Tyre re-treading service tax valuation excludes VAT-paid material cost from taxable value.

In tyre re-treading, the taxable value for service tax cannot include the cost of materials on which VAT has already been paid. Section 67 of the Finance Act, 1994 excludes the value of parts or other materials sold, and Notification No. 12/2003-ST applies where the material component is separately identifiable and supported by proof. The governing Supreme Court ruling on retreading transactions was applied to treat tax as payable only on the service element, not on the material portion subjected to local tax. On that basis, the material cost was held outside the taxable value and the demand was unsustainable.

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Issues: Whether, in levying service tax on tyre re-treading activity, the gross value could include the cost of materials on which VAT had been discharged.

Analysis: The valuation of taxable services under Section 67 of the Finance Act, 1994 excludes the cost of parts or other materials sold, and the benefit reflected in Notification No. 12/2003-ST applies where the material component is separately identifiable and supported by proof. The governing Supreme Court ruling on retreading transactions held that service tax is payable only on the service component and not on the material portion already subjected to local tax.

Conclusion: The material cost could not be included in the taxable value. The impugned demand was unsustainable and the appeal succeeded.

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