Tribunal has recently decided a case involving an important issue of applicability of service tax on AMC contract where the material is part of the AMC contract.

WIPRO GE MEDICAL SYSTEMS (P.) LTD. Versus COMMISSIONER OF SERVICE TAX, BANGALORE [2009 -TMI - 32871 - CESTAT, BANGALORE]

References:

Section 67 of the Finance Act, 1994

Notification No. 12/2003, dated 20-6-2003

Article 366(29A)(b) of the Constitution

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Facts of the Case:

The appellants undertake installation of various medical equipments. They enter into Annual Maintenance Contract with their customers for maintenance of such equipments.

They have entered in an agreement called "Maxicare and Comprehensive Annual Maintenance Contract".

In this the appellants apart from supplying labour, also supply the materials which have to be used in the maintenance contract.

In other words, for the maintenance of the equipments at certain times the spare parts etc. have to be replaced and the contract covers these spares also.

Appellant's Contention

That they are not liable to pay service tax on the cost of the materials supplied in the course of the service.

In fact, the appellants have paid service tax only on 30 per cent value of the gross receipt.

In respect of the remaining 70 per cent, they have stated that they had paid the sales tax to the State Government.

According to them, in any works contract the transfer of property in the course of the works contract will be considered as sale.

For this they have relied on the Constitutional provision in article 366(29)(B) of the Constitution

Department's Contention

Entire amounts received by the appellants in these cases are liable to service tax under the category of "Annual Maintenance and Repair Service'.

Decision:

Once, the sales tax has been paid on the materials, then on the same service tax also cannot be charged. In fact, the appellants had relied on the decision of the Hon'ble Karnataka High Court which has been upheld by the Hon'ble Supreme Court. In the Modi Xerox Ltd.'s case (supra) it has been clearly held that in the Annual Maintenance Contract, the replacement of spares etc. would be considered as sale.

Even in the present case, on 70 per cent of the value sales tax has been paid and this has been accepted by the Government of Karnataka. This fact also cannot be ignored.

Moreover, Notification No. 12/2003, dated 20-6-2003 clearly provides for exempting the value of the materials sold during the provision of the service. Whenever, any service is provided if in the course of the provision of the service certain materials are used they will definitely be considered as sale. This is clearly covered by the Constitutional article 366(29A)(b) cited by the learned Advocate.

We do not agree with the learned Commissioner that the said Constitutional provision has no application here.

The Maintenance and Repair Contract entered into by the appellant with their customers has been recognized as Works Contract by the Government of Karnataka and the registration has been obtained for payment of sales tax. When that is the case, it cannot be said that the spare parts received by the clients of the appellant have not been sold to them.

We hold that in any Annual Maintenance Contract the spare parts etc. which have been used in the course of the maintenance service are definitely to be considered as sold and when sales tax has been paid on the value of such goods, simultaneously one cannot charge them to the service tax.

In view of these clear legal provisions, there is absolutely no justification for levy of service tax beyond 30 per cent of the value of the total contract.

 

For full text of judgment visit:

WIPRO GE MEDICAL SYSTEMS (P.) LTD. Versus COMMISSIONER OF SERVICE TAX, BANGALORE

[2009 -TMI - 32871 - CESTAT, BANGALORE]

 

Treatment of spare parts as sale limits service tax liability where sales tax is paid on materials used in AMC. Where an AMC supplies and replaces spare parts, those materials are to be treated as a sale of goods and, if sales tax has been paid on their value under a works contract classification, that value is excluded from service tax liability; the exemption framework and constitutional definition of sale support excluding material value from the service tax base, leaving service tax only on the portion of receipts attributable to non-material service elements.