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of <h1>CESTAT allows appeal; exempts service tax on raw materials for tyre retreading under Notification 12/2003-ST</h1> <h3>M/s Padmashree Tyre Retreading Works Versus Commissioner of Central Excise And Service Tax-Pune-I, Pune</h3> M/s Padmashree Tyre Retreading Works Versus Commissioner of Central Excise And Service Tax-Pune-I, Pune - TMI 1. ISSUES:1.1 Whether service tax is payable on the value of raw materials used in the retreading of tyres when appropriate VAT has been discharged on those materials.1.2 Whether the exemption under Notification No. 12/2003-ST dated 20.06.2003 applies to the material component used in the retreading service.1.3 Whether the service tax department can demand service tax on the gross value of service including the material component, despite evidence of VAT payment and maintenance of records.1.4 The applicability and interpretation of Section 67 of the Finance Act, 1994 regarding valuation of taxable services and exclusion of material costs.2. RULINGS / HOLDINGS:2.1 The exemption benefit provided under Notification No. 12/2003-ST dated 20.06.2003 is available for the material component used in retreading tyres, provided the appellant maintains adequate records demonstrating use of raw materials for the service.2.2 Service tax is leviable only on the service component of the contract and not on the value of raw materials or parts supplied, as Section 67 of the Finance Act, 1994 'specifically excludes the costs of parts or other material, if any, sold (deemed sale) to the customer while providing maintenance or repair service.'2.3 The service tax department cannot impose service tax on the gross value of the service including the material component where VAT has been duly paid on such materials and no evidence is shown to dispute the authenticity of records maintained.2.4 The issue is settled by the Supreme Court's ruling in Safety Retreading Co. (P) Ltd., which holds that the taxable service value excludes the material component on which VAT is paid, and that the service tax is chargeable only on the labor or service portion.3. RATIONALE:3.1 The Court applied Section 67 of the Finance Act, 1994, which governs the valuation of taxable services and excludes the cost of parts or materials sold to the customer in repair or maintenance contracts from the taxable service value.3.2 The Court relied on Notification No. 12/2003-ST dated 20.06.2003 and CBEC Circular dated 07.04.2004, which provide exemption to the material component when VAT or sales tax is paid on such materials.3.3 The Supreme Court judgment in Safety Retreading Co. (P) Ltd. clarified that the service tax liability is limited to the service component and not the gross amount including materials, overruling prior contrary views by the Appellate Tribunal majority.3.4 The Court emphasized that no dispute was raised about the appellant's maintenance of records or the correctness of VAT payment, and that the department's later challenge to the authenticity of data was an afterthought and unsustainable.3.5 The ruling represents a doctrinal clarification that in contracts involving supply of materials and service (like retreading), service tax is leviable only on the service portion, preventing double taxation on material costs already subjected to VAT.
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