Works contract valuation for tyre retreading followed the deemed 70% rule where actual labour charges were not ascertainable.

For tyre retreading treated as a works contract, valuation of the service portion depended on whether actual material and labour components were ascertainable. Where the evidence showed that labour charges were not separately ascertainable and VAT had been discharged on a deemed 70% basis, Rule 2A(ii)(B)(i) of the Service Tax (Determination of Value) Rules, 2006 applied rather than Rule 2A(i). On that basis, service tax could not be levied again on the same value already subjected to VAT, and the service element was confined to the balance 30% of the contract value. The demand and penalties were not sustainable.

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Issues: Whether, in respect of tyre retreading treated as a works contract, the value of the service portion was required to be determined under Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006 on the basis of actual ascertainable material and labour components, or under Rule 2A(ii)(B)(i) on 70% of the total contract value.

Analysis: The activity of tyre retreading was not disputed as a works contract. The dispute was confined to valuation. The invoices showed a split between material and labour, but the evidence accepted by the Tribunal showed that the VAT treatment had proceeded on a deemed percentage basis because actual labour charges were not ascertainable. In that situation, the Tribunal held that the statutory scheme of Rule 2A(ii) was attracted. It further held that once VAT had been discharged on 70% of the contract value, service tax could not again be levied on the same portion, because sales tax and service tax could not overlap on the same value. The Tribunal distinguished the revenue's reliance on later authority and accepted the assessee's reliance on the non-overlap principle and the valuation method consistent with the statutory fiction.

Conclusion: Rule 2A(ii)(B)(i) applied, and service tax was leviable only on the balance 30% of the total contract value; the demand and penalties could not be sustained.

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