By the Court.—The appeal arises from a decision of the Customs, Excise & Service Tax Appellate Tribunal dated 21 February 2014.

2. The Revenue which is in appeal has sought to raise the following question of law:

“Whether the CESTAT has erred in holding that Service tax is not required to be paid on goods used in the repairing process on which Excise duty and VAT has been paid on the value of the said goods, ignoring the fact that as per the contract the respondents were under an obligation to replace the damaged parts and to maintain the transformers in a proper working condition.”

The assessee is engaged in the manufacture of electrical transformers. The assessee had entered into a contract with M/s. Dakshinanchal Vidyut Vitran Nigam Ltd., Agra and M/s. U.P. Power Corporation Ltd., Lucknow for repair and maintenance of transformers. The assessee was duly registered and was discharging its service tax liability under the service head ‘Management, Maintenance and Repair’. The liability on account of service tax was discharged in respect of the labour charges recovered by the assessee. The case of the Revenue was that the contract with the assessee is a composite contract under which the assessee was to provide the service of repairing transformers. Hence, according to the Revenue, the assessee was required to pay the service tax on the total contracted value, including consumables and items used in the repair of the transformers.

3. The Commissioner in the course of his order dated 24 May 2011 agreed with the submission of the assessee that where in the course of repair and maintenance, an assessee uses goods which are separately identifiable or replaced, on which tax has been paid, the value of such goods has to be excluded from the total value charged for the levy of service tax.

4. However, in the present case, the Commissioner was of the view that the assessee had entered into a contract for a complete repair package and the break-up of individual items was for the purpose of computing the price variation. The observations in that regard in paragraph 25 of the order of the Commissioner read as follows:

“In this regard, I am in agreement with the party’s view that while providing any kind of service of repair and maintenance, if any goods are replaced which are separately identifiable and on which proper taxes have been paid, the value of such goods should be excluded from the total value charged for the purpose of levy of Service Tax and the Service Tax should only be charged on the value representing the labour charges etc. as provided under Notification No. 12/2003 dated 20.6.2003; but in the instant case, the condition are altogether different as in this contract a complete repair package cost per transformer (capacity wise) is being charged by the party. Further, it has been explained under para 1.2 of the said contract that for the purpose of calculations of price variation of HV/LV Leg Coil, Transformer Oil, excise duty, Sales Tax, the breakup of repair package is being given that means the replacement of parts like HV/LV Leg Coil, Transformer Oil was as part and parcel of condition of the said contract and the party was not having any option not to replace these items etc. which do not find a mention in the said contract.”

5. The Commissioner confirmed the demand of duty on service tax and imposed a penalty.

6. In appeal, the Tribunal has held that that there was no dispute about the following factual aspects:

(i) the contract showed the cost of each and every item separately;

(ii) as a matter of fact, the Commissioner had accepted that the invoices reflected separately the value of various items such as HV/LV Leg Coils and Transformer Oil on which the assessee paid tax including value added tax.

7. In this background, the Tribunal held that merely because the segregation of various items was shown in the contract for the purpose of price variation, the contract would not be regarded as one for providing ser