Where VAT is paid on the material component of a composite works contract, Service Tax is only leviable on the service portion. The authorities cannot charge Service Tax on the entire contract value if the material portion has already been subjected to VAT.

Per M. Ajit Kumar,

This appeal is filed by the appellant against Order in Original No. MDU-ST-COM-06-2016 dated 29.06.2016 passed by the Commissioner of Central Excise, Madurai (impugned order).

2. The appellant provides ‘Maintenance or Repair Service’ and ‘Transport of Goods by Road’ through units at Madurai, Dindigul and Paramakudi. Centralized accounts for the units are maintained at the Madurai Branch Office. Prior to 01.07.2012, the appellant classified tyre retreading services under ‘Maintenance & Repair Service’, with service tax paid on the gross amount after availing CENVAT credit. From 01.07.2012, the appellant shifted to ‘Works Contract Service’ claiming the benefit under Notification No. 24/2012 dated 06.06.2012. During Departmental audit of the accounts and ST-3 returns for August 2011 to March 2014, it was found that the appellant valued the service portion under Rule 2A (i) of the Service Tax (Determination of Value) Rules, 2006 (Valuation Rules 2006), by considering only labour charges and excluding material cost. The Department held that Rule 2A (i) was inapplicable since the value of property in goods transferred was not determinable and the appellant had admitted that labour charges were not ascertainable for VAT purposes. Accordingly, valuation under Rule 2A (ii)(B), requiring adoption of 70% of the total contract value, was considered applicable. Hence Show cause Notice (SCN) for a differential service tax demand of ₹1,07,24,022/- for the period July 2012 to September 2014, was issued by the department. The Commissioner passed the impugned Order-in-Original (OIO), and confirmed the demand while imposing penalties under Sections 78 and 77(2) of the Finance Act, 1994, leading to the present appeal.

3. The learned Advocates Shri Raghav Rajeev and Ms. Nimrah Ali appeared for the appellant and Ld. Authorized Representative Smt. G. Krupa appeared for the respondent.

3.1 Shri Raghav Rajeev the Ld. Counsel for the appellant submitted that the Appellant is engaged in the retreading of used motor vehicle tyres. Customers supply worn-out tyres, which undergo buffing, rasping, cementing, tread building, enveloping and curing, after which the retreaded tyres are inspected and delivered. For this activity, the Appellant procures materials such as tread rubber, bonding gum and vulcanizing cement. Upon completion of retreading, the property in such goods is transferred to the customers along with the retreaded tyres. Accordingly, the activity constitutes a works contract involving transfer of property in goods, which is not disputed by the Department. Since the activity qualifies as a works contract and the material and labour components are separately ascertainable from the invoices, the Appellant discharged service tax only on the service portion, i.e. actual labour charges, after excluding the value of goods transferred, in terms of Rule 2A (i) of the Valuation Rules 2006. VAT was discharged on the value of transfer of property in goods under Section 5 of the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act, 2006) read with Rule 8(5)(d) of the Tamil Nadu Value Added Tax Rules, 2007 (TNVAT Rules, 2007). The Ld. Counsel submitted that:

A. The Appellant is engaged in tyre retreading, an admitted works contract involving transfer of property in goods. The Department does not dispute the classification.

B. The Appellant’s invoices separately disclose material cost and labour charges. Accordingly, in terms of Section 67(1)(i) of the Finance Act, 1994, serv