2025 (1) TMI 312 - AT - Service Tax

Service tax not applicable on goods value in works contracts under Section 67 and Rule 2A, penalties quashed

The CESTAT held that service tax cannot be levied on the value of goods sold during execution of works contracts, as only the value of services is taxable ... Quantification of service tax - whether the amount reflecting in Income Tax return for the year 2014-15 is taxable value of services or it includes non-taxable amount also? - penalty. HELD THAT:- The learned Commissioner (Appeals) in the impugned order has placed reliance on the Statement/ 26AS to hold that services rendered by the Appellant were taxable services and service tax was chargeable on whole consideration received during impugned period 2014-15. As per Statement/ 26AS, TDS was deducted under Section 194C of the Income Tax Act. As per the learned Commissioner (Appeals), under Section 194C of the Income Tax Act, TDS is deductible when services namely Works Contract Service, Construction of Commercial Complex Service, Construction of Residential Complex Service, Repair Maintenance, Erection, Commissioning & Installation Services are provided. For charging service tax, valuation of every service specified in Section 194C requires specific method and specific abatement. Onus lies on the Department to identify the nature of service provided on which demand of service tax is being raised. In the case of COMMR. OF C. EX., CHANDIGARH VERSUS ARPIT ADVERTISING [2011 (5) TMI 702 - CESTAT, NEW DELHI], the Tribunal has held that without identifying the nature of the Service provided by way of proper investigation, demand of service tax cannot be raised on the basis of Balance Sheet and other financial statements. Similarly, Hon’ble Madras High Court in the case of M SUGANTHI, THIRUMURTHY BUS TRANSPORT AND K MAHALINGAM VERSUS ASSTT COMMISSIONER OF CENTRAL EXCISE, POLLACHI [2011 (4) TMI 11 - HIGH COURT OF MADRAS] held that the Department exercising power under fiscal statute while passing order bringing someone under taxing net, requires specific finding as to the liability. In this case, the Department failed to discharge the onus upon it to identify nature of service before confirming demand. The impugned order is not proper and justified. In accordance with provisions of Section 67 of the Finance Act, 1994 read with Rule 2A of the Service Tax (Determination of Value) Rules, 2006 no service tax was chargeable on the value of goods sold during execution of work contract. Ld. Commissioner (Appeals) has erred to confirm the demand of service tax on the value of goods also. Section 67 of the Finance Act, 1994 provided to charge service tax on the value of service only. Rule 2A of the Service Tax (Determination of Value) Rules, 2006 provided that value of service in works contract would be less by the value of goods supplied. Thus, no service tax was chargeable on value of goods amounting to Rs.33,00,650/-. It was observed by the Ld. Commissioner (Appeals) that no sale tax was paid on the supply of goods. Hence, the value of goods was taken as value of service. Reference is drawn to the decision of the Hon’ble Supreme Court in the case of Bhayana Builders Pvt. Ltd. [COMMISSIONER OF SERVICE TAX ETC. VERSUS M/S. BHAYANA BUILDERS (P) LTD. ETC. [2018 (2) TMI 1325 - SUPREME COURT] where the Apex Court has observed that a plain meaning of the expression “gross amount charged” used in Section 67 of the Finance Act, 1994 for charging service tax by the service provider would lead to obvious conclusion that value of goods even if provided free of cost would not be included for arriving at “gross amount”. It shows that value of goods even if there is no sale would not be part of value of service. It also shows that there would be no VAT/ sale tax as no sale element exists, even then no service tax would be payable on value of material. Thus, no service tax would be demanded on the value of goods sold. Out of total consideration of Rs.57,68,440/- for 2014-15, an amount of Rs.33,00,650/- pertains to sale of goods and the remaining amount of Rs.24,67,790/- pertains to provision of services of erection, assembling and installation against the works contracts as certified by the Chartered Accountant and submitted by the Appellant. The Appellant raised Invoice No.13 dated 19.08.2014 to M/s Par Techno Heat Pvt. Ltd., for fabrication, erection and commissioning work of ESP including cost of material against contract dated 18.01.2013. The invoice is a composite invoice. The contract was Works Contract. Service Tax @12.36% was payable on the forty percent of the said value of Rs.24,67,790/- as per Rule 2A(ii) (A) of the Service Tax (Determination of Value) Rules, 2006 - In accordance with above N/N. 30/12-ST dated 20.06.2012, service tax liability on the Appellant comes to Rs.61,004/- (50% of Rs.1,22,008/-) which was already discharged vide challan No.22394 dated 30.03.2015 along with interest before issuance of the instant SCN. Thus, no demand of service tax is sustainable. Penalty - HELD THAT:- In case no demand is sustainable, no penalty is imposable. In the SCN, penalty under Section 78 of the Finance Act, 1994 was proposed and subsequently vide the impugned order penalty under the said Section was imposed - As in the present case, there is no short payment of Service Tax, no penalty is imposable under Section 78. Penalty imposed under Section 78 is, therefore, liable to be quashed. Penalty under Section 77(2) was also imposed which is a residuary penalty but in the SCN and subsequent order, nothing was discussed for imposition of residuary penalty. Hence, no penalty is imposable under Section 77(2). As regards, demand of late fee for filing ST-3 Return for the period from Oct, 2014 to Mar, 2015 belatedly, she submitted that as there was no tax liability during that period, non-filing or late filing of return was not chargeable to any late fee in view of Board’s Circular No.97/08/07-ST dated 23.08.2007 which has clarified the requirement of filing returns when service tax liability is nil. Conclusion - Service tax cannot be levied on amounts received for the sale of goods. Proper investigation is required to determine the taxable value of services. Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the amount reflected in the Income Tax return for the year 2014-15 by the Appellant includes non-taxable amounts or represents the taxable value of services provided.Whether the Department was justified in demanding service tax on the entire consideration received by the Appellant during 2014-15, including amounts for the sale of goods.Whether the penalties imposed under Sections 77(2) and 78 of the Finance Act, 1994, and the late fee under Section 70 were justified.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Taxable Value of ServicesRelevant legal framework and precedents: The Finance Act, 1994, specifically Section 66B, imposes service tax only on the value of services. Section 65B(44) defines 'service' and excludes the transfer of title in goods. Precedents include the Tribunal's decision in Kush Construction, which held that service tax cannot be demanded based on figures in financial statements without proper investigation.Court's interpretation and reasoning: The court found that the Department failed to distinguish between amounts received for services and those for the sale of goods. The Department relied solely on the Income Tax Statement/26AS without proper investigation.Key evidence and findings: The Appellant provided invoices and a Chartered Accountant's certificate showing that a significant portion of the amount was for the sale of goods, not services.Application of law to facts: The court applied Section 66B and Rule 2A of the Service Tax (Determination of Value) Rules, 2006, concluding that service tax was only applicable to the service portion of the works contracts.Treatment of competing arguments: The Department's reliance on the Income Tax data was deemed insufficient without further investigation into the nature of the transactions.Conclusions: The court concluded that the demand for service tax on the sale of goods was unsustainable.Issue 2: Penalties and Late FeesRelevant legal framework and precedents: Sections 77(2) and 78 of the Finance Act, 1994, pertain to penalties for non-payment or short payment of service tax. The Board's Circular No.97/08/07-ST clarifies the requirement of filing returns when service tax liability is nil.Court's interpretation and reasoning: The court found that no service tax was due; hence, penalties under Sections 77(2) and 78 were not applicable. The late fee for filing returns was also unjustified as the Appellant had no tax liability.Key evidence and findings: The Appellant had already discharged the service tax liability for the service portion before the issuance of the Show Cause Notice.Application of law to facts: The court applied the relevant sections and circulars, determining that penalties and late fees were not warranted.Treatment of competing arguments: The Department's argument for penalties and late fees was rejected due to the lack of any service tax liability.Conclusions: The court quashed the penalties and late fees imposed on the Appellant.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'Without identifying the nature of the Service provided by way of proper investigation, demand of service tax cannot be raised on the basis of Balance Sheet and other financial statements.'Core principles established: Service tax cannot be levied on amounts received for the sale of goods. Proper investigation is required to determine the taxable value of services.Final determinations on each issue: The court set aside the demand for service tax on the sale of goods, quashed the penalties under Sections 77(2) and 78, and annulled the late fees due to the absence of service tax liability.In conclusion, the Tribunal allowed the appeal filed by the Appellant, setting aside the impugned order and providing consequential relief as per law.