2025 (5) TMI 1822 - AT - Service Tax

Levy of service tax on works contract services to SEZ units - exemption from payment of service tax vide Notification No. 9/2009-ST - availed CENVAT Credit of service tax paid on input services - demand along with the interest and penalty - difference in the value of the goods procured by the appellant and the value of the sales from their side - HELD THAT - We find that the ratio laid down in the in the case of HAMON SHRIRAM COTTREL PVT LTD VERSUS COMMISSIONER OF C.E. S.T. 2024 (4) TMI 628 - CESTAT AHMEDABAD wherein the judgements of Supreme Court have been relied on is squarely applicable to the facts of the present appeal. Following the same we set aside the confirmed demand of Rs.67.62 lakhs and allow the appeal on merits. We have also given a thought to the present demand which is in terms of Service Tax demand. Without any dispute the case is that of purchase from third party by the appellants and sale to the clients of the appellant of goods. Admittedly both purchase and sale require VAT payment since the transaction is that of goods. The margin between the purchase and sale can never be subjected to any Service Tax irrespective of whether it is on account of any cost loading or purely on account of price mark up for profit. It is for the Revenue to answer as to how the Service element comes in the margin between the purchase and sale price. Thus no case towards Service Tax demand could have been made at all in such a situation. Even on this ground the entire confirmed demand fails. Coming to the argument of the appellant on time bar we find that the appellant is registered with the Department for both Central Excise Duty and Service Tax payment. They have been filing their Returns. They also could be holding a bonafide belief that the profit margin is not liable for tax which is correct. They have recorded all the transactions in the P L accounts and Balance Sheet from wherein the data has been gathered by the Revenue to quantify the demand. All these factual details point out that no case of suppression with an intent to evade can be fastened on the appellant. Therefore we hold that the confirmed demand to the extent of extended period is time-barred. Hence we said aside the same on the ground of limitation. The appeal stands allowed with consequential relief if any as per law.

Summary

The core legal questions considered by the Tribunal were: (1) Whether the appellant was liable to pay service tax on the profit margin or cost loading included in the sale price of goods procured from third parties and supplied to customers under works contracts; (2) Whether the appellant's payment of VAT/CST on the sale price of goods precludes the levy of service tax on the same value or its components; (3) The applicability and interpretation of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 regarding valuation of composite contracts involving goods and services; (4) Whether the extended period of limitation for demand of service tax could be invoked in the facts of the case; and (5) The relevance and evidentiary value of the Chartered Accountant's certificate and commercial tax returns filed by the appellant in contesting the demand.

Regarding the first issue, the legal framework involved the Service Tax Act and the Service Tax (Determination of Value) Rules, 2006, particularly Rule 2A, which governs the valuation of works contracts by bifurcating the value attributable to goods and services. Precedents relied upon included the Supreme Court's ruling in Imagic Creative Pvt. Ltd., which held that service tax and VAT are mutually exclusive and that service tax cannot be levied on the value of goods on which VAT has been paid. The Tribunal also referred to a coordinate bench decision in Hamon Shriram Cottrel Pvt. Ltd., which dealt with a similar issue of valuation and bifurcation of goods and services under works contracts.

The Court interpreted that the appellant had entered into two separate agreements for supply of materials and provision of services, with bifurcated pricing. The appellant paid VAT on the entire sale price of goods, which included purchase cost, transit insurance, transport, head office costs, and profit margin. The Tribunal noted that the appellant had produced a Chartered Accountant's certificate certifying that the amount on which VAT/CST was paid or exemption claimed corresponded to the sale price of goods and that this certificate was neither rebutted nor discredited by the adjudicating authority. The Court found that the loading of costs and profit margin formed part of the sale price of goods and, as such, service tax could not be levied on this amount.

The key evidence included the bifurcation of contracts, the invoices issued, the payment of VAT/CST on the sale price of goods, the Chartered Accountant's certificate, and annexures to CST returns disclosing the transactions. The appellant's argument that the profit margin and cost loadings are part of the sale price of goods and not subject to service tax was supported by these documents. The Revenue's contention that the differential value between purchase and sale price attracted service tax was rejected on the basis that such differential represented profit and cost components of sale of goods, which are taxable only under VAT/CST and not under service tax.

In applying the law to the facts, the Tribunal emphasized that the appellant's transactions clearly distinguished between goods supply and service provision, with appropriate tax payments made under respective statutes. The Court relied on authoritative judgments to uphold the principle that service tax cannot be levied on the value of goods on which VAT or CST has been paid, even if the sale price includes additional cost elements and profit margin. The Tribunal also held that the appellant's practice of not separately disclosing profit margins or cost components in invoices does not alter the taxability, as there is no statutory requirement for such disclosure under the Finance Act or VAT rules.

The Tribunal considered competing arguments regarding the applicability of extended period of limitation. The Revenue justified invoking the extended period due to detection of differential value through detailed verification. The appellant argued that there was no suppression or evasion and that they had filed returns regularly, disclosing taxable services and paying service tax accordingly. The appellant relied on several Supreme Court and Tribunal decisions holding that extended period cannot be invoked without positive, conscious, and deliberate evasion. The Tribunal found that the appellant had bona fide belief that the profit margin was not liable to service tax and that all transactions were recorded transparently, negating any intent to evade tax. Consequently, the Tribunal held the demand for the extended period to be time-barred and set it aside on limitation grounds.

On the issue of the dropped demand relating to the 5%/6% payment under Rule 6(3) of the CENVAT Credit Rules, the Tribunal noted that the Revenue had not preferred any appeal, and thus that issue attained finality and was not further considered.

The significant holdings of the Tribunal include the following verbatim legal reasoning:

"Irrespective of the type of contract entered into by the Appellant, separate values of the goods supplied and the values towards erection, commissioning and installation services of cooling towers are available, which are separately disclosed in the executed contracts and on the invoices raised. Thus, there is clear basis of bifurcation between the supply of goods and the supply of services."

"The Appellant discharges the appropriate excise duty / sales tax / VAT in respect of the value of transfer of property and goods and service tax in respect of the value of erection, commissioning, installation services etc."

"In any event there is no dispute that the appellant has discharged the VAT/CST/ Sales Tax liability on the sale value of the goods supplied to its customers and thus the same cannot be subjected to the service tax again."

"The margin between the purchase and sale, can never be subjected to any Service Tax, irrespective of whether it is on account of any cost loading or purely on account of price mark up for profit. It is for the Revenue to answer as to how the Service element comes in the margin between the purchase and sale price."

"We hold that the confirmed demand to the extent of extended period is time-barred."

Core principles established by the Tribunal are: (a) Service tax cannot be levied on the value of goods on which VAT/CST has been paid, including any cost components and profit margin embedded in the sale price; (b) Proper bifurcation of contracts and invoicing between supply of goods and provision of services is critical in determining tax liability; (c) The burden lies on the Revenue to demonstrate how the profit margin or cost loading constitutes a taxable service element; (d) Extended period of limitation for service tax demand cannot be invoked without evidence of deliberate evasion or suppression; and (e) Chartered Accountant's certificates and commercial tax returns filed by the appellant are relevant evidentiary materials that must be considered and can rebut Revenue's demand if not properly challenged.

In conclusion, the Tribunal set aside the confirmed service tax demand of Rs. 67.62 lakhs on the profit margin and cost loading included in the sale price of goods supplied by the appellant, holding that such amounts represent sale of goods on which VAT/CST has been paid and are not liable to service tax. The Tribunal also held the demand raised for the extended period to be barred by limitation and accordingly allowed the appeal with consequential relief.