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REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO(S).641/2012

SAFETY RETREADING COMPANY (P)  LTD.     ...APPELLANT

VERSUS COMMISSIONER OF CENTRAL EXCISE, SALEM         ...RESPONDENT

WITH CIVIL APPEAL NOS. 6375-6376/2014

[M/S TYRESOLES INDIA PRIVATE LMITED VERSUS  THE COMMISSIONER OF CENTRAL EXCISE, GOA]

CIVIL APPEAL NOS. 6062-6063/2013 [M/S LAXMI TYRES VERSUS COMMISSIONER OF

CENTRAL EXCISE, PUNE]

J U D G M E N T  

RANJAN GOGOI, J.

CIVIL APPEAL NO.641 OF 2012 1. The  main  issue  for  consideration  in this appeal is whether in a contract for

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retreading  of  tyres,  service  tax  is leviable  on  the  total  amount  charged  for retreading  including  the  value  of  the materials/goods  that  have  been  used  and sold in the execution of the contract.

2. The  definition  of  'taxable  service' contained  in  Section  65(105)(zzg)  of  the Finance  Act,  1994,  as  amended  by  Finance Act, 2003 may be noticed at this stage.

“65. Definitions In  this  Chapter,  unless  the context otherwise requires.--

* * * (105)  'taxable  service'  means any service provided-

* * * (zzg) to  a  customer,  by  any person  in  relation  to maintenance or repair;”

3. The expression “maintenance or repair” is defined by Section 65(64) of the Finance Act, 1994 is in the following terms:

“65. Definitions In  this  Chapter,  unless  the context otherwise requires.--

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(1)....    .... (64) “management,  maintenance or  repair”  means  any  service provided by- (i) any  person  under  a contract or an agreement; or (ii) a manufacturer or any person  authorized  by  him,  in relation to,--

(a) management of properties, whether immovable or not;  

(b) maintenance or repair of properties, whether immovable or not; or

(c) maintenance  or  repair including  reconditioning  or restoration, or servicing of any goods,  excluding  a  motor vehicle;”

4. Section  66  which  is  the  charging section brought about by the 2003 Amendment to  the  Finance  Act,  1994,  authorizes  the levy  of  service  tax,  at  the  prescribed rate,  on  the  value  of  taxable  services referred  to  in,  inter  alia,  sub-clause

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(zzg) of Clause 105 of Section 65 of the Finance Act, 1994.   

5. Section 67 of the aforesaid Act deals with  valuation  of  taxable  services  and specifically  mentions  that  the  same  does not  include  the  cost  of  parts  or  other material,  if  any,  sold  to  the  customer during the course of providing maintenance or repair service.  

6. There  is  a  government  notification bearing No.12/2003-ST dated 20th June, 2003 and a CBEC circular dated 7th April, 2004 dealing with the instant matter which may also be noticed and extracted below:

“Notification  No.12/2013-ST dated 20  th   June, 2003. 'Valuation (Service Tax) – Goods and  materials  sold  by  service provider to recipient of service – Value thereof, exempted. In  exercise  of  the  powers conferred by section 93 of the Finance Act, 1994 (32 of 1994),

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the  Central  Government,  being satisfied  that  it  is  necessary in the public interest so to do, hereby  exempts  so  much  of  the value  of  all  the  taxable services,  as  is  equal  to  the value  of  goods  and  materials sold by the service provider to the  recipient  of  service,  from the service tax leviable thereon under section (66) of the said Act,  subject  to  condition  that there  is  documentary  proof specifically  indicating  the value  of  the  said  goods  and materials. 2. This  notification  shall come into force on the 1st day of July,  2003  (Notification No.12/2003-S.T.  dated 20.6.2003)' CBEC  Circular  dated  7  th   April, 2004 'I am directed to refer to your representation  forwarded  to Finance  Minister  vide  letter dated  11-3-2003  and  state  that in  terms  of  the  notification 12/2003-ST  dated  20-6-2003,  the exemption  in  respect  of  input material  consumed/sold  by  the service provider to the service recipient  while  providing  the taxable  service  is  available. However,  the  exemption  is available  only  if  the  service provider  maintains  the  records showing  the  material

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consumed/sold  while  providing the taxable service.  The value of such material should also be indicated  on  the  bill/invoice issued in respect of the taxable service provided.”

7. A demand for levy of tax on the gross value of the service rendered including the cost of materials used and transferred was raised  and  answered  against  the  assessee leading  to  an  appeal  before  the  Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench at Chennai (hereinafter referred to as “appellate Tribunal”). The learned appellate Tribunal returned a split verdict  with  the  Technical  Member  taking the  view  that  the  gross  value  of  the service rendered would be exigible to tax under the Act. The third member (Technical) to  whom  the  matter  was  referred  held  as follows:

“21. From  the  foregoing,  the following emerges:

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a) There is no evidence of sale of  materials  in  rendering  the impugned service of “Maintenance and Repairs”. b) “Maintenance  and  Repair Service”  being  as  specific service  cannot  be  treated  as service  under  the  category  of “Works Contract” for the service tax purposes. c) The concept of “deemed sales” is relevant only in respect of services  under  the  category  of “Works  Contract”  and  not  in respect  of  “Maintenance  and Repair Service”. d) The  assessee  has  not  proved that  the  conditions  under Notification  12/03  ST  dated 20.06.2003  have  been  satisfied and,  therefore,  they  are  not entitled  to  the  benefit  of deduction  of  cost  of  raw materials  consumed  in  providing the impugned service.”

8. Aggrieved, this appeal has been filed.

9. We have heard the learned counsels for the parties.

10. The exigibility of the component of the gross turnover of the assessee to service

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tax in respect of which the assessee had paid taxes under the local Act whereunder it  was  registered  as  a  Works  Contractor, would no longer be in doubt in view of the clear  provisions  of  Section  67  of  the Finance Act, 1994, as amended, which deals with the valuation of taxable services for charging  service  tax  and  specifically excludes  the  costs  of  parts  or  other material, if any, sold (deemed sale) to the customer  while  providing  maintenance  or repair service.  This, in fact, is what is provided  by  the  Notification  dated  20th

June,  2003  and  CBEC  Circular  dated  7th

April,  2004,  extracted  above,  subject, however, to the condition that adequate and satisfactory  proof  in  this  regard  is forthcoming from the assessee.  On the very face of the language used in Section 67 of the Finance Act, 1994 we cannot subscribe to the  view held  by the  Majority in  the

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appellate  Tribunal  that  in  a  contract  of the  kind  under  consideration  there  is  no sale or deemed sale of the parts or other materials  used  in  the  execution  of  the contract of repairs and maintenance.  The finding of the appellate Tribunal that it is the  entire of  the gross  value of  the service rendered that is liable to service tax, in our considered view, does not lay down the correct proposition of law which, according  to  us,  is  that  an  assessee  is liable  to  pay  tax  only  on  the  service component  which  under  the  State  Act  has been quantified at 30%.   

11. An argument has been advanced by Ms. Pinky  Anand,  learned  Additional  Solicitor General  that  there  is  no  evidence forthcoming from the side of the assessee that the value of the goods or the parts used  in  the  contract  and  sold  to  the

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customer amounts to seventy per cent (70%) of the value of the service rendered which is  the  taxable  component  under  the  State Act.  The  aforesaid  argument  overlooks certain basic features of the case, namely, the undisputed assessment of the assessee under the local Act; the case projected by the  Department  itself  in  the  show  cause notice;  and  thirdly  the  affidavit  filed before  this  Court  by  one  S.  Subramanian, Commissioner of Central Excise, Salem.

12. No dispute has been raised with regard to the assessment of the appellant on its turnover under the local/State Act, insofar as  payment  of  value  added  tax  on  that component (70%) is concerned. A reading of the  show  cause  notice  dated  24th January, 2008  would  go  to  show  that  the  entire thrust  of  the  Department's  case  is  the alleged  liability  of  the  appellant  –

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assessee to pay service tax on the gross value. In the aforesaid show cause notice, the details of the value of the goods, raw materials, parts, etc. and the value of the services rendered have been mentioned and service tax has been sought to be levied at the prescribed rate of ten per cent (10%) on  the  differential  amount.  It  is  now stated before us that the aforesaid figures have been furnished by the assessee himself and, therefore, must be understood not to be authentic. This, indeed, is strange.  No dispute has been raised with regard to the correctness of the said figures furnished by the assessee in the show cause notice issued  to  justify  the  stand  now  taken before this Court; at no point of time such a plea had been advanced.  

13. Besides the above, the affidavit of the learned  Commissioner,  referred  to  above,

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proceeds  on  the  basis  that  the  appellant assessee is also liable to pay service tax on  the  remaining  seventy  per  cent  (70%) towards material costs in addition to the 30%  of  the  retreading  charges.  This  is clear from the following averments made in the  said  affidavit  of  the  learned Commissioner:

“The relevant bills showed that the Appellant had paid service tax only on  the  labour  component  after deducting 70% towards material cost on  the  gross  tyre  Retreading charges billed and received for the period from 16.06.2005. In short, they have paid service tax only on the  30%  of  the  tyre  Retreading charges  received  from  the customers, by conveniently omitting 70% of the consideration received towards Retreading charges to avoid tax burden. The verification of invoices of the Appellant  for  the  period  from Jan-2007  to  March-2007,  the officers noticed that the Appellant have  shown  material  cost,  patch cost and misc. charges i.e. Labour charges  separately  in  their invoices. However, on the follow-up action  the  customers  of  the Appellant revealed that they have

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neither purchased nor received raw materials  intended  for  Retreading and  they  had  paid  only  the Retreading charges for carrying out the  Retreading  activity.”

The  invoices  which  the  appellant assessee has also brought on record by way of illustration show the break up of the gross  value  received.  There  is  again  no contest  to  the  same.  Leaving  aside  the question that the case now projected, with regard  to  lack  of  proof  of  incurring  of expenses on goods and materials which has been  transferred  to  the  recipient  of  the service  provided,  appears  to  be  an afterthought,  even  on  examination  of  the same  on  merits  we  have  found  it  to  be wholly unsustainable.  

14. We, therefore, in the light of what has been  discussed  above,  set  aside  the majority  order  of  the  appellate  Tribunal dated 14th October, 2011 and hold that the

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view taken by the learned Vice President of the appellate Tribunal is correct and the same  will  now  govern  the  parties.  All reliefs that may be due to the appellant – assessee  will be afforded to it forthwith and without any delay. All amounts, as may have  been,  deposited  pursuant  to  the order(s)  of  this  Court  shall  be  returned forthwith  to  the  appellant,  however, without  any  interest.  Bank  guarantee furnished insofar as the penalty amount is concerned shall stand discharged.

The  appeal  is  allowed  in  the  above terms.

CIVIL  APPEAL  NOS.6375-6376  OF  2014  AND CIVIL APPEAL NOS.6062-6063 OF 2013

15. Order of this Court passed today i.e. dated  18th January,  2017  in  Civil  Appeal No.641 of 2012 will govern the proceedings in Civil Appeal Nos.6375-6376 of 2014 and

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Civil  Appeal  Nos.6062-6063  of  2013. Consequently, the appeals are disposed of on the same terms.

....................,J. (RANJAN GOGOI)

...................,J.    (ASHOK BHUSHAN)

NEW DELHI JANUARY 18, 2017