2025 (7) TMI 69 - AT - Service Tax

Separate contracts for advertising services and vinyl materials exempt from combined service tax valuation

CESTAT Mumbai ruled in favor of appellants who had separate contracts for advertising services and sale of printed vinyl/flex materials. The tribunal ... Levy of service tax - sale of printed vinyl/flex material - such activity is a part of provision of the taxable service - requirement to include the value of printed vinyl/flex material in the gross value towards the advertisement service - HELD THAT:- The appellants had entered into separate and distinct contracts, one for provision of services, on which service tax liability was discharged by them; and in respect of the other contract, involving sale of goods, they had also discharged the VAT liability levied under the State legislation. For ascertaining the facts, whether the printed vinyl/flex materials were sold by the appellants, the tax invoices available in the appeal records are examined. As a test check, the suppliers of flex materials M/s S.DAC Technologies Pvt. Ltd. had issued a tax invoice dated 28.10.2013 containing therein the purchase order reference placed by the appellants. In the said invoice, the supplier of flex material had claimed VAT at the requisite percentage on the value of the goods supplied by them. Further, it is also found that flex material purchased by the appellants from the said supplier was in turn, sold by the appellants to their client M/s Tata Capital Finance Services Pvt. Ltd., vide their invoice No. 540/30006 dated 05.12.2013, again by charging VAT in the said invoice issued to the said client. Thus, it is evident that supply of such printed vinyl/flex material is purely a ‘sale activity’, and since a separate contact was executed with the client for supply of the same, the value of such supplied goods therein shall not be included in the value of the service for payment of service tax thereon. Further, the amount received by the appellants towards sale of printed vinyl/flex material is not towards the provision of any advertising services, as they had not undertaken any activity like designing, visualizing, conceptualizing etc., of the advertisements. The ratio of the judgment of Hon’ble Kerala High Court in the case of Zodiac Advertisers [2008 (5) TMI 258 - KERALA HIGH COURT] relied upon by the learned AR for the Revenue is distinguishable from the facts of the present case, inasmuch as in the said decided case, the advertisement materials were sold to the customers in the form of banner/hoarding, film slide and the same were in context with the advertisement services. However, contrary is the situation, in the case in hand, inasmuch as the appellants had entered into two distinct and separate agreements with the clients, one exclusively for supply of the goods and other for provision of advertisement services. Since in the first agreement, there is no whisper about provision of any service, it cannot be said that the material supplied/sold to the client will also form part of the taxable value, for the purpose of levy of service tax thereon. There are no merits in the impugned order, insofar as it has upheld confirmation of the adjudged demands of Rs.2,91,62,112/- along with interest and penalty on the appellants and as such, the impugned order to such extent, is set aside - the appeal is allowed in favour of the appellants. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal include:- Whether the supply of printed vinyl/flex material by the appellants to their client constitutes a sale of goods or a provision of taxable service under the category of 'Advertisement Agency Services' for the purpose of levy of service tax.- Whether the value of printed vinyl/flex material supplied should be included in the gross value of advertisement services for the levy of service tax.- The validity of the service tax demand confirmed by the Commissioner, including interest and penalty, on the ground that the supply of printed vinyl/flex material is part of the taxable service.- The applicability and interplay of VAT and service tax laws in respect of transactions involving both sale of goods and provision of services.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Nature of transaction involving printed vinyl/flex material - Sale of goods or taxable serviceRs.Relevant legal framework and precedents: The legal framework involves the distinction between sales tax/VAT on goods and service tax on services. The Supreme Court precedent in Image Creative Pvt. Ltd. Vs. Commissioner of Service Tax clarified that payment of VAT and service tax are mutually exclusive and that composite contracts must be analyzed to separate sale and service components. The principle that VAT paid on sale of goods precludes levy of service tax on the same transaction was emphasized. Further, the ruling in M/s AD-inn Innovative Advertisers & Ors. held that advertising materials on which VAT has been paid cannot be subjected to service tax.Court's interpretation and reasoning: The Tribunal examined the contracts and tax invoices evidencing separate agreements-one for sale of printed vinyl/flex material and another for sale of advertisement space. The appellants discharged VAT on the sale of goods and service tax on the advertisement services separately. The Tribunal noted that the appellants did not undertake any conceptualization, designing, or other service activities in respect of the printed vinyl/flex material. The invoices showed VAT charged on the sale of goods, confirming the transaction as a sale rather than a service.Key evidence and findings: Tax invoices from the suppliers to appellants and from appellants to clients showed VAT charged and paid on printed vinyl/flex materials. Separate contracts existed for sale of goods and provision of advertisement services. No service activities were linked to the supply of printed vinyl/flex materials.Application of law to facts: Applying the principle that VAT payment on sale of goods excludes service tax liability on the same transaction, the Tribunal held that the supply of printed vinyl/flex material is a sale transaction and not a taxable service. The value of such goods cannot be included in the gross value of advertisement services for service tax levy.Treatment of competing arguments: The Revenue relied on a Kerala High Court judgment which held that expenditure on procurement of advertisement materials should be included in the gross value of advertisement services. The Tribunal distinguished that case on facts, noting that in the present case, separate contracts existed for goods and services, unlike the composite contract in the Kerala case. The Tribunal also relied on coordinate Bench decisions and Supreme Court precedents to reject the Revenue's contention.Conclusions: The Tribunal concluded that the supply of printed vinyl/flex material is a distinct sale of goods transaction on which VAT has been paid, and is not a provision of taxable service. Therefore, service tax cannot be levied on the value of these goods.Issue 2: Inclusion of value of printed vinyl/flex material in gross value of advertisement services for service tax levyRelevant legal framework and precedents: The valuation principles under service tax law require inclusion of the entire consideration received for the taxable service. However, where distinct contracts exist and VAT is paid on goods supplied, the value of such goods cannot be included in the service tax base. The Tribunal relied on the Supreme Court's ruling in Image Creative Pvt. Ltd. and the coordinate Bench decisions that have held similarly.Court's interpretation and reasoning: The Tribunal found that the lower adjudicating authority erred in including the value of printed vinyl/flex materials in the gross value of advertisement services without analyzing the nature of the contracts and the activities undertaken by the appellants. The Tribunal emphasized that the appellants' financial statements and invoices clearly separated sale of goods and provision of services.Key evidence and findings: The Tribunal noted the absence of any activity related to conceptualization or designing of advertisements in respect of the printed vinyl/flex material. It also referred to the invoices and contracts to establish the separation of transactions.Application of law to facts: Applying the legal principle that VAT-paid goods supplied under a separate contract cannot be considered part of the taxable service, the Tribunal rejected the inclusion of the value of printed vinyl/flex material in the advertisement service value.Treatment of competing arguments: The Revenue's argument that procurement costs should be included in the gross value was rejected on the ground that the contracts were distinct and the supply of goods was not incidental or ancillary to the service but a separate transaction.Conclusions: The Tribunal held that the value of printed vinyl/flex material should not be included in the gross value of advertisement services for service tax purposes.Issue 3: Legality of confirmation of service tax demand, interest, and penalty on the appellantsRelevant legal framework and precedents: The principles governing demand confirmation require that the tax be correctly levied on taxable transactions. If the transaction is not a taxable service, demand cannot be sustained. The penalty and interest flow from the correctness of the tax demand.Court's interpretation and reasoning: Since the Tribunal held that the supply of printed vinyl/flex material is a sale of goods and not a taxable service, the demand of service tax on this portion is not sustainable. Consequently, interest and penalty based on this demand also cannot be upheld.Key evidence and findings: The impugned order confirmed a service tax demand of Rs. 2,91,62,112/- along with interest and penalty. The Tribunal found that this demand was based on inclusion of the value of printed vinyl/flex material in the taxable service value, which was erroneous.Application of law to facts: The Tribunal set aside the impugned order to the extent it confirmed the service tax demand, interest, and penalty on the appellants.Treatment of competing arguments: The Revenue's reliance on the Kerala High Court judgment and the contention that the materials formed part of the taxable service was rejected based on the facts and legal precedents.Conclusions: The Tribunal allowed the appeal and set aside the impugned order confirming the service tax demand, interest, and penalty.3. SIGNIFICANT HOLDINGS'Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contra distinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided. The approach of the assessing authority, to us, thus, appears to be correct.''Since the Appellant has discharged VAT and Service Tax on the relevant portions of Sale or Service, as the case may be, demand of Service Tax in respect of sale transactions is not legal and so cannot be sustained.''After appreciating the evidence and following the judicial precedents, we are inclined to hold that the advertising materials like glow sign boards, flex printing, broachers, stickers, tags, posters, hand bills, signages, etc., which cater to the requirements of the specific customers, on which VAT is paid, is not leviable to Service Tax.''The amount received by the appellants towards sale of printed vinyl/flex material is not towards the provision of any advertising services, as they had not undertaken any activity like designing, visualizing, conceptualizing etc., of the advertisements.''The impugned order to such extent, is set aside and the appeal is allowed in favour of the appellants.'