2025 (10) TMI 395 - AT - Service Tax

Service tax due only on service component; material value deductible; Notification No. 12/2003-ST benefit upheld; penalties waived

M/s Speedways Tyre Services Versus Commissioner of Service Tax, Chandigarh-II

CESTAT held that the appellants are liable to pay service tax only on the service component and are entitled to deduct the value of materials used in ... Eligibility to get deduction on account of the value of materials used in the services rendered - levy of penalties - benefit under N/N. 12/2003-ST - HELD THAT:- It is found that the issue is decided on merits in favour of the appellants - Hon’ble Supreme Court, in the case of Safety Retreading Co (P) Ltd [2017 (1) TMI 1110 - SUPREME COURT] held that a tyre re-trader was liable to pay service tax only on service component which under State Act was quantified at 30%; assessee was not liable to pay Service Tax on total amount for retreading including value of materials/goods that have been used and sold in execution of contract. It is found that this decision was followed by tribunal in many cases involving identical facts. Thus, the appellant is liable to pay Service Tax only on the Service Component of the Service and is eligible for deduction to the extent of the value of material used in the provision of Service. It is found that the appellants claimed the benefit as contained in N/N. 12/2003-ST. It is found that the appellants have demonstrated before the adjudicating authority that they are eligible for such benefit as they fulfil the criteria. The appellants have submitted a Chartered Accountant’s Certificate showing the value of taxable clearances during 2005-06 and 2006-07 to be at Rs. 2,39,679 and Rs. 3,33,135, respectively, after allowing benefit of Notification No. 12/2003 ST. There is no reason to disbelieve the Certificate, more so, as the impugned orders do not present any evidence to negate the same. The appellants are eligible for deduction on account of the value of the material used in the provision of the service. We also hold that the appellants are eligible for the benefit of Notification No. 12/2003 ST. All the penalties imposed are set aside. The appellants shall pay the Service Tax as may be computed by the adjudicating authority, who shall quantify the Service Tax, payable by the appellants as per the figures certified by the Chartered Accountant, within four weeks of receipt of this order. Appeal allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether the activity of tyre re-treading constitutes taxable 'Maintenance or Repair Service' attracting service tax on the full gross amount charged or whether the value of materials used is deductible, making only the service component taxable. 2. Whether the appellants are entitled to the benefit under Notification No. 12/2003-ST in computing the taxable value for the relevant period. 3. Whether the activity of tyre re-treading can be classified as 'Works Contract Service' for the relevant period, thereby altering tax treatment. 4. Whether imposition of penalties under the Service Tax provisions is justified where taxability was subject to bona fide dispute/interpretation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of tyre re-treading: deduction of value of materials vs. full gross charge Legal framework: The relevant statutory framework distinguishes between pure service components and transfer/sale of goods in the course of providing a service, prescribing taxability on the service component subject to applicable notifications and principles governing valuation. Precedent Treatment: The Court relied on a controlling Supreme Court decision holding that a tyre re-trader is liable to pay service tax only on the service component and not on the total amount including the value of materials/goods used and sold in execution of the service; that precedent has been followed by tribunals in similar fact situations. Interpretation and reasoning: The Tribunal examined the nature of retreading operations and accepted that the activity involves both goods (materials used) and services (labour/expertise). It concluded that tax cannot be imposed on the gross receipt inclusive of the distinct value of materials consumed/sold in execution of the service, where the service component can be separated. The Court emphasized that mere involvement of material in a service does not convert the whole transaction into goods-sale for service tax purposes and reiterated that taxing the entire gross amount would be contrary to the binding precedent. Ratio vs. Obiter: The holding that only the service component is taxable and the value of materials used is deductible is adopted as ratio, being directly decisive of the controversy; remarks concerning general principles distinguishing goods and services are explanatory but supportive. Conclusions: The appellants are liable to pay service tax only on the service component of tyre re-treading; deduction for the value of materials used in provision of the service is allowable. Issue 2 - Entitlement to benefit under Notification No. 12/2003-ST Legal framework: Notification No. 12/2003-ST provides specified relief/abatement from taxable value for certain services subject to fulfillment of stipulated conditions, typically evidenced by appropriate certification. Precedent Treatment: The Tribunal treated entitlement consistent with law that where conditions are satisfied and not disproved by the Revenue, the benefit must be allowed. Interpretation and reasoning: The appellants produced Chartered Accountant certificates quantifying taxable clearances for the impugned period after applying the notification. The adjudicating and appellate records did not contain evidence to rebut or negate the certificates. The Tribunal found the documentary evidence credible and procedurally sufficient to establish eligibility for the notification's benefit. Ratio vs. Obiter: The acceptance of the CA certificate and allowance of the notification benefit is ratio in the context of the present appeal; ancillary remarks on standard of proof/absence of contrary evidence are obiter but practical guidance. Conclusions: The appellants are entitled to the benefit of Notification No. 12/2003-ST; the taxable clearances, as certified by the Chartered Accountant, stand accepted for computation of service tax. Issue 3 - Classification as 'Works Contract Service' Legal framework: 'Works Contract Service' has a statutory meaning requiring a contractual obligation to execute a composite supply involving transfer of property in goods in execution of a contract; taxable treatment depends on nature of contract and evidence of workmanship/goods transfer. Precedent Treatment: The Tribunal noted the temporal aspect that works contract service became specifically taxable from a later date and treated classification queries in light of evidentiary requirements and established tests separating services from works contracts. Interpretation and reasoning: The appellants themselves admitted absence of contracts/agreements with customers; no evidence was produced to demonstrate contractual work obligations akin to a works contract. The Tribunal reasoned that the mere involvement of material in providing a service does not convert the service into a works contract; classifying every material-involving service as works contract would be untenable and lead to absurd results. Ratio vs. Obiter: The conclusion that the activity does not qualify as works contract for the relevant period is ratio applicable to the facts; the general maxim that presence of materials alone is insufficient for classification is explanatory obiter reasoning supporting the conclusion. Conclusions: The appellants' activity cannot be classified as 'Works Contract Service' on the record presented; the alternative contention fails for lack of evidentiary support. Issue 4 - Legitimacy of penalties where taxability was subject to judicial interpretation Legal framework: Penalties under service tax provisions are attracted where there is wilful evasion, fraud, or gross negligence; tax positions founded on substantial, arguable interpretation are relevant to mitigation or exclusion of penalties. Precedent Treatment: The Tribunal referred to tribunal decisions holding that where there existed genuine confusion or disputed questions of law/fact on taxability of tyre retreading, penalties were not imposable. Interpretation and reasoning: Given that the taxability issue had been the subject of judicial consideration and that a Supreme Court decision directly supported the appellants' position on separate taxation of service component, the Tribunal found imposition of penalties inappropriate. The Tribunal also observed that appellants had taken alternate pleas and produced certificates, indicating absence of mala fide or deliberate evasion. Ratio vs. Obiter: The quashing of penalties is ratio with respect to the facts; broader commentary that penalties are not to be imposed where interpretation of statutory provisions is genuinely debatable is instructive obiter applied here. Conclusions: All penalties imposed are set aside; interest and service tax (where applicable) to be computed on the accepted taxable value and recovered accordingly. Cross-references and Implementation The Tribunal directs quantification of service tax by the Adjudicating Authority in accordance with the figures certified by the Chartered Accountant and within a fixed time frame; penalties are vacated and the entitlement under Notification No. 12/2003-ST is to be given effect. The conclusions on Issues 1-4 are interlinked: allowance of material deduction and notification benefit informs the re-computation of tax, while lack of contractual evidence negates the works contract plea and supports penalty relief.