the Revenue was set aside.

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Issues: Whether the deduction of 2% VAT by the service recipient on the total gross service charges is permissible for the purpose of paying service tax on the gross value excluding VAT.

Analysis:
The case involved a dispute regarding the deduction of 2% VAT by the service recipient on the total gross service charges for Commercial and Industrial Construction Service provided by the appellant. The appellant contended that during the relevant period of 2005-2006, works contract service was not taxable as per the judgment of the Hon'ble Supreme Court in the case of Commissioner of Central Excise & Customs, Kerala vs. Larsen & Toubro Ltd. The appellant argued that since the works contract service itself was not taxable, the demand made on the 2% VAT deducted by the service recipient was not sustainable. The appellant emphasized that service tax is payable only on the service charges and not on any other elements, citing the judgment of the Hon'ble Supreme Court in the case of Union of India vs. Intercontinental Consultants and Technocrats Pvt. Ltd.

The Revenue, represented by the Assistant Commissioner, reiterated the findings in the impugned order, maintaining their stance on the demand raised. However, upon careful consideration of the submissions and perusal of records, the Tribunal observed that during the relevant period, works contract service was not taxable in accordance with the judgment in the case of Larsen & Toubro Ltd. The Tribunal noted that the works contract service became taxable under service tax w.e.f. 01.06.2007. Therefore, since the service itself was not taxable during the relevant period, the Tribunal set aside the demand raised by the Revenue. The Tribunal acknowledged that the appellant had already paid the service tax, which was not disputed. Consequently, the impugned order was set aside, and the appeal was allowed in favor of the appellant.

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