Fly ash collection system installation and maintenance contract-per-tonne rate valuation rejected; service tax demand set aside, input credit allowed.

The dominant issue was whether the arrangement for installation, operation and maintenance of a fly ash collection system constituted a taxable service with assessable value to be derived by extrapolating a per-metric-tonne rate. Applying contract-interpretation principles (including SC guidance that the contract must be read as a whole to ascertain parties' intent), the Tribunal held that, absent any allegation of camouflage or fraud, the agreed consideration and explicit terms could not be substituted; the per-unit amount collected from one recipient could not be extrapolated to value the entire fly ash generated, and the related demand was set aside. On input tax credit, it held that, since no privity existed between the sub-contractor and the power utility, the tax paid on repair and maintenance was eligible credit to the appellant. The impugned order was set aside and the appeal allowed.

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Issues: Demand of service tax on the activity of installation, operation and maintenance of the fly ash collection system at Mettur Thermal Power Station (MTPS) and denial/restriction of Cenvat credit on services procured from the contractor.

Analysis: The MOU and subsequent tripartite agreement must be construed to ascertain the joint intent of the parties. The agreements show that the appellant installed and operated the fly ash collection system in return for an allocation of a portion of the fly ash (an input for cement manufacture); the infrastructure installed became the property of TNEB and the appellant was allocated a specified share of fly ash. The Rs.206 per MT charged to India Cements represented a proportionate recovery of overheads from that co-allocatee and cannot be extrapolated as the consideration for the entire quantity of fly ash generated at MTPS. The consideration for services, including consideration in kind, must accrue to and benefit the alleged service provider to be taxable as its value under Section 67. The contractor rendered services to the appellant under contract and invoiced the appellant; in those circumstances the appellant was entitled to avail Cenvat credit for service tax paid to the contractor, and earlier administrative decisions holding admissibility of such credit have attained finality. Because the issue on merits is decided in favour of the appellant, consequential findings on extended period, interest and penalty do not survive.

Conclusion: Demand of service tax on the installation, operation and maintenance of the fly ash collection system is not sustainable to the extent challenged and the appellant is entitled to Cenvat credit on the service tax paid to the contractor; impugned orders are set aside and the appeals are allowed in favour of the appellant.

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