2023 (11) TMI 1381 - AT - Service Tax

Classification of service - Business Auxiliary service (BAS) or Management Maintenance or Repair service (MMRS)? - material component used in their business of re-rubberisation of old and worn out rubberized rollers - applicability of nil rate of tax in terms of N/N. 14/2004 - period in dispute is April 2010 to March 2011 - HELD THAT - It is found that admittedly the Appellant has paid VAT on the material component. Thus there can be no controversy with regard to sale of materials in execution of contract of service. It is further found that the issue is squarely covered by the ruling of the Apex Court in favour of the Appellant in the case of Safety Retreading Co. Pvt Ltd 2017 (1) TMI 1110 - SUPREME COURT . The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the appellant is liable to pay service tax on the material component used in their business of re-rubberisation of old and worn-out rubberized rollers.

2. Whether the activity of re-rubberisation falls under the category of 'Business Auxiliary Service' (BAS) attracting a 'nil' rate of service tax under Notification No. 14/2004 dated 10.09.2014, or under the category of 'Management, Maintenance or Repair Service' (MMRS) which is taxable.

3. Whether the valuation of service tax should include the cost of materials used and sold to the customer during the course of providing the service.

Issue-wise Detailed Analysis

Issue 1 & 2: Classification of the re-rubberisation activity under BAS or MMRS and liability to pay service tax on materials

The appellant's business involves removing worn-out rubber compound coating from rollers and replacing it with fresh rubber coating. The question is whether this activity amounts to a taxable service under MMRS or falls under BAS, which is exempted at a nil rate under Notification No. 14/2004.

The appellant contended that the activity is covered under BAS and not MMRS, relying on previous orders in their favor for earlier periods (2005-2010) where similar issues were adjudicated. These previous decisions set a precedent that re-rubberisation is a business auxiliary service and thus exempt from service tax.

The Revenue's contention was that the activity falls under MMRS and that service tax should be levied on the entire value, including the material component.

The Tribunal referred to the ruling of the Apex Court in Safety Retreading Co. Pvt Ltd vs CCE, which dealt with a similar issue of retreading tyres. The Apex Court held that service tax under MMRS does not apply to the value of parts or materials sold to the customer during the service, provided documentary evidence exists to separate the value of goods from the service component.

This ruling clarified that where materials are separately sold and taxed under VAT, service tax should only apply to the service portion, not the material cost. The appellant demonstrated through sample invoices that VAT was paid on 70% of the value (material component) and service tax on 30% (service component), consistent with the Apex Court's ruling.

Thus, the Tribunal accepted the appellant's submission that the activity falls under BAS attracting nil rate of service tax, and that service tax liability does not extend to the material component which is separately sold and taxed under VAT.

Issue 3: Valuation of service tax and inclusion of material cost

The legal framework includes Section 65(105)(zzg) defining taxable service under MMRS, Section 66 charging service tax, and Section 67 relating to valuation. Notification No. 12/2003-ST exempts the value of goods and materials sold by the service provider to the recipient from the value of taxable service, subject to documentary proof.

The Apex Court in Safety Retreading Co. Pvt Ltd emphasized that the value of service excludes the cost of parts or materials sold during the service. The Tribunal applied this principle, noting that the appellant had paid VAT on the material component and service tax only on the service portion, supported by documentary evidence.

The Revenue's argument that the appellant should pay service tax on the entire amount including materials was rejected based on this legal framework and the Apex Court's authoritative ruling.

Treatment of competing arguments

The appellant relied heavily on binding precedents, including their own prior favorable orders and the Apex Court's ruling in Safety Retreading Co. Pvt Ltd. The Revenue relied on the impugned order and precedent where the activity was held taxable under MMRS, but the Apex Court had dismissed the Revenue's appeal on monetary grounds, effectively upholding the favorable position for the appellant.

The Tribunal gave greater weight to the Apex Court's ruling and the appellant's consistent documentary evidence of VAT payment on materials, concluding that the appellant's position was legally sound.

Conclusions

The Tribunal concluded that:

• The re-rubberisation activity falls under Business Auxiliary Service attracting nil rate of service tax under Notification No. 14/2004.
• The service tax liability does not extend to the material component used and sold during the service, as the value of materials is excluded from taxable service value under Notification No. 12/2003-ST and relevant provisions.
• The appellant has discharged VAT on the material component, removing any controversy regarding sale of materials.
• The appellant's case is squarely covered by the Apex Court ruling and prior decisions in their favor.

Significant Holdings

The Tribunal preserved the following crucial legal reasoning verbatim:

"The Apex Court examined the definition of taxable service in relation to MMRS under Sec 65(105)(zzg), the charging section 66 & section 67 with respect to valuation, wherein, the section specifically mentions that the value of service does not include the cost of parts or other material, if any, sold to the customer during the course of providing MMRS."

"The Apex Court also referred to Notification No. 12/2003-ST, which specifically exempts from the value of taxable service, the value of goods and materials sold by the service provider to the service recipient, from the levy of service tax subject to the condition that there is documentary proof specifically indicating the value of the said goods and material."

"The Apex Court was pleased to set aside the majority Order of the Tribunal and held that no service tax is attracted where material is separately sold to the recipient of service."

Core principles established include:

• Service tax under MMRS excludes the value of goods/materials sold during the service, provided documentary proof exists.
• Re-rubberisation of rollers is a Business Auxiliary Service attracting nil rate of service tax under Notification No. 14/2004.
• Where VAT is paid on the material component, service tax should only be levied on the service portion.

Final determinations:

• The appellant is not liable to pay service tax on the material component used in re-rubberisation.
• The re-rubberisation activity is covered under BAS and attracts nil rate of service tax.
• The impugned order demanding service tax on the entire value including materials is set aside.
• The appellant is entitled to consequential benefits in accordance with law.