T.K. Jayaraman, Technical Member. - This appeal has been filed against the Order-in-Revision No. 1/ST/08, dated 27-3-2008/3-4-2008 passed by the Commissioner of Central Excise, Customs & Service Tax, Mysore.

2. We heard both sides.

3. The appellants are carrying out retreading of old tyres used in motor vehicles. Revenue proceeded against the appellants on the ground that they were not including the value of materials such as tread rubber, cushion gum, vulcanizing solution, which were used/consumed in the activity of retreading/reconditioning of tyres in the value of taxable services for the purpose of payment of Service Tax. The invoice issued by them contained information regarding the charges towards ‘Material Charges’ and charges towards ‘Labour & Other Charges’. On the material charges, the invoice indicated VAT. Revenue issued a show-cause notice on the ground that the gross amount charged by the appellants should be the value of taxable services. However, the appellants discharged the Service Tax liability only on the rubber and other charges. In other words, the cost of the materials was excluded. In the adjudication proceedings, the Joint Commissioner held that since the invoice gives clear value for raw material used and specifically mentions it as "deemed sale value for transfer of property in goods involved in the execution of Tyre Retreading job vide this invoice", the assessee is correct in excluding the value of the raw material used considering it as a sale and finally dropped all proceedings raised in the show-cause notice. The Commissioner of Central Excise & Service Tax, Mysore in exercising all the powers conferred on him under section 84 of the Finance Act, examined the Order-in-Original dated 19-4-2007 passed by the Joint Commissioner and initiated the revisionary proceedings. A Notice dated 15-11-2007 was issued to the assessee demanding Service Tax on the gross invoice value. Consequently, differential Service Tax amount of Rs. 5,62,347 was demanded. Proposals were made for imposition of penalties also. After giving an opportunity, the Commissioner held that the appellants are liable to discharge the service tax liability on the gross receipts. Consequently, he set aside the order dated 19-4-2007 passed by the Joint Commissioner of Central Excise, Mysore, and confirmed the proposed demand. Interest was also demanded. He imposed a penalty of Rs. 200 per day under section 76 of the Finance Act for the period prior to 18-4-2006 and at the rate of 200 per day or 2 per cent of the tax whichever is higher from 18-4-2006 till the date of actual payment. The appellants are highly aggrieved over the impugned order.

3.1 ‘Tyre Retreading’ is a composite contract involving both sale of materials and rendering of services. It is specified as Works Contract under the Karnataka Value Added Tax Act (KVAT), 2003 and listed as Sl. No. 21 under Schedule VI to KVAT Act, 2003. The appellants are paying VAT on that portion of their turnover attributable to transfer of property. For the purpose of arriving at the value of service, sales value, as separately charged in the tax invoice on which VAT is paid is claimed as exempted under Explanation 1(g)(vi) to section 67 of the Finance Act up to 17-4-2006 and Notification No. 12/2003, dated 20-6-2003 for the entire period of dispute viz., 16-6-2005 to 31-7-2006. When the proceedings were initiated for charging to Service Tax on the gross receipts, the Joint Commissioner dropped the proceedings with the following observations :

"Since the invoice gives clear value for raw materials used and specifically mentions it as ‘deemed sale value for transfer of property in goods involved in the execution of tyre retreading job vide this invoice’, the assessee is correct in excluding the value of the raw materials used considering it as sale."

3.2 However, the Commissioner reversed the order of the Joint Commissioner in the Revisionary proceedings on the following grounds:-

(a)There is no sa