2025 (11) TMI 7 - AT - Service Tax

Consumables/spares treated as separate from maintenance service; VAT paid excludes their value from taxable service

M/s Redington India Limited Versus Directorate General of Central Excise & Intelligence (Adjudication Cell), New Delhi And (Vice-Versa)

CESTAT (Delhi) AT held that two agreements-one for sale of consumables/spares and one for support/maintenance-are distinct contracts, not a single ... Evasion of service tax - two agreements, Service Level Agreement and Consumables and Parts Support Agreement, are two distinct and independent contracts or both are the part of one composite contract being intentionally splitted by the appellant - inclusion of value of spares and consumables into the value of Support and Maintenance services rendered by the appellants to their end customers - HELD THAT:- This issue came up for consideration before Hon’ble Supreme Court in the case of State of Madras Vs. Gannon Dunkerley & Co. (Madras) Ltd. [1958 (4) TMI 42 - SUPREME COURT] wherein it was clearly held that 'To avoid misconception, it must be stated that the above conclusion has reference to works contracts, which are entire and indivisible, as the contracts can assume are set out in Hudson on Building Contracts. It is possible that the parties might enter into distinct and for money consideration, and the other for payment of remuneration for services and for work done.' The question came for consideration again in Builders’ Association of India & Ors. Vs. Union of India & Ors. [1989 (3) TMI 356 - SUPREME COURT]. It has expressly been laid down therein that the effect of amendment by introduction of clause 29A in Article 366 is that by legal fiction, certain indivisible contracts are deemed to be divisional into contract of sale of goods and contract of service. It is further observed that Section 67 of the Finance Act, 1994 itself recognizes the fact that goods and materials would indeed be sold during the course of the maintenance or repair. Further, the Hon’ble High Court of Karnataka in the case of Modi Xerox Ltd. Vs. State of Karnataka [1999 (2) TMI 637 - KARNATAKA HIGH COURT] has held that during the course of providing maintenance service in Annual Maintenance Contract the supply of materials can be considered as sale and this position has been affirmed by Supreme Court [2005 (8) TMI 359 - SUPREME COURT]. Therefore, it is now settled law that even during the course of rendering maintenance service there is the element of sale of goods. Reverting to the facts of the present case, it is observed that the two contracts involved in the present case are about two distinct purpose, one is for providing consumables and spare parts and another is for providing Maintenance Service of the printers sold to the end consumers not the composite works contracts but the independent contracts of service and sale but are the independent contracts of sale of consumables and spare parts and another for support and maintenance service. There is no dispute to the fact that the value of consumables used in providing the service has also been separately indicated - The intention of parties is clear to keep separated the service part from the goods which are to be provided to the consumers while maintenance the printer purchased by them. There is no denial of the department that VAT is paid by the appellant. Department has not produced any evidence that the VAT paid was with reference to some other goods. The confirmation of demand on the value of goods also treating both the contracts as one composite contract is thus held to be the result of presumption and assumption of the adjudicating authority. Thus, out of two separate agreements the agreement which pertains to the sale of goods is absolutely distinct from the another service agreement. The VAT has admittedly been paid on viz-a-viz sale agreement which is exclusive to service tax. Hence the value of goods is not to be included in the gross value of taxable service. The service tax demand has wrongly been confirmed against the appellant. The appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether two separate contracts - a 'Service Level Agreement' and a 'Consumables and Parts Support Agreement' - constitute distinct and independent transactions or are parts of one composite/indivisible contract such that the value of consumables and spare parts must be included in the taxable value of maintenance/support services. 2. Whether, assuming the contracts are composite or the value of goods is not segregable, service tax (as MMRS for the earlier period and as works contract service for the later period) is leviable on the value of consumables and spare parts when VAT has been paid on those goods. 3. Whether extended period of limitation and penalties under the Finance Act (Sections 76, 77 and 78) were rightly invoked/imposed in view of alleged mis-representation, suppression of facts, lack of proper invoices and maintenance of records. ISSUE-WISE DETAILED ANALYSIS Issue 1: Distinctness of the two agreements (service vs sale) - Legal framework Legal framework: Determination depends on contract intention, divisibility of composite contracts, concept of 'works contract' and deeming provisions converting certain indivisible contracts into deemed sales. Relevant principles include dominant-intention test, separability where goods are sold as distinct transactions, and statutory/notification provisions recognizing deduction of value of goods where sales tax/VAT is paid. Precedent Treatment The Tribunal followed authoritative decisions establishing that (a) whether goods constitute 'sale' is primarily a matter of contract and intention; (b) the 46th Constitutional Amendment created specific deemed-sale categories but did not alter the definition of 'goods'; and (c) where agreements/invoices separately identify materials and VAT/excise on such goods is paid, the goods component can be treated as sale and excluded from service tax. Prior tribunal and High Court decisions holding spare parts/materials used in maintenance to be deemed sale (and not subject to service tax) were followed. Interpretation and reasoning The Tribunal examined the contractual documents and commercial practice: (i) the two agreements address distinct purposes - one for supply/sale of consumables and spares and the other for provision of support/maintenance services; (ii) values of consumables/spares were separately indicated; (iii) VAT was admittedly paid on consumables/spares and accounting indicated trading of goods; (iv) departmental evidence failed to establish that VAT related to other goods or that supplies were genuinely without commercial consideration; and (v) statements relied upon did not contradict the conclusion that transactions were principal-to-principal sales of goods and separate maintenance services. Applying the dominant-intention/separability test and taking into account statutory recognition of deemed sales, the Tribunal found the contracts distinct and not an artificial split to evade service tax. Ratio vs. Obiter Ratio: Where contractual intention, separate invoicing/accounting and payment of VAT establish that consumables/spares are sold as distinct transactions, the goods component is not includible in gross value of taxable service and no service tax can be demanded on that goods value. Obiter: Observations on historical constitutional amendments and broader jurisprudence explaining survival of prior doctrine beyond deemed-sale clauses are explanatory and supportive rather than dispositive of the specific facts. Conclusion The Tribunal held the two agreements to be distinct: one sale of goods (VAT paid) and one service. Consequently, value of consumables and spare parts is not includible in the taxable value of maintenance/support services; the demand for service tax on that value is set aside. Issue 2: Applicability of service tax/works contract classification and the effect of VAT payment - Legal framework Legal framework: Service tax classification depends on nature of activity in the relevant period (MMRS earlier; works contract post specified date). Article/constitutional deeming provisions and statutory notifications permit segregation of goods value where VAT/ sales tax has been paid; Service Tax Determination of Value Rules and Notification exempting goods value from service tax (when taxed as sale) are relevant. Precedent Treatment The Tribunal relied on precedents establishing that where goods used in maintenance are separately invoiced and VAT/Excise duty is paid, the goods component is to be treated as sale and excluded from service tax - decisions affirmed by higher courts. Authorities stressing the dominant intention and separability of contracts were applied. Interpretation and reasoning The Tribunal accepted the departmental classification (MMRS for the earlier period and works contract for the later period) only to the extent of recognizing the legal position that works contracts may attract deemed sale. However, since the goods component here was segregable, separately shown and subject to VAT, statutory/administrative instruments (notification and rules) and jurisprudence mandated exclusion of the goods value from service tax computation. The Tribunal rejected the department's approach of adding the goods value to service value on the basis of presumption without proof that VAT related to other goods or that supplies were free/non-commercial. Ratio vs. Obiter Ratio: Classification as works contract does not automatically render the goods component taxable as service value where that component is segregable and VAT has been paid; statutory and jurisprudential rules permit deduction of goods value from gross service value. Obiter: Comments on rates of VAT vis-à-vis service tax rates and commercial accounting practices are ancillary. Conclusion The Tribunal concluded that, despite works contract classification in the later period, the segregable goods value on which VAT was paid cannot be included in the taxable value for service tax; the demand based on including such value is unsustainable. Issue 3: Extended period, mis-representation and imposition of penalties under Sections 76, 77 and 78 - Legal framework Legal framework: Penalties and invocation of extended period require establishment of suppression/mis-representation/intentional evasion, failure to maintain proper records or incorrect invoicing. Burden lies on revenue to demonstrate connection between alleged malpractices and tax shortfall. Precedent Treatment Authorities cited by both sides were considered insofar as they articulate the standards for invoking extended period and penal provisions; precedents require concrete evidence of suppression or mis-statement to sustain extended period and certain penalties. Interpretation and reasoning The Tribunal examined evidence relied upon by the Revenue (contract wording, lack of customer-wise records, invoice remarks) and the assessee's counter-evidence (separate invoices, VAT payments, accounting classification, statements confirming principle-to-principle sales). The Tribunal found Revenue failed to produce cogent evidence that VAT related to other goods or that supplies were without consideration; reliance on presumptions and invoice notations was insufficient to establish suppression or mis-representation. Consequently, extended period and penalty provisions predicated on such suppression were not sustained in relation to the goods component. The impugned order had already not imposed penalty under one provision; the Tribunal set aside the other penalties to the extent they flowed from the unsustainable demand. Ratio vs. Obiter Ratio: Invocation of extended period and imposition of penalties require demonstrable suppression/mis-representation; where the revenue fails to show that segregable goods value was other than invoiced and VAT-paid, penal consequences and extended period invocation are not maintainable insofar as they are premised on inclusion of that goods value in taxable services. Obiter: Observations regarding the need for customer-wise records and best practices in invoicing, while persuasive, are ancillary. Conclusion The Tribunal held extended period/penalties based on alleged evasion with respect to the goods component were not justified. The demand and penalties confirmed insofar as they derive from inclusion of the goods value were set aside; the appeal by Revenue was dismissed and the appellant's appeal allowed.