2025 (1) TMI 69 - AT - Service Tax

Service tax cannot be charged on materials already subject to sales tax in bifurcated works contracts

Commissioner of C.E. - Kutch (gandhidham) Versus Radeep Electricals Private Limited

CESTAT Ahmedabad dismissed revenue appeals regarding service tax demand on works contracts. The assessee had bifurcated a single contract into goods and ... Non-payment of service tax - artificial bifurcation of one single contract for payment of service tax on value of services and payment of VAT on the value of supply of goods under the said contracts - application filed under Service Tax Voluntary Compliance Encouragement Scheme (VCES) 2013 - HELD THAT:- Similar issue was considered by the division bench of this Tribunal in the matter of LAXMI ENGINEERING P LTD VERSUS C.S.T. -SERVICE TAX – AHMEDABAD [2023 (4) TMI 348 - CESTAT AHMEDABAD] wherein it was held that 'Once, the sales tax has been paid on the materials, then on the same, service tax also cannot be charged.' The issue is otherwise covered by the decision of Hon’ble Supreme Court in case of SAFETY RETREADING COMPANY (P) LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, SALEM, M/S TYRESOLES INDIA PRIVATE LMITED VERSUS THE COMMISSIONER OF CENTRAL EXCISE, GOA AND M/S LAXMI TYRES VERSUS COMMISSIONER OF CENTRAL EXCISE, PUNE [2017 (1) TMI 1110 - SUPREME COURT] wherein it is observed 'The invoices which the appellant assessee has also brought on record by way of illustration show the break up of the gross value received. There is again no contest to the same. Leaving aside the question that the case now projected, with regard to lack of proof of incurring of expenses on goods and materials which has been transferred to the recipient of the service provided, appears to be an afterthought, even on examination of the same on merits we have found it to be wholly unsustainable.' It can be seen from the preamble of the Notification that it exempts the services of commercial or industrial construction services and works contract services provided in relation to port or other port. It is well established principle of law that wherever the words used “in relation to”it expand the scope of the subject. It is undisputed that the Respondent assesee has carried out the installation of high mast lighting tower on Jetty No. 8 of the Kandla Port. Therefore, the same is covered within the scope of the above exemption notification - The Respondent assessee has arrived at the value of service portion in the works awarded to them and declared the liability of service tax of Rs. 91,74,594/- under VCES 2013 which Ld. Commissioner has accepted and not challenged by either party in these appeals. The Respondent Assessee has correctly paid service tax of Rs.91,74,594/- under VCES-2013. Conclusion - The contracts involving both goods and services can be bifurcated for tax purposes if distinct parts are identifiable. Additionally, services related to port construction can qualify for exemptions under specific notifications. The demand of service tax in both these appeals is not sustainable - revenue’s appeals are dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe legal judgment from the CESTAT Ahmedabad Tribunal primarily revolves around the following core issues:(i) Whether the Respondent was justified in bifurcating a single work order into separate parts for the payment of service tax, specifically applying different tax rates to labor charges and un-bifurcated work.(ii) Whether the services provided by the Respondent in the back-up area of Jetty No. 8 at Kandla Port, specifically for the erection and commissioning of high mast and other electrical fittings, were exempt from service tax.(iii) Whether the application filed by the Respondent under the Service Tax Voluntary Compliance Encouragement Scheme (VCES) 2013 was substantially false.2. ISSUE-WISE DETAILED ANALYSISIssue (i): Bifurcation of Work Order for Tax Purposes- Relevant Legal Framework and Precedents: The case references the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, and Rule 2A of the Service Tax (Determination of Value) Rules, 2006. The judgment also considers the precedent set by the Supreme Court in the case of State of Madras vs. Gannon Dunkerley & Co. (Madras) Ltd., which discusses the separability of contracts for the sale of goods and provision of services.- Court's Interpretation and Reasoning: The Tribunal agreed with the Respondent's argument that the work of erection and commissioning of electrical equipment and the construction of foundations were distinct and separate activities. Therefore, the bifurcation was not artificial but rather a reflection of the actual contracts awarded.- Key Evidence and Findings: The Tribunal noted that the Respondent had paid VAT on the value of goods, indicating a sale of goods, and service tax on the service component, aligning with the bifurcation in the work order.- Application of Law to Facts: The Tribunal found that the Respondent correctly applied different tax treatments to distinct parts of the contract, as permitted by the legal framework.- Treatment of Competing Arguments: The Revenue's argument that the bifurcation was artificial was dismissed, with the Tribunal emphasizing the legitimacy of separate contracts within a single document.- Conclusions: The Tribunal upheld the Respondent's method of tax payment, finding it in compliance with the applicable rules and precedents.Issue (ii): Exemption for Services in Port Area- Relevant Legal Framework and Precedents: The Tribunal considered Exemption Notification No. 25/2007-Service Tax, which exempts certain services related to port construction from service tax.- Court's Interpretation and Reasoning: The Tribunal interpreted the exemption to cover the installation of high mast lighting towers on Jetty No. 8 at Kandla Port, as the activity was related to port construction.- Key Evidence and Findings: The Tribunal found that the Respondent's activities fell within the scope of the exemption notification.- Application of Law to Facts: The Tribunal applied the exemption to the Respondent's activities, thereby exempting them from service tax.- Treatment of Competing Arguments: The Tribunal did not find any substantial counterarguments from the Revenue regarding the applicability of the exemption.- Conclusions: The Tribunal concluded that the services provided by the Respondent in the port area were exempt from service tax.Issue (iii): Validity of VCES 2013 Application- Relevant Legal Framework and Precedents: The VCES 2013 was a scheme allowing assessees to declare and pay service tax dues voluntarily.- Court's Interpretation and Reasoning: The Tribunal found no evidence to suggest that the Respondent's application under VCES 2013 was false.- Key Evidence and Findings: The Tribunal noted that the Respondent had declared and paid service tax of Rs. 91,74,594 under VCES 2013, which was accepted by the Commissioner and not challenged.- Application of Law to Facts: The Tribunal found that the Respondent had complied with the requirements of the VCES 2013.- Treatment of Competing Arguments: The Tribunal did not find any compelling arguments from the Revenue to challenge the validity of the VCES 2013 application.- Conclusions: The Tribunal upheld the validity of the Respondent's application under VCES 2013.3. SIGNIFICANT HOLDINGS- Preserve Verbatim Quotes of Crucial Legal Reasoning: 'The service recipient could have very well awarded the works of erection and commissioning to one party and construction of foundation to other one. It was in fact not division of one contract in two parts instead the service recipient had given to the Noticee two contracts in one document.'- Core Principles Established: The judgment reinforces the principle that contracts can be legitimately bifurcated for tax purposes if they represent distinct and separate activities. It also affirms the applicability of exemptions for services related to port construction.- Final Determinations on Each Issue: The Tribunal dismissed the Revenue's appeals, upholding the Respondent's method of tax payment and confirming the applicability of the port area exemption and the validity of the VCES 2013 application.